In the third quarter (Q3) of 2023, venture capital (VC) for financial technology (FinTech) companies in the seed growth stages dropped by 36% year-over-year to approximately $6 billion. Funding deal volumes, in particular, plunged 39% to roughly 484 transactions.
On a positive note, mature start-ups returned despite being hit hardest in preceding quarters. Their funding values and deal count reportedly increased to around 30% year-over-year. This improvement could be because of the low base effect.
The current funding downturn started in Q3 of 2022 when VC’s exposure was first scaled back to mature start-ups before halting the pace of investments in Series A or early-stage start-ups. However, it’s still uncertain whether this optimism in late-stage VC will be preserved and trickled down to venture investors at earlier stages.
Digital lending has become more widespread than ever before. Its global market was valued at $12.6 billion last year 2022. It’s expected to grow even higher, up to $71.8 billion from 2023 to 2032, at a CAGR of 19.4%.
The digital lending market is divided into different categories based on several factors. These include the type of components (solution and service), how it’s set up (on-premise and cloud), the size of the businesses using it (large enterprises and small/medium-sized enterprises), and who uses it (banks, NBFCs, and credit unions). The market is also looked at in terms of regions, which include North America, Europe, Asia-Pacific, and LAMEA (Latin America, the Middle East and Africa).
In 2022, the solution segment experienced the highest growth. This is because using digital lending technologies allows lenders to offer faster and more convenient loan processing, which is crucial for borrowers who need quick access to funds. For example, CreditNinja co-signed loans can be approved almost instantly, whereas traditional lenders’ approval may take one to two weeks longer.
Moreover, with a rising number of FinTech start-ups and established financial institutions entering the digital lending market, there are plenty of opportunities for creative solutions that can meet the evolving needs and preferences of both borrowers and lenders.
This increasing demand for online financial services prompted several digital financial institutions to return to the VC market. This increased several investors’ interest in AI-based fintech models in Q3 2023.
Unfortunately, these positive drivers could not seize the funding decline across geographies and verticals. Some big financial technology companies are being practical and accepting lower valuations to keep growing.
However, there’s also evidence that venture capitalists support the leading companies in their portfolios to help them stay strong, even if it means valuing them based on previous investment rounds. While it’s not unusual for companies to rely on existing investors when there’s not a lot of available capital, the industry would prefer to see new investors as a positive sign of improvement.
In the first nine months of 2023, 1,655 funding rounds raised $29 billion. This is a decrease compared to the year before, when 2,684 rounds raised $54 billion during the same period. The third quarter of 2023 had the lowest amount of funding activity since the beginning of 2021, both in terms of the number of rounds and the amount of money raised.
In 2022, when there was still a lot of excitement in the funding environment, there were an average of 270 deals per month. The number of deals dropped below 200 only twice in the last two months of the year. In contrast, in 2023, the number of deals exceeded 200 only in January and March. In September of 2023, there were 159 deals, which is less than the 147 deals in August and the 178 deals in July.
In the third quarter of 2023, Latin America saw the steepest decrease in venture capital (VC) investments, with only $310 million, a 72% drop from $1 billion in the same period of 2022. Investments in Europe, the Middle East, and Africa (EMEA) also declined by over half compared to the previous year, totaling $1.2 billion.
Conversely, North America remained the primary destination for VC investments, but the total funding dropped by one-third to $2.63 billion. Asia-Pacific experienced a relatively small change, raising $1.9 billion, nearly the same as the previous year.
In terms of valuation, FinTech grew the fastest in the last two years. However, as an adage says, the higher it climbs, the harder it falls. This week, the public market’s reset’s trickle-down effect hits extra hard, causing multiple FinTech start-ups to start making cuts and raise a down round. Despite all these headwinds, there’s one crucial silver lining: FinTech will strive harder to build better businesses, especially after the tailwinds are gone.