FinTech: 2024 Valuation Multiples

The FinTech industry was among the big winners of the pandemic starting in 2020 thanks to skyrocketing adoption rates and an investment frenzy—especially in the stock market—fuelled by favourable economic policies.

Then, 2021 saw unprecedented levels of investment and M&A activity, although Revenue valuation multiples faltered, likely as a correction from the previous year. The following two years were not as generous to the sector, with investment falling 46% in 2022 and then a further 50% in 2023, reports CBInsights.

FinTech companies raised a total of $38.2bn globally in 2023 over 3,801 deals—the lowest level since 2017, with Q4 2023 being the worst quarter by number of deals in 7 years. All FinTech sub-sectors were hit by the funding shortage but none quite like banking, down by over 70% in terms of investment value compared to 2022.

This continues a trend started in 2022 with the rise of inflation, which disproportionately affects banking startups by slashing their profits. In fact, for the second year in a row, the Payments sub-sector led the investment market raising over a third of the total cash that was injected in the FinTech sector last year.

It’s easy to discount the causes of the FinTech crisis reducing them to a high-inflation environment, but there are deeper structural issues that hinder the sector’s health over the long term which are only exacerbated by the unfavourable economic outlook, which makes invested and borrowed money way more expensive than it’s been in the past two years.

At the beginning of Q2 2022 Avi Eyal, co-founder of Entrée Capital—a VC specialised in FinTech—traced the root of the problem back to cost of acquisition and over-reliance on fundraising: “Companies that have raised a lot of money acquire users for insane amounts. There will be a significant collapse in the fintech field in the next two years and one has to think carefully about what is going to happen. The cheap money of the past will be gone.“

FinTech Valuation Multiples

SEG’s reports offer interesting insights into FinTech valuation multiples. Their index comprises over 100 publicly traded SaaS companies, broken down by sector.

After closing Q4 2020 with a median EV/Revenue multiple of 15x, companies in the Index peaked at 19x in the first quarter of 2021 before nosediving well below pre-pandemic levels.

2022 started with a 40% fall compared to Q4 of the previous year, and continued on a negative trend until Q1 2023. Last year, however, saw an ever-so-slight gain in revenue multiples, growing from 5x in Q1 2023 to 6.3x in Q4 2023.

Source: SEG

This trend amplifies what we saw in the broader SaaS space. This is likely related to inflation, which has been rising steadily throughout last year in most countries adding pressure on FinTech companies to deliver returns to their investors. Moreover, FinTech companies in the smart banking space face further disadvantages in high inflation periods due to increased interest rates and over reliance on cash reserves.

This is also true of payment processing companies that aren’t already extracting significant processes from their business model. While giants such as Mastercard may do just fine in a high-inflation environment, as their returns are directly correlated with consumer spend and their cost base remains largely unchanged, newer players will struggle with rising cost of labour outweighing their very early profits.

When we look at EBITDA multiples, we can see how—despite seeing a correction from their mid-2020 peak—they remained broadly unchanged throughout 2022 and 2023, even recording an all-time-high mid-2023, which unfortunately is most likely a data fluke. The median EBITDA multiple for Fintech SaaS companies in was 29.6x in Q4 2022.

Source: SEG

The majority of public SaaS companies (on which this analysis is based) remain unprofitable. This is a key factor to consider when looking at EBITDA data (based only on profitable companies), as it paints a completely different picture compared to the complete cohort (profitable and unprofitable companies).

When negotiating with a potential investor, a profitable business model—although small in scale—might put you in a much stronger position when justifying your valuation.