- Fintechs raised a record $125 billion in 2021 but investment in the sector has slumped this year.
- Europe’s neobrokerage startups face cuts and consolidation as funding dries up, sources say.
- For startups that can’t fundraise it’s “shoulders against the wall,” one investor told Insider.
Europe’s brokerage startups are facing a winter of job cuts and consolidation as the sector battles with slumping trade volumes and a scarcity of investor cash, industry sources say.
Consumer fintech enjoyed a stellar 2021 with venture capital investment reaching a record $35.3 billion globally in the final quarter of the year, according to Dealroom data. However, investment has since plunged by almost a third in 2022.
The disastrous share price performance of now-public fintechs like Robinhood and Marqeta matched with the substantial write-downs in the valuation of both Klarna and Stripe has cooled investors’ fervor on all sectors of the industry.
Investment into crypto exchanges slid by 31% to $1.3 billion in the second quarter of 2022 while neobrokerage firms recorded a 78% drop in funding to $400 million, per Dealroom.
The drop-off has made raising funds a difficult exercise for many fintechs and has also led to a bifurcation in the market of the “haves and the have-nots,” one London-based investor told Insider.
“For the companies that cannot raise, regardless of valuation, it’s shoulders against the wall,” another investor said.
“They can either slim down, reduce their burn and headcount to try to get to profitability and in doing so cut their product innovation or tech hedge or they try to get out of the storm, making M&A more of a plan A.”
Banks and other financial institutions have been circling with previously fast-growing businesses now in a weaker position. Among them is JPMorgan, two sources with direct knowledge told Insider. The bank acquired wealth management startup Nutmeg in 2021 and recently considered acquiring a stake in open banking API business, Yapily.
JPMorgan declined to comment.
The US financial giant is thought to be one of a number of banks that have looked at fintech deals of late, with two London-based fund partners telling Insider businesses in their portfolio had been contacted. However, prospective buyers might opt to wait longer for companies to run out of cash before widespread consolidation takes place, sources said.
German neobrokerage Trade Republic is a notable example of a company that has raised in 2022, but on unfavorable terms, while London-based Freetrade previously struggled to raise an external funding round and instead opted for a convertible loan note and its eighth crowdfunding round.
Another European player, Bux, has also struggled to fundraise in 2022 and has been in acquisition talks with Tiger Global-backed US player Public.com in recent months, Insider reported.
“Everyone is struggling with trading volumes being down and a lot of these companies have lofty valuations from previous rounds but much lower growth than expected,” another London-based investor said.
It’s not just well funded rivals from overseas that have taken a shine to Europe’s teetering trading apps. Other players in the market include Japanese corporates and even crypto startups on the lookout for regulated entities to boost their appeal to relevant authorities, in a similar vein to rumors of FTX acquiring Robinhood, one VC fund partner said.
Market consolidation will be driven by price, one fintech fund partner told Insider. Many current players were able to grow and build their products in boom times were money was cheap but are now no longer in a position to benefit from investors looking to fund the brokerage model in perpetuity.
Despite that, the sector is benefitting from an increasing number of Europeans accessing retail trading products which is a fundamental positive tailwind for longer-term investors looking for strategic buys, the London-based fintech investor told Insider.
Trading app downloads are down 36% year-on-year while money management app downloads are up in the UK, as the country combats inflation and an ongoing cost of living crisis, per App Radar.