Fintech maintains investment appeal as VC deals fall in Q3
Fintech is one of the industries still attracting venture capital (VC) investment, despite the overall volume of UK deals reaching its lowest rate since 2016.
According to KPMG’s latest Venture Pulse report, the value of VC investment halved in the UK during the third quarter of 2022 to $4.6bn (£3.9bn).
As investments moved ahead with caution, the volume of deals completed in the quarter fell by more than a third to 575 (from 865 in the previous quarter), the lowest seen since the third quarter of 2016.
However, the report shows that, as consumer and retail investment fell sharply, VC investors turned their attention to companies focused on business productivity, digital enablement and B2B fintech solutions.
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The third quarter of 2022 also saw more deals completed in the regions versus London, which last happened in the second quarter of 2014.
While London continued to attract the lion’s share of investment by value pulling $3.2bn, VC investments in innovative businesses outside of the capital accounted for 51 per cent (293 deals) of UK deals completed over the summer.
Of the $4.2bn invested in UK businesses during the third quarter, VCs maintained their appetite for late-stage businesses, which accounted for more an a third (39 per cent) of all VC investments completed in the UK over the period.
“As the cost-of-living crisis deepens, investors are increasingly turning away from those sectors that rely on consumer spend to drive growth and doubling down on investments in those sectors where technology is addressing big macro trends such as health tech and ESG”, Warren Middleton, lead partner for KPMG’s Emerging Giant Centre of Excellence said.
“While some VCs will be focused on existing portfolios, many have a commitment to investors to deploy capital so there is still dry powder and opportunities for good businesses with solid growth plans. Competition for good businesses in strong sectors will be fierce and could lead to some deal heat as we head into the final quarter of the year. However, as the economic conditions continue to deteriorate, it is likely that VC investment will remain subdued heading into quarter four ‘22 and beyond.”
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VC investment globally dropped to below $100bn in the third quarter of 2022 as deal levels fell to 7,817 – the lowest level since the fourth quarter of 2017.
Deal numbers across the Americas, Europe and Asia fell, with the Americas attracting more than half of global VC total, $45.5bn, during quarter.
Amid a growing energy crisis, economic turbulence, continued pandemic impacts and increased pressures on businesses, funds continue to flow into clean energy, fintech, biotech, cyber and B2B, including AI and machine learning start-ups and scale-ups.
Klarna was among the top 10 global financings in the third quarter of 2022. The Swedish fintech raised $800m in a late-stage VC round. However, this was at a $6.7bn valuation — down from $45.6bn in 2021.
“While start-ups that have strong or profitable business models will likely continue to raise traditional VC funding rounds, others are showing increasing interest in alternative financing solutions as a means to avoid or delay their next funding round,” said the report. “The challenge with debt financing is that it is much more expensive, particularly for start-ups with little to no hard assets.”
Commenting on the outlook for global VC investment, Jonathan Boyers UK head of corporate finance and vice chair at KPMG said deal value and volume are likely to fall further by the end of the year.
“Smaller start-ups are likely to place more emphasis on rightsizing their business so they can conserve cash and better position themselves for a new funding round”, he said.
“In a challenging environment we are likely to see depressed valuations, more layoffs, and more down rounds and potentially even more exit activity. While the IPO door is shut pretty tight for the moment, there could be an upswing in M&A activity as mature companies consider alternative exit plans, companies unable to raise new funding look for potential buyers, and buyers continue to look for bargains.”
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