Fintech VCs are readying their checkbooks as cash-strapped startup founders run out of options

• Fintech funding has been on a decline from 2021’s peak levels, but VCs see signs of a rebound.
• B2B fintechs and earlier-stage startups are the likeliest to see benefit.
• Four VCs outline the ‘new normal” and the kinds of fintechs they want to back.

VCs are eager to resume dealmaking as they see early signs of a recovery in the fintech industry.

Fintechs were hot in 2021, with investors pouring $140 billion into the ecosystem globally. However, as interest rates rose and the tech markets tanked, the free-flowing capital became a trickle throughout 2022. According to CB Insights, investors allocated less than $8 billion to fintechs in the second quarter, indicating a continued decline in funding in 2023. It was the sector’s lowest level of funding since 2017.

Cash-strapped founders who refused to fundraise in a down market and risk having their valuations slashed are running out of options and time. Startups typically raise funds 12 to 18 months after the market turns, even if they had hoped to wait longer, according to Mark Peter Davis, partner at Interplay.

“They wanted to wait it out longer, but they don’t have a choice,” Davis explained. Startups may be forced to seek funding as early as this fall.

Investors who were waiting for founders to change their minds are now preparing to deploy capital on their terms. However, the increase in funding is unlikely to benefit later-stage and consumer-facing fintechs, which have dominated the market in recent years. Insider spoke with four venture capitalists who explained what types of deals they’re looking for and what aspects of startups’ pitches they’ll be scrutinizing.

“We’re still early, getting toward the check-writing side of things,” said Tripp Shriner, managing partner and fintech investor at Point72 Ventures.

If 2021 was a founder’s market, the new investing landscape will shift power back to venture capitalists.

“Before, founders could really ask for almost anything they wanted in terms of control, and now they have to give up more control,” said Robert Ruark, KPMG’s financial services strategy and fintech leader, to Insider.

“All of that is more balanced, which is advantageous to the venture capital firm,” Ruark added.

Late-stage and B2C fintechs likely to bear the brunt

Fintechs that sell to businesses (B2B) are more likely to succeed than those that sell to individual consumers (B2C), according to venture capitalists.

Traditional financial services are delivered in a modern and convenient manner by B2C fintechs such as Chime and Affirm. They dominated the fintech market for several years, but the luster is wearing off, according to Shriner.

“For a variety of reasons — crowdedness, overvaluations, incumbents starting to innovate on their own — that part of the market, the digital financial services market, has kind of taken a hit,” Shriner explained. “How many more neobanks or buy now, pay later names do we actually need here?”

Point72 is looking for startups that are solving problems for financial firms, such as scaling regulatory solutions.

It is early-stage founders who are driving some of the market’s pick-up activity.

“A lot of the volume increase that we’re seeing is on the pre-seed and seed side of things,” Shriner explained. “You’re seeing a little bit more of a thawing out, where if you rewound six, 12 months ago, most people just weren’t even coming to the market,” he added.

Growth-stage fintechs, those that have raised Series C and above, were hit much harder by the downturn than their earlier-stage peers. According to Shriner, the majority of those later-stage companies still rely on bridges and extensions.

“The growth stage market has been more or less decimated by this market contraction,” Davis added. He also stated that crossover funds, such as Tiger Global, entered the market and drove up valuations. Other investors have fled the market as a result of the shift, and those who have remained are wary of being burned again, according to Davis.

“Those capital markets have been really screwed up, and later-stage companies are bearing the brunt of it,” Davis explained.

Time, as they say, waits for no one.

“Companies that have not raised and are still burning must raise.” Many have delayed raising capital, but they can’t wait forever,” Stephanie Choo, partner at Portage Ventures, told Insider about growth-stage companies.

The ‘new normal’

The days of growth at all costs, as in 2021, are over. According to Marcos Fernandez, managing partner at Fiat Ventures, investors are focusing their time and money on companies that can generate revenue in the short term. In some cases, this meant that startups needed to retool and prioritize initiatives that yielded returns sooner rather than later.

And demonstrating those financial results will be critical in the future. According to KPMG’s Ruark, the days of a founder securing funding from a VC after only a discussion with a founder are long gone.

“We’re seeing, perhaps not a temporary shift, but a more permanent shift in how some VCs approach some of the companies they want to invest in,” Ruark explained.

Fintech VCs will be able to devote more time to due diligence, looking beyond so-called “vanity metrics,” according to Fernandez.

Founders can no longer claim to have 100,000 users, for example, according to Fernandez. VCs will be interested in knowing how many are active, how many are active on a weekly basis, and how they generate revenue.

“It’s going to take more meetings than ever before to secure capital as a founder,” Fernandez predicted. “You need to make sure you’re prepared and ready to have three to four times as many conversations as you did one to two years ago.”

“I wouldn’t say it’s the new normal for just fintech, but for startup investing as a whole,” he added.