FinTech: 2023 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. According to research firm CB Insights‘ latest annual report on the State of Fintech in 2022: “funding reached $75.2bn in 2022 — marking a 46% drop from 2021, but up 52% compared to 2020. The funding slowdown was especially severe in the second half of the year, with Q4’22 funding clocking in at $10.7bn — the lowest quarterly level since 2018.“

The funding decline is largely due to the number of mega-deals plummeting, and investment rounds decreasing in value across the board. In fact, despite total 2022 funding being about half the amount invested in 2021, total number of deals fell by less than 8%.

The Payments sub-sector led the FinTech space with $3.2bn raised across 188 deals. Although this is remarkably lower than the previous year, we can see how investors are moving towards a segment that is believed to be more “inflation-proof”, as opposed to Banking—for example—which saw a 63% drop in funding and a 33% fall in number of deals.

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 taking a dip nearly back to pre-pandemic levels.

2022 started with a 40% fall compared to Q4 of the previous year, and continued on a negative trend, although less abrupt. In Q4 2022, FinTech companies in the SEG Index recorded a median EV/Revenue multiple of 5.4x, less than half compared to pre-pandemic levels.

Source: SEG

This trend amplifies what we saw in the broader SaaS space, but with a greater magnitude. 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. The median EBITDA multiple for Fintech SaaS companies in was 24.6x 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.