Dive Brief:

• Reflecting economic shifts and investors’ tighter purse strings, global venture capital funding raised by payments startups in 2022 totaled $8.47 billion across 95 deals, as of Dec. 13, according to the research firm Pitchbook.
• In the U.S., there were 46 payments deals that added up to $2.92 billion, Pitchbook said.
• Those figures paled in comparison to the activity last year, when payments firms collected a record-setting $31.9 billion as of mid-December, according to data from another research firm, CB Insights. In 2021, payments firms notched 662 deals.

Dive Insight:

This year saw seismic shifts in the payments venture capital world. From 2019 to 2021, as the COVID-19 pandemic fueled rapid change in payments and fintech, “it was a battle to get onto a lot of companies’ radars,” said Commerce Ventures Principal Vivek Krishnamurthy.

In 2022, with higher interest rates, inflation and consumer behavior shifts, “that has changed tremendously,” Krishnamurthy said. Commerce Ventures, which invests in early-stage businesses, has backed payments companies Marqeta, Bill, Paystand and Resolve. The firm’s latest fund is $150 million, and it makes about 30 investments per fund, he said.

The year started off fairly rosy in the first quarter from a funding standpoint, with sizable deals for online checkout startup Bolt, at $355 million, and payments company Checkout.com, at $1 billion. But the market shifted in the second quarter as factors such as the war in Ukraine and inflation affected the fintech funding ecosystem, said Jordan McKee, a principal research analyst with 451 Research, part of S&P Global Market Intelligence.

As wallets tightened in the second quarter, “some of those large nine-figure funding rounds that had become commonplace in the space began to disappear,” McKee said. 

Rapid growth, followed by economic pressures, led firms that raked in some of the biggest funding rounds of 2021 – digital payments company Stripe and buy now-pay later provider Klarna – to embark on job cuts this year. 

Throughout 2021, investors had a fear of missing out with respect to the fintech space, McKee said. “VCs were really just looking to get in and placing bets everywhere,” without much due diligence, he said.

As conditions changed this year, investors began looking at fintechs and their business models more critically, McKee said. “It's not only about growth, but what's the story around profitability, what's the story around scaling efficiently?” he said.

Krishnamurthy echoed those sentiments. Funding rounds are taking about three times what they did previously as investors employ more scrutiny. They’re seeking detailed answers from founders on factors like total addressable market size and path to profitability, he said. 

“The new mantra is really focused on proven product market fit,” Krishnamurthy said. “There's a lot less room for, ‘Hey, give us the money, and we're gonna go figure out what the product is and we’ll let you know as soon as we've really nailed it down.’”

That shift has hit payments companies hard, especially later-stage fintechs being pressed to reach profitability. This year’s economic conditions have created a “stranded batch” of thousands of startups still expecting 2021’s momentum, Krishnamurthy said. Venture capitalists are pointing to changes in the public market and saying, “‘I can’t do that anymore.’”

For companies that didn’t raise capital in 2021 and needed to do so after March 2022, it didn’t matter how strong the business was, Krishnamurthy said. Those firms have been put under the microscope by investors due to uncertainty in the market, he added. 

After raising $13.5 million during a March seed round, card issuance fintech Tallied is waiting until September 2023 to pursue another funding round, said CEO and founder Sunil Singh. The market “has definitely slowed down for fundraising,” Singh said. Investors are taking “a lot more thoughtful approach to diligence,” he added.

The appetite for anything and everything that’s fintech has disappeared, Singh said.

He expects the first half of 2023 will bring more of the same, followed by an upswing in deal activity in the second half of the year. “That’s part of the reason why we want to hang tight and not go back to the market for our fundraise until then,” Singh said.

McKee expects constrained funding and investors’ critical approach will remain heading into 2023. “All the trends that we’re seeing right now are going to persist at least through the first half of next year,” he said.