Venture capital funding for U.S. fintech companies has skyrocketed in 2021, both in value and deal volume. While we were expecting “another good year”, the magnitude of the increase – a near doubling of deal value – was surprising.
US fintech funding had a banner year in 2021, but it will be a tough act to track. Falling public equity market valuations and potential interest rate hikes do not bode well for future investment activity. Private capital remained abundant in January 2022, based on the aggregate total of all US industries, but we will watch for signs of a slowdown.
The surge in fintech funding in 2021 was not simply due to favorable year-over-year comparisons after a slowdown in activity in 2020 at the height of the pandemic. Fundraising activity fell from March 2020 to April 2020 but recovered quickly. A look at the fourth quarters of 2020 and 2021 alone echoes the findings of the full year: the total amount raised increased by more than 95% and the volume of transactions jumped by more than 40%.
Investment and capital markets technology firms were the main beneficiaries of the wave of venture capital in 2021. According to our estimate, approximately $9 billion has been poured into this space, a total that does not even include Robinhood Markets Inc.The $3.4 billion capital injection in February 2021. Details were lacking at the time, but we now know that Robinhood raised non-convertible debt, which we exclude from our equity funding cycle analyzes .
The investment and capital markets technology category also led in 2021 based on the number of funding rounds, with 33% more than the next highest category. The roughly 250 rounds that investment and tech firms closed accounted for 26% of the total rounds of all U.S. fintech companies in 2021.
The surge in funding from investment companies and capital markets in 2021 was likely due to the boom in stock markets and cryptocurrencies, as well as successful investor exits. The year saw spectacular displays of retail investor activity, with an avalanche of deals in GameStop Corp. late January and a June spike in Dogecoin purchases, among other examples. These may have spurred venture capital bets on consumer apps and the infrastructure companies that support them. robinhood Initial Public Offering likely added to VC investor optimism, demonstrating that a startup can grow from a $3 million seed round to a $2.3 billion public offering in eight years.
Four of the top 10 fintech fundraisers in the United States in 2021, by amount raised, came from investment firms and capital markets technologies. The largest of these four comes from New York Digital Investment Group LLC, illustrating the popularity of bitcoin. NYDIG helps institutions offer bitcoin services and could arguably fall into other categories, such as banking technology or payments, given its customer base. But since NYDIG has brokerage affiliates dedicated to bitcoin trading, S&P Global Market Intelligence classifies it as an investment and capital markets technology.
Another significant increase came from a clearer provider of investment technology and capital markets: DriveWealth Holdings Inc. The company provides a host of back-end services, such as clearing and settlement, for trading and investing applications, including Block Inc.CashApp. While startups with consumer-facing applications tend to attract media attention, venture capitalists are generally equally, if not more, interested in business-to-business startups in investment and market technologies. of capital.
It’s still early in 2022, but there are worrying signs for the fintech sector. Many startups that have gone public since the start of 2020 are now trading below their IPO price and, more generally, growth stocks currently seem out of favor with investors. If the market rout continues, it will likely mean fewer fintech startups going public, if at all. We’ve already seen special purpose acquisition company deals removed from the investment app Acorns Grow Inc. and insurtech owners Kin Insurance Inc., and we expect other companies’ IPO plans to be put on hold. A declining stock market could also dampen M&A activity, as publicly traded acquirers would have weaker currencies to complete deals in and likely go into capital preservation mode.
While no slowdown in IPOs or M&As will have an immediate impact on venture capital funding—funding could even increase for a while if startups stay private longer—these factors could possibly discourage investment if venture capitalists view exits as less lucrative or impractical. Another key barometer for the future of venture capital funding, in our view, is interest rates. If the Federal Reserve raises rates, as expected, it will raise the minimum rate for investors, making private capital more expensive and, most likely, lowering its supply.
On the bright side, venture capital funding across all sectors did not slow in January 2022, even with the fall in the broader stock market. In addition, several seasoned startups, such as stripe inc. and Financial Chime Inc.remain private and should continue to perform grand tours until they become public or acquired.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.