Cautious investors are turning to startups with more robust business models that have a clearer path to profitability, a move that looks set to benefit fintech companies amid a global slowdown in venture capital funding.
According to accounting firm KPMG’s Private Enterprise Q2 report, global VC funding dropped to a six-quarter low between April and June.
In the UK both deal value and volume declined compared to the previous quarter, but according to KPMG it remains “robust”.
It identified fintech, the UK’s leading technology sector, as a “red hot area of investment”.
Fintech has often been considered a safer investment than other areas in tech. That’s because they tend to scale well and often have clearer paths to profitability than growth at all cost sectors, such as rapid delivery startups.
Similarly, energy tech has historically struggled to attract later-stage funding because of the longer time expected to see a return.
Dry powder remains in market
High inflation and rising interest rates have made capital harder to come by, but KPMG said there “continues to be a reasonable amount of dry powder in the VC market globally”.
However, the report added that “VC investors are expected to become more cautious with their investments, focusing on companies within their portfolios [and] companies with strong paths to profitability”.
Heading into Q3, investors in Europe are expected to continue exercising caution with investment choices.
Despite UK fintech’s impressive investments, KPMG’s report notes the distinct lack of activity from tech firms on the London Stock Exchange.
“The market is cooling. There are no IPOs happening in the UK, or really across Europe, there’s no ECM activity either, whether equity or debt,” said KPMG partner Jonathan Boyers.
“The consumer tech sector has seen the biggest slowdown, along with the industrial sector where costs and overhead increases are now coming through. That said, there are still businesses where growth is outstripping inflation, there’s still a lot of VC money around, and there is still quite a bit of M&A activity.”
KPMG’s report comes after industry body Innovate Finance published UK fintech funding data, confirming the sector had bucked the trend of a slowdown in funding to receive £7.6bn in investments in the first half of 2022.
“It is critical that we now keep up this momentum. The UK is currently receiving more investment in fintech than all of Europe, second only in the world to the US,” said Janine Hirt, CEO of Innovate Finance.