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Why Investors in Fintech Startups Are Still Cautious

Investors priorities have shifted towards scalable business models close to break-even, favoring B2B startups with stable partnerships over volatile B2C fintech companies. Major fintech companies like N26 still attract investment. Startup valuations have dropped, delaying financing rounds, but significant funding is expected within a year. The focus is now on profit overgrowth, reflecting pre-pandemic levels.




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)

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

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Valerie Harrison is a mom of two who likes reporting about the world of finance. She learned about the value of investing at a young age upon taking over her family's textile business when she was just a teenager. Valerie's passion for writing can be traced back to working with an editorial team at her corporate job, where she spent significant time working on market analysis and stock market predictions. Her portfolio includes real estate funds, government bonds, and equities in emerging markets such as cannabis, artificial intelligence, and cryptocurrencies.