Few deals drive FinTech volumes, record number of mid-market M&A transactions, but European capital markets remain elusive for FinTech

Today Finch Capital issued the 6th edition of its annual State of European FinTech Report for 2021. The report covers a range of topics including capital market and M&A implications for FinTech valuations and exits, events that might stall the FinTech “blast”, the broader European FinTech landscape and the themes the Finch Capital team expect to shine through in the next year.

"Fintech continued to dominate European tech, but compared to last year we see a shift towards B2B, more concentration of large funding rounds with 5% of deals getting 65% of funding, a growing war for talent, and exits predominantly in the €50-500m range with limited large ticket listings. The last trend is especially concerning for the highly valued loss-making unicorns' ' says Radboud Vlaar, Managing Partner at Finch Capital.

Key findings:

• FinTech Funding dominates European Tech: The lull pandemic phase seems to have disappeared in the past 12 months, as financing amounts have more than doubled in Europe from c.€5 billion in H2 2020 to over €15 billion in H1 2021. B2B funding has clearly dominated with 65% of the capital, seeing the appetite in B2C FinTech businesses slip from 50% to 35% in the past two years 

• More capital went to fewer companies in Europe than any other region: Despite record financing, it is becoming increasingly clear that a few deals are driving the growth in overall funding. Europe is the least diversified, with 5% of the deals seeing over 65% of the funding amounts. As FinTech now accounts for over 25% of the value of overall VC funding, a few large unicorns are driving this trend (eg: Klarna, Rapyd) rather than the broader ecosystem benefiting from more capital

• War for talent as aggressive hiring continues across most sub-sectors: Companies are not backing down. The shift in workplace dynamics has enabled all companies to become even more aggressive with their pace of hiring. Brokerage businesses understandably saw the most growth, but as new member growth slows and wage inflation creeps into the system, there could be signs of margin pressure

• Record M&A transactions in the €50-500m range, while IPO and SPAC markets in Europe remain elusive: Europe should see a record 2x growth in the number of financial services M&A under €500m by the end of this year compared to 5 years ago, higher than the US or Asia in terms of growth. However, the IPO market remains elusive, with 60% fewer IPOs expected this year than in 2015.

• There are early signs that the FinTech blast could stall in 2022: We see 4 factors:  (1) War on Talent, putting financial plans at risk as growth falls behind due to longer time to find talent and cost rise due to increase in salaries;  (2) Public & IPO markets starting to slow down putting pressure on the primary exit path for European Unicorns; (3) Increased regulatory scrutiny resulting in higher costs and slower expansion; (4) Finally, rising interest rates can have a dramatic impact on the valuation of high growth loss making companies

• Big trends that will shape 2022: Examples of our predictions are margin pressure in payments driving M&A and value add growth; Credit cards to be replaced by BNPL; The rise of embedded insurance; New infrastructure being delivered for financial services via APIs; and a shift back to basic AI.

Vlaar continues: “We expect the market environment for FinTech in 2022 to be a bit circumspect, with early signs of structural events that could stall the amazing ride of the last 8-10 years. Rising interest rates put pressure on the valuation of loss-making high growth companies, war for talent puts pressure on economics and ability to grow. To allow the unicorns to deliver against their growth expectations we expect significant M&A activity in 2022 of € 50-500m companies using their cash war chest and valuable stock.” 

The report summarises and compiles industry data from hundreds of sources including Dealroom, CBInsights, McKinsey, Morningstar and equity research as well as interviews and views from experts in the industry. It also includes the Finch team’s own views, proprietary insights and data based on a decade of investment experience in European FinTech.