H1 2024 FinTech Investment Landscape

03rd July 2024 | Capital and Investment

Home   /   Insights   /   H1 2024 FinTech Investment Landscap...

 

As we close out the first half of 2024, the world continues to navigate choppy waters. While public equity markets such as the FTSE100 and S&P 500 have climbed to all time highs this half year, private capital raising continues to be muted.

As Innovate Finance takes another deep dive into VC investment data, it's clear that the FinTech sector is demonstrating resilience and adaptability in the face of significant headwinds. Global FinTech investment reached $15.9bn so far this year, 19% down in the second half of 2023. Q2 2024 was slightly up on Q1 2024, but still below all quarters of 2023. This begs the question: have we reached the bottom? Innovate Finance has once again delved into the data and spoken to our pool of members to find out .

The murky landscape can be attributed to a combination of factors: the anticipation surrounding more than 40 major elections worldwide, including in the US and UK; persistent macroeconomic challenges; and the lingering effects of higher interest rates in key markets like the US and UK.

At home in the UK, FinTech attracted $2bn in VC investment across 184 deals. While that represents a steep drop from the $3.2bn invested in the second half of last year, it’s notable that 167 of those deals came in at under $20 million at Seed and Series A stages.

As established FinTechs like Starling and Monzo expand overseas, a new generation of innovative startups is emerging at the seed and Series A stages. This sets the stage for the next wave of innovators, provided the UK can continue to nurture these platforms through to scale. The relatively high volume of early-stage deals in the UK further underscores a clear call to action for the UK government to support innovation.

This report provides a comprehensive overview of the current state of FinTech investment, highlighting both the challenges and the opportunities that lie ahead.

Global Overview

  • Global investment of $15.9 bn across 1,566 deals in H1 2024 (H2 23: $19.5bn).
  • The US maintained its leading position with $7.3 billion invested (45.6% of global share), almost flat on H2 2023 of $7.2bn.
  • The UK secured $2.0bn in investment, representing 12.7% of the global share (compared to 13.9% share in 2022 and 2023).
  • Early-stage deals (Seed and Series A) dominated, accounting for 81% of all deals globally.
  • The average deal size was $10.2 million, reflecting a return to early-stage investments.

Global Overview

The first half of 2024 saw the global FinTech sector navigate a challenging investment landscape. Global investment in FinTech in H1 2024 reached $15.9 billion across 1,566 deals. The average deal size was $10.2 million, a drop from 2022 and 2023’s $12 million mean deal size – and a first indication of a return to early stage venturing.

The current market environment has pushed investors to prioritize more robust and sustainable business models,” says Kaan Akin, Chief Commercial Officer at Tenity, an early stage FinTech accelerator with a global network of programmes. “While the volume of investments has decreased, the quality of investments has improved. This suggests that companies are now delivering more substantial value compared to previous years. Overall, despite the slowdown, this shift towards more prudent investments could be a positive sign for the upcoming years, setting a stronger foundation for future growth in the fintech sector.

The global total is a continuation of the downward trend observed in 2022 and 2023, with investment falling every half year (adjusting for anomalies) since the end 2021 peak, and is now lower than pre-Covid levels. This feels like the market reset has fallen too far because there is significantly more innovation and technology available for investment today, for example in payments, digital banking, open banking and blockchain, than there was 5 years’ ago, and yet investment is lower than 5 years’ ago.

Say Tim Levene, CEO of Augmentum VC: There is some uncertainty in the market fuelled by a confluence of external factors including inevitable political change driven by a year of elections across the globe, regional political instability and caution over the trajectory of interest rates to name a few. This uncertainty does naturally cause some investors to be reticent towards deploying capital.

“That being said,” Levene emphasizes, “we see fintechs have become integral components of financial services with staggering impact on our day-to-day lives. When we zoom out on the data, we also see a continuous broad reversion to long-term funding trends and fintech continues to be a resilient sector when it comes to attracting capital.”

Jay Wilson, Partner at Albion VC expresses similar sentiments:

“There has been a slow down since 2021 but funding 2021-2023 was at unprecedented levels which were always going to be unsustainable,” says Jay Wilson, Partner at Albion VC.” It feels like we have reached a much healthier level of capital deployment, and indeed, generally an upward trend from 2019. Funding is increasingly concentrated into the very best assets which is a flight to quality playing out in the VC market more generally. Valuations are not lower for these investment opportunities, however there is a greater variation in valuations reflecting the above. Inflation/interest rates, geopolitics/elections, and changing market structure (on the supply side of capital) have all impacted global funding volumes.”

Investment by stage shifted a little towards earlier stage (Seed to Series B versus Series C and beyond) in H1 2024 compared to 2023 and 2022, possibly reflecting a reluctance by better-capitalised later stage platforms to issue capital at lower valuations. Earlier stage platforms may have less cash runway and fewer options to reduce costs compared to larger FinTechs, prompting earlier stage platforms into raising capital.

Says Steve Lemon, Partner at Volution: “The journey from A to B is one of the hardest parts. This is the stage when you are proving that your business is working. That you’ve identified a problem and created a viable solution that is selling well. You have a go to market strategy that works, and you’re working on how to further achieve broader product market fit with more robust and scalable go to market processes.

Getting to Series B is about realising that the generalists on your team that were so essential in getting your business stood-up, now need to specialise in chosen areas... You need to have best in class execs who know what good looks like and how to get there, … Your input metrics all needs to be moving consistently and reliably moving in the right direction. And of course, the ultimate metric, revenue, needs to be tracking well and tightly correlated to your burn rate.”

 

As the FinTech industry matures in a challenging global market, founders and investors alike are collectively focused on operational resilience. Mark Beeston, Founder and Manager Partner at Illuminate Financial, states: “First and foremost amongst those is that following the rerating of valuations in 2022/23 many boards have guided companies to focus on metrics and extend runway, so the gaps between raises are increasing as a function of both the valuation environment but also a reduced risk appetite for burn from VCs.”

Finally, an assessment of Mega Deals (deals over $100 million) show that 32 Mega Deals took place this half year, median size $150m. For comparison, there were 72 Mega Deals in the whole of 2023. In boom year 2022, the UK alone booked 32 Mega Deals.

Across global markets, the top 10 destinations for FinTech investment in H1 2024 are similar to the full year 2023 picture. :

 

The US continues to lead global FinTech investment with a c.46% market share, in line with recent years. The UK continues to be the clear second country for FinTech investment, with a market share this half year of c12.7%, slightly down on recent years.

Across the Top 10 global markets, the Top 3 countries are unchanged compared to 2023 full year: United States, United Kingdom and India. Further down the Top 10 there have been some relegations and new entries compared to 2023, for example France is not in the Top 10 at the half-way stage this year. However, deal volumes are thin and it would take only one large megadeal for a country to move into the Top 10. All Top 10 countries are down on H2 2023 levels.

Have we reached the bottom?

When we compare global VC investment in all non-FinTech sectors to global investment in Fintech since pre-Covid (2019), we see unsurprisingly that Fintech investment largely moves in tandem with other VC investment. They both grew rapidly and peaked at end 2021/start 2022, and then declined equally rapidly. However, during this cycle Fintech investment grew to a higher level relative to non-FinTech sectors, and has fallen further from its peak than non-Fintech. Interestingly, non-FinTech VC investment has stabilised over the last 18 months, but has not started to turn up again. This may be a helpful leading indicator as we consider whether FinTech investment has reached the bottom.

European Overview

A look at the Top 10 European Markets shows a similar slow down in investment on par with global movement.

 

With $2.0 billion invested across 184 deals, the UK's investment level surpasses the combined total of the rest of Europe, which stands at approximately $1.8 billion for the half year This underscores the UK's continued strength as Europe's leading FinTech hub, despite ongoing global economic challenges and political uncertainties.

Germany and the Netherlands follow as the second and third largest markets, respectively, showing the growing importance of continental European tech hubs. Sweden maintains a strong position, while France rounds out the top five, highlighting its appeal as a financial centre embracing Tech innovation.

US Overview

The United States maintained its global leadership in FinTech investment, securing $7.3 billion across 599 deals in the first half of 2024, which accounts for 45.6% of global FinTech investment.

This robust performance underscores the USA's continued lead in the sector. A closer look at US investment reveals that while it has continued to fall since 2021 in common with the global trend, investment in H1 2024 was very similar to H2 2023 ($7.2bn). Like in many global regions, US deals were biased towards earlier stages (Seed to Series B), with 66% of deals by value invested in these stages.

UK Overview

The United Kingdom secured $2.0 billion in FinTech investment in the first half of 2024, which puts UK Investment ahead of the remaining European countries combined. A look at UK Investment in 2024 shows a 37% drop in overall investment from H2 2023, part of a falling trend since the peak at the end of 2021. On a 12 month rolling basis, smoothing out some of the short term volatility, UK investment is down only 9% (year to June 2024 versus year to December 2023).

Says again Jay Wilson, Partner at Albion: “Early stage deal flow in UK FinTech is healthy, overall the core FinTech verticals are maturing but embedded FinTech, Gen AI in FS, FinTech at the intersection of Healthcare and Climate, and Digital Assets are all seeing growth”.

Overall the UK appears to be bouncing along just above pre-Covid levels of investment, but only just, and has not yet started to turn the corner. The UK also recorded 2 Mega Deals this half year – the well-received $620 million investment going to neobank Monzo and $174 million going to savings account challenger Flagstone. It is encouraging that Mega Deals are still getting done, and Monzo’s post money valuation was an impressive $5bn

The UK FinTech landscape is largely populated by early stage investments that are “crucial for the next 5 to 10 years, as these are the companies that will eventually be raising substantial rounds of 50 to 100 million USD. Currently, the UK’s early-stage investment landscape highlights the need for more structures that support and inspire entrepreneurs to create more valuable business models;identify new clients and… expand their valuations” the way accelerators like Tenity do.

The UK also recorded 2 Mega Deals this half year – the well-received $620 million investment going to neobank Monzo and $174 million going to savings account challenger Flagstone. It is encouraging that Mega Deals are still getting done, and Monzo’s post money valuation was an impressive $5bn.

Wilson, again: “Monzo and Revolut are great examples of successful UK FinTech innovation, they touch millions of consumer and improve their financial lives, but the UK FinTech narrative needs to move beyond creating the next unicorn to enabling the ecosystem to create the next wave of multi decacorn FinTech companies.”

The period from Half-two 2023 into 2024 has also been marked by impressive profitability headlines from UK FinTechs including Revolut, Starling, Monzo and Zopa Bank. All four companies, founded approximately 10 to 12 years ago have sparked rumours about initial public offerings (see IPO section below) and suggest that the UK FinTech ecosystem is quite healthy.

Tim Levene, who firm Augmentum VC was an early investor in ZOPA, says, “2023 was a year where neobank profitability became front of mind, however per BCG, only 23 out of 453 digital banks globally are profitable, this underscores the exemplary performance at Zopa. We are very excited to see several UK fintechs announcing strong results, which is testament to the quality of our ecosystem. We can only be excited about the next generation of founders who are going to start their own ventures and apply similar playbooks with an acute growth mentality.“

Female Founders

Female founders and co-founders in the UK continue to face a significant investment gap this year. According to data from Beauhurst, a database tracking UK enterprises, only 136 million GBP (or 173 million USD) has gone to fintechs founded or co-founded by women. This brings female founders a 6.7% share of investment.

“The persistent underinvestment in female founders,” says Nina Foote, Partner and Head of Growth at Volution VC, “remains a significant issue and one that, unfortunately, won't be solved overnight. Progress is being made with VCs adopting diversity pledges such as the Investing in Women Code, promoting funding transparency, and introducing initiatives like female office hours and mentorship programs to enhance inclusivity from the grassroots.”

Nevertheless, in order for investment to reach a better level of gender parity, “Systemic change is essential and must originate both from the top down and the bottom up. We are seeing the LP community actively requiring VCs to disclose their diversity metrics and seeking out diverse teams. Research indicates that women are more likely to invest in female-founded startups and that diverse teams generate higher returns.”

Volution’s commentary echo growing industry sentiment that true inclusion goes beyond making strategic hires or allocating capital – but goes further to set innovators up for success.

Mergers & Acquisitions

2024 might just be the year that FinTech M&A comes back with a reported 301 deals representing $45.8 billion worldwide. A retrospective look at M&A over the previous five years shows this may just be the case.

 

The historical data and this year’s possible recovery of M&A activity further demonstrate that FinTech investment is not merely constrained to venture capital. Mergers and acquisitions and private equity deals show a more complete picture of FinTech investment. Tim Levene again, of Augmentum VC: “Close collaboration with fintechs has become a competitive imperative for incumbent financial services firms. They are faced with three strategies: buy, build or partner. Over the years, it has become apparent that their focus has shifted towards buy and partner versus build. Interestingly,85% of global M&A deals involve a strategic buyer. We see this especially in fintech given the large universe of strategic buyers.”

The 5 largest M&A Deals this year so far included:

  • Worldpay: $12,502.21 million (February 1, 2024)
  • Nuvei: $6,300.00 million (April 1, 2024)
  • IRIS Software Group: $4,003.04 million (April 1, 2024)
  • EngageSmart: $4,000.00 million (January 26, 2024)
  • VirginMoney: $3.68 (£2.9) billion by NationWide (May 22, 2024)

The IPO market

Given that many of our members are now reaching the stage in their development where IPO is under discussion, we’re expanding our Investment Landscape report to include commentary on capital raising in the IPO market, with data provided by our member, the London Stock Exchange Group. There has been much discussion lately about the state of IPO markets globally, which have been through a cyclical low over the last few years in parallel with the private capital markets. However, the IPO markets are leading the recovery in capital raising.

In the first half of 2024 the LSE saw 8 IPOs and 184 secondary issues, raising £514m and £18.4bn respectively. This compares to £360m (5 IPOs) and £7.5bn (166 secondaries) raised in the 2nd half of 2023. The UK Tech sector saw the IPO of Raspberry Pi, the innovative UK computer supplier founded in Cambridge 12 years ago, and interestingly 3 US companies also chose London as their listing venue in the first half of 2024. We note that the LSE ranked 3rd globally for total capital raised in H1 2024. While there were no FinTech IPOs in H1, there are currently around 20 Fintech companies listed on the LSE, spanning sectors such as payments, SME lending, pensions and crypto mining.

image

“We’re pleased to report that the London Stock Exchange was one of the most active exchanges globally in H1 2024. IPO activity has begun to pick up, and in March, a £2.4bn placing by Haleon was the largest deal globally in Q1, topped by National Grid’s £7bn rights issue in Q2, the largest primary share issuance globally. These deals highlight robust demand in the public markets for good companies. Importantly for the Innovate Finance community, we hear that a number of FinTechs are also exploring their options and so we may soon be welcoming new FinTechs to the market”

– Neil Shah, Head of Tech, Primary Markets, London Stock Exchange

Mark Beeston, Partner at Illuminate Financial, again: “Manycompanies are finding staying private or returning to private ownership attractive compared to the burdens of a public listing. Of course IPO’s are only one exits option for investors: Industry trade sales, Financial Sponsor driven transactions or secondary sales are all valid ways to create LP liquidity.”

Summary

FinTech investment volumes both globally and in the UK over the last 5 years have been a rollercoaster ride, in common with non-FinTech investment more generally. Despite this volatility the UK continues to maintain its #2 position globally, and is the clear leader in Europe. However there are no signs yet that the UK or global FinTech investment have turned the corner. There are some helpful leading indicators: global VC investment ex Fintech appears to have stabilised, and the IPO market has started to recover. These data points suggest we are close to the bottom for FinTech investment although we may not see improvement until 2025.

The challenge for the UK (and all nations) is that when investment in FinTech returns to growth, where globally will it return? Can the UK maintain its market position and increase market share? Or will the UK lose market share? Unlike the technologies of 5 or 10 years ago, the next wave of technologies such as AI and tokenisation will be geographically homogeneous in nature, and will be built in (any) one country and easily rolled out internationally. This means founders and investors will be able to be more selective about where they invest, and the UK will have to redouble its efforts to capture new investment for the next technology age. We have, for example, already seen in the wider Tech sector a French AI company barely a year old raise $1bn in the last 12 months.

The FinTech sector is at a critical inflexion point globally, with potential upside or downside for the UK depending on how it positions itself for this next industrial phase. There is a short window before global investment re-starts,and during this window the UK FinTech sector and the new Government need to put in place the necessary actions, plans and incentives to make the UK the go-to destination for the next wave of global FinTech investment, and an important contributor to the UK’s Growth plans. Innovate Finance’s Plan for Government published today sets out the key steps for the new Government to make sure the UK is well positioned to meet this challenge.

Innovate Finance’s FinTech Plan for Government sets out the key steps to make sure the UK is well positioned to meet this challenge. It details how FinTech and Government can work in partnership to deliver the Government’s missions on growth and opportunity and strengthen our FinTech ecosystem. The plan develops specific proposals for implementation of policies proposed by the new Chancellor in a report on financial services and innovation, 'Financing Growth', produced in consultation with industry in January 2024. If implemented, these recommendations could deliver up to £328 billion growth for the UK economy. These include delivering the next phase of Open Banking as a priority, unlocking institutional investment in UK capital markets, implementing a joined up and tech-enabled anti-fraud strategy and specific proposals for the new Regulatory Innovation Office.

The UK is starting from a good position, but as they say in financial services, past performance is no guarantee of future results!