The market correction has been widespread, but technology and fintech stocks have seen the biggest falls, according to a recent report.
El fintech index – which tracks the performance of publicly traded emerging fintech companies – fell by a staggering 72% in 2022, according to F-Prime Capital's State of Fintech 2022 report. After reaching a peak of $1,3 trillion at the end of 2021, the F-Prime Fintech Index slid to $397.000 billion at the end of 2022.
The Fintech Index currently comprises 55 companies across B2B SAAS, payments, banking, wealth and asset management, lending, insurance, and proptech.
“The biggest change in 2022 was that public investors for the first time had a say in fintech stocks,” said David Jegen, managing partner at F-Prime Capital. "It was probably not a very good time considering the broad macroeconomic impact on the technology."
The fact that so many fintech companies went public was a big problem in itself, Jegen said. “We had 10 years of exciting fintech disruption, all of it led by private investors,” he said. “So 2021 was spectacular because the IPO window was open when we had a really mature cohort of fintech companies.”
In fact, 75 fintech companies went public in 2021, meaning 2022 was the first year F-Prime was even able to put together a Fintech Index.
In particular, the decline was especially steep for the 10 largest departures during the peak years of 2020-2021. In other words, the higher the output, the higher the dropout. The cumulative decline in market capitalization for the top 10 recent exits totaled more than $220 billion; Coinbase, NuBank, Robinhood, SoFi, Affirm and Wise all saw their valuations fall.
According to other research, companies in the B2B SaaS and payments spaces suffered the least negative impact. Proptech, insurance, lending, WAM, and banking (in that order) saw the biggest drops in market capitalization. Hardest hit were Dave, Coinbase, Oscar, Opendoor, and Affirm.
But on the bright side, despite the valuation correction, the companies in the Fintech Index continued to grow: collective revenues increased roughly 15%, from $136.000 billion in 2021 to $155.000 billion in Q2022 XNUMX. And even fintechs like Bill.com, Adyen, NuBank, Toast, and Wise continue to grow at high rates.
What is surprising, however, is that while fintech companies enjoyed historically high valuations in 2021, they have now fallen below historic median valuation multiples. And contrary to what one might expect in a parched IPO market, fintech M&A volume dropped from about $350.000 billion in 2021 to about $116.000 billion in the first three quarters of 2022.
Also notable: Less than 25% of the companies in the Fintech Index were profitable in the last 12 months, mostly payments businesses. But almost half of the companies in the Fintech Index expect to be profitable in the next 12 months.
Other key findings of the report:
- In 2022, public investors reassessed many fintech companies and shifted their valuation multiples from SaaS to traditional financial services businesses, with average multiples down 71%.
- Fintech companies enjoyed historically high valuations in 2021, but fell below historically median valuation multiples in 2022.
- Although significant acquisitions occurred, the overall volume of M&A declined as buyers and sellers adjusted to new valuation expectations.
- Like the headlines, banking and wealth management startups that hold client cash balances or float are benefiting from recent interest rate hikes.
- Of the companies that exited after the start of 2020, proptech and insurtech startups have seen the biggest declines in valuations.
- Fintechs achieved historically high valuation multiples in 2021; these multiples decreased in the fourth quarter of 2021 and in 2022.
Naturally, public market corrections directly affect private markets, starting with later-stage financing. Some fintech breakouts have spawned “impressive” down rounds, according to PitchBook data and F-Prime analysis, including Stripe, Klarna, and Checkout.com.
“The key message was that private investors had highly valued fintech companies as technology companies, and public investors had highly valued them as financial services companies, and that is very nuanced,” Jegen said. "I would say that was the biggest reassessment that we witnessed."
Now, he said, investors are trying to determine which companies are actually innovating rather than improving existing technology. “The only distinction that investors are making now is what is a truly disruptive model and what is more of a traditional, better version of a headline model,” she said.
“I think 2022 was the calm before the storm that will be the second half of this year. We are really only beginning to see the ripple effects in the private markets of the 72% drop in valuations that we saw in the public markets.”
