UK fintech funding has declined in the first half of 2023, with total cash raised reaching $2.9 billion—marking a 37% decrease compared to the latter half of the previous year, as reported by Innovate Finance.
The global fintech sector has encountered significant challenges over the past year, including high inflation, rising interest rates, cash flow constraints, and a cautious investment climate. During the first half of 2023, $27.3 billion was invested across 1,711 deals worldwide, representing a 14% decline from the second half of 2022.
Stephen Lemon, a partner at Volution, noted, “The market was very frothy in 2021 and 2022, and there’s been a correction. We’ve observed some deals in our portfolio where revenue has doubled, but valuations have corrected. In the grand scheme, this isn’t necessarily a bad thing, though it does make people nervous. Boutique firms are becoming more methodical. We’re not seeking outliers but instead are focusing on meaningful, steady returns.”
Despite these challenging economic conditions, the average deal size in the fintech sector has shown consistent growth in recent years. In the first half of 2023, the average deal size was about $15.9 million—comparable to 2022’s $16.5 million and significantly higher than the pre-COVID 2020 average of $12.6 million.
In terms of investment stages, later-stage venture capital attracted the majority of funds, accounting for approximately 70% of the total, up from 54% for the entire year of 2022. Seed capital deals comprised the largest number of transactions (31% of the total) but represented only 6% of the capital invested, down from 9% in 2022. This trend indicates a shift towards investing in established fintech firms during the market downturn.
Average deal size has decreased since the first quarter of 2022, reflecting lower company valuations and a desire among firms to minimize dilution for existing shareholders when raising funds at reduced valuations.
Investors continue to express strong interest in B2B fintech products, with additional enthusiasm for ESG and climate technology, wealth management, and artificial intelligence.
Erik Mostenicky, principal at nvestment, FISV, remarked, “We’re seeing a lot of M&A discussions happening alongside potential fundraises across both successful and struggling startups. Consumer fintechs, in particular, as well as sectors like ESG and ClimateTech, which have attracted many entrepreneurs, provide a good opportunity for complementary capabilities.”