Fernway DiarySM

Mar 21, 2023

After a record-setting year in venture capital funding, 2022 marked a significant cooling in the fintech sector. According to CB Insights’ State of Fintech 2022 Report, total global fintech funding amounted to just $75.2 billion last year, down 46 from its peak in 2021. The decline was even more apparent in the second half of the year, with only $10.7 billion invested in fintech startups in the final quarter of the year, compared to $38 billion invested in the fourth quarter of 2021. Overall global venture funding showed a somewhat less precipitous drop, with $415.1 billion invested in 2022, down 35 from 2021.

Notably, the global fintech deal count for the year was down only 8 from 2021, at 5,048. Investors preferred smaller, earlier-stage deals over the bigger, later-stage deals of 2021, with early-stage funding rounds making up 68 of fintech deal share in 2022. According to the report, the average 2022 deal size was $18.7 million and median deal size was $4.3 million, down from $31.4 million and $5 million respectively in 2021. Rounds of $100+ million were down 60 from the prior year, making up $36.5 billion of total funding. The number of new unicorns declined significantly as well, with only 69 new fintech unicorns emerging in 2022, a 58 drop from the 166 that emerged in 2021. Among fintech sectors, the largest decline in funding was in banking, which fell 63 year over year, returning to pre-pandemic levels.

In the US, fintech funding was $32.8 billion for the year, down 50 from 2021 but still higher than 2020 levels, making it the second highest fintech funding year on record. While overall deal volume was down only 9 , mega-round deals were down 52, again highlighting investor preference for early-stage deals in the face of an uncertain economy. The only major region to see deal volume climb in 2022 was Africa, with a record 227 deals (up 25 from 2021). However, because 89 of those deals were early stage, the overall funding level on the continent was still lower than 2021.

Mergers and acquisitions, initial public offerings, and special-purchase acquisition company activity in the fintech space also dropped in 2022 compared to 2021. Last year saw 742 fintech mergers and acquisitions, down 20 from the previous year; the fourth quarter marked the slowest period for the sector, with only 143 M&A deals. Contrary to the overall trend, insurrect M&A exits rose 40, from 58 in 2021 to 81 in 2022. There were only 23 fintech IPOs in 2022, down 72, and 9 SPACs, down 53 year over year.

While some have speculated that the fintech funding decline marks a popping of a bubble, CB Insights’ lead fintech analyst Anisha Kothapa disagreed, characterizing the downturn as a correction and an unsurprising turn of events, given the macroeconomic environment of rising inflation and interest rates. The investment patterns of venture capital firms Sequoia Capital and Andreessen Horowitz (a16z) seem to indicate continued interest in the sector; in 2022, both invested more in fintech than in any other sector. Of the more than 100 overall investments Sequoia made last year, 25 were in fintech, representing nearly a quarter of the total. The top three categories for the firm’s investment in the space were capital markets, payments, and payroll and benefits. A similar proportion of a16z’s 2022 deals were in fintech, 49 of 206 total, with payments, blockchain, and digital lending as their top targets.

Although total global fintech funding in 2022 still surpassed 2021 numbers, fourth-quarter funding was at the lowest quarterly level since 2018. Fintech startups can reasonably expect to encounter continued investor caution and scrutiny in the months ahead.

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