Dive Brief:

• Investments in fintech startups globally fell 48% for the second quarter to $7.8 billion, down from $15.1 billion for the first quarter of this year, according to a report last week from the research firm CB Insights. That was a bigger drop than for other major sectors, the July 13 report said, as overall venture funding dropped.
• The number of investment rounds for startups also slid during the period, with 22% fewer instances, globally, of venture capitalists injecting money into young fintech businesses, the report said. 
• The second-quarter results accentuated a decline in fintech dollars for the first half of this year, with S&P Global Market Intelligence reporting in a separate July 13 report that fintech venture capital funding worldwide decreased 49% to $23 billion for the first six months of the year, relative to the first half of last year. 

Dive Insight:

The poor fintech venture showing reflects the troubled global economy, with higher interest rates and a global economic slowdown tempering venture interest in startup companies having a tougher go of it in the difficult environment. Instead, investors have been eager to see young companies turn a profit.

Those worldwide fintech trends were largely reflective of the U.S. venture scene as well. While digital payments powerhouse Stripe was able to raise $6.5 billion in March and Austin-based Episode Six raised $48 million in May, smaller rounds such as instant payments startup Ivy’s $7.7 million fundraiser this month were more common. 

In the U.S., not a single payments or fintech player made the top ten investment rounds during the second quarter, according to CB Insights. That’s a change from recent years when a bevy of fintechs were attracting dollars.

Overall U.S. venture funding for the second quarter decreased 27% to $31.3 billion from the first quarter and was cut almost in half relative to the year-ago second quarter, the CB Insights report said. The second-quarter funding level this year was the lowest level since the fourth quarter of 2019.

Internal rates of return for venture capital funds, which reflect returns from their venture portfolios, have been on a downswing since 2021. The rates went into negative territory in the fourth quarter of last year, after peaking in 2021, according to a July 14 report from the research firm Pitchbook, a unit of investment services company Morningstar.

“Perhaps the most worrying sign for fintech venture funding is the continued drop in the deal count,” the S&P report said, citing a 64% decline to 1,178 venture funding rounds for fintechs during the first half of the year, compared to last year. That decline worsened between the first and the second quarters of this year, skidding to 522 fintech rounds in the second quarter versus 656 in the first quarter. Last year, there were 944 fintech rounds in the second quarter, the report said.

Overshadowing the venture investment environment in the first half was also the March demise of Silicon Valley Bank, which had played a significant role in providing financing for venture capitalists and startups, particularly in the U.S. That event helped depress the appetite for venture investing, according to S&P.

Despite the gloomy venture start to the year, S&P noted that the downturn started late last year, not this year. It also gave a vote of confidence for a recovery, at least for fintech.

“A recovery in public market valuations of tech stocks, stabilization in interest rates and a pickup in M&A activity could arrest further decline in VC investments in the second half of 2023,” S&P said in its report. “Underlying digital trends in financial services continue to be robust, and the long-term growth story of fintechs remains intact.”

Another positive factor for startups seeking more funding is that venture capital funds are still flush with cash. “Dry powder,” or the money that venture capital funds have on hand for investment, is at an all-time high of $279.8 billion for U.S. funds, according to the Pitchbook report. That means they’ll eventually need to find startups to invest those funds in.