Why Investors in Fintech Startups Are Still Cautious

There have certainly been more pleasant years for startup founders than the past three. Since 2021, when investors put more money in start-ups in Germany than ever before, the volume of financing has continued to collapse. At least that is what a look at EY’s start-up barometer shows. In 2023, only six billion euros flowed into German start-ups.

That is 65 percent less than in 2021. At least there is some evidence that the bottom has now been reached, the management consultancy announced at the beginning of this year. So things should now be looking up for the country’s start-ups. But that is not quite working yet, and that is especially true for the fintech sector.

“We’re still waiting for the bottom to end,” admits EY partner Christopher Schmitz. For founders who are eyeing new financing, this means above all: hold on a little longer. Tobias Schulz from the High-Tech Gründerfonds (HTGF) basically agrees. “There’s a saying that fits quite well at the moment,” says the investor: “Survive till ’25 and you’ll be in heaven in 27.” Fintech founders often have to get through a good 1.5 years if they’re looking for a large financing round with a high valuation.

Hard metrics are more decisive for investors

However, investors’ priorities have shifted permanently. “They are now focusing on business models that can be easily scaled without additional staff,” said Schmitz from EY. The closer a start-up is to the break-even point, the better. Potential growth becomes less of a criterion outside of the early phase.

B2B start-ups are likely to fare better in the future. According to Schulz from HTGF, this is also because they have more easily calculable business models. “If a fintech has a partnership with an asset manager for several years, for example, that is attractive for investors,” he says. Investors are more cautious with B2C fintech companies, also because new regulatory requirements are felt more quickly and sales are typically more volatile.

Meanwhile, fintech companies such as N26, Trade Republic or Solaris should have no problems getting new money – regardless of whether they are in the B2B or B2C sector. “The business models of the really big fintechs are now fully developed,” said Schmitz from EY. In addition, some of them are no longer subject to supervisory restrictions, as is the case with N26 when it comes to customer growth.

According to Schmitz, the payment industry is currently difficult to assess. “It was actually the investors’ favorite child for a long time,” he says. But the industry in Europe has recently consolidated strongly. The larger providers such as Worldline and Nexi now have to digest their acquisitions first.

Larger financing rounds become more likely

According to Schmitz, since the valuations of start-ups have recently fallen, many have postponed their planned financing rounds. “They have only grown sideways at most, and at most have received fresh money from their existing investors,” said Schmitz. However, these companies cannot stretch out the period until the next large financing round forever. “I therefore assume that we will see some major financing within the next twelve months,” says Schmitz.

But it is unlikely that 2021 will be repeated any time soon. “Back then, there was simply a lot of money in the funds that wanted to be invested,” Schmitz looks back. Schulz from HTGF cannot imagine that either. “It would have to be a lot for that to happen,” he said. Corona triggered a surprising boom in e-commerce at the time. Digitalization was the trend, and tech stocks went through the roof. “I think we will soon get back to the level of 2019 and 2020,” said Schulz.

According to Schulz, the HTGF has also been concerned with stabilizing companies in recent years. “And that means focusing them more on profit and not on excessive growth,” he explains. The early-stage investor is nevertheless willing to invest in young, new fintechs. “Unfortunately, there are fewer new start-ups at the moment than in the boom years,” said Schulz. So it’s not just investors who have become more cautious; founders are also probably thinking twice about starting a new company.

At least there is good news for the start-ups that are already in the HTGF portfolio. With a new fund behind it, the HTFG can now reinvest in the companies. 660 million euros are available for this purpose. This should initially enable the HTGF to handle larger sums. It can now contribute up to 50 million euros if a private investor also participates, the HTGF announced last week. So there is something happening again in Germany’s VC scene.

__

(Featured image by Jonas Leupe via Unsplash)

DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.

This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.

First published in paymentandbanking. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us