Although macroeconomic factors are having a dampening effect on venture capital investments across the fintech space, the amount of funding going to enterprise and business-focused startups has increased in recent months compared to consumer-centric counterparts, a recent Pitchbook report shows.
Rising interest rates, the
Nearly 80% of all venture capital investments in fintech went to enterprise-focused companies in the first quarter of this year, across segments like B2B payments, capital markets and wealthtech, per Pitchbook data. Pitchbook analyst Rudy Yang said the weight on B2B is striking because in 2019, the split of VC money in fintech was about 60-40, favoring B2C companies. The shift began last year, but accelerated toward B2B startups in 2023, Yang said.
"Investors are demonstrating that flight toward quality, and they are looking for profitable bottom lines, rather than just focusing on scale and user acquisition," Yang said. "The consumer is seen as more risky relative to a lot of enterprise revenues, so investors want those few degrees of separation away from the consumer, especially as credit quality is starting to deteriorate."
Mike Nugent, managing director at Boston-based Vestigo Ventures, said business models that involve long-term contracts with established institutions are a more stable bet for investors than consumers, who can be fickle in more challenging economic landscapes.
Companies that raised rounds at massive valuations during the up cycle are now proving—or failing to prove—their business models. Yang said that many retail fintechs, especially those that rely on interchange fees, haven't been able to demonstrate profitable business models. Buzzy consumer fintech services like robo-advisors and buy now/pay later providers, which reeled in funding during 2021, are beginning to look less tenable as credit quality drops.
Nugent added that it's easier to understand the true return on investment of enterprise fintechs. He added that institutions are often slow to approve fintech partners, and there are risks and challenges to integrating fintech and bank tech stacks, but he said the payoff is clear.
"I think B2C had its day because it's easier to adopt," Nugent said. "You're not going through budget approval, you're not going through committees, you're not going through technology convergence. But as more and more folks realize these independent, third-party, nimble organizations can add so much value in cost reduction and customer improvement, that's what it's going to always come down to."
Fintech valuations' decline in the last year has also pushed some companies to delay raising funds that could lower their valuations. In March, payment processor Stripe raised $6.5 billion in a round that nearly halved its valuation to $50 billion, down from $95 billion in 2021.
The funding round included investors like Andreessen Horowitz and Goldman Sachs Asset and Wealth Management. The San Francisco- and Dublin-based company laid off 14% of its workforce in November, which CEO Patrick Collison wrote in a letter at the time was due to the economy and management miscalculations.
Other fintechs have also slashed staff,
Elle Bruno, managing director at TechStars, said investors are reluctant to make new investments across industries, and are requiring more due diligence. In B2C fintech, sputtering businesses and later-stage companies are struggling to raise capital.
"Consumer fintech is a real challenge right now," Bruno said. "We saw an acceleration of consumer fintech products in 2021, due to the frothy market. But because of inflation and interest rates, in this current economy, investors are very shy to invest further in that space. There's a lot more opportunity for founders in the B2B fintech space right now."
Enterprise fintech includes sectors like alternative lending, capital markets, infrastructure and wealth management, but Yang, Nugent and Bruno said areas like B2B payments and regtech are top of mind in the space.
Yang said he thinks regtech, which includes compliance, fraud detection and risk management, is a massively underinvested segment. Last year, regtech investments made up less than 3% of fintech venture capital, he said.
Software that helps banks meet compliance obligations, for instance, know-your-customer, anti-money laundering and Bank Secrecy Act rules, are an opportunity for investors, Bruno and Yang said, especially as open banking continues to be a hot topic among regulators. Bruno added that she thinks the development of generative AI will also increase potential fraud, directly raising the need for more regtech.
Since the failure of Silicon Valley Bank in mid-March, financial institutions have looked at
Although investments in fintech are down from 2021, Yang said interest in the industry is far from gone. Nugent also said he still feels like it's "early innings" in fintech, especially as many "rickety," legacy financial technologies are in need of innovation. Even major banks' VC arms are
Bruno said investing is cyclical, and that environments that are tougher on founders can teach grit and the importance of due diligence.
"To say the last few years have been unique is an understatement," Bruno said. "Everyone's a human being at the end of the day. That's why there's so much uncertainty. Interest rates, the recent bank runs and inflation had people very scared. All of the above makes people want to hold on to their money a little bit tighter."
