A recent report from Andreessen Horowitz illustrates a sad state of affairs for the fintech industry, which has gotten clobbered in the tech-stocks downdraft. A chart included in the report shows fintech valuations in sharper decline than any other sector, by a significant margin.
The analysis, which looks at forward revenue multiples, found that fintech valuations have fallen from 25 times forward revenue in October 2021 to four times forward revenue in May.
An analysis of valuations based on forward revenue multiples show fintechs have fallen harder than other tech sectors.Image: Andreessen Horowitz
The chart is part of a report, “A Framework for Navigating Down Markets,” by partners Justin Kahl and David George. Startups need to reassess how much they're worth and prepare for the worst, the authors say.
The report doesn’t focus on fintechs specifically, and thus doesn’t explain why fintechs’ numbers are in such steep decline compared to other groupings like large software companies or consumer and internet startups. The partners weren’t available to comment.
There are a couple of reasons analysts and other observers propose, the most common of which is simply that many fintechs are better evaluated as financial services companies than software companies. The financial sector is seriously affected by cyclical tightening and loosening of lending markets, and many fintechs haven’t proven they can last through those ups and downs. “Now there’s more and more talk of, ‘Are we headed toward a recession?’ and none of these fintechs have been through a credit cycle,” said Val Greer, chief commercial officer at Bread Financial.
Many economic analysts point to interest rates as a factor. Rising rates have affected tech valuations as a whole but also affect fintechs in unique ways. Lending models depend heavily on easy access to funding, for example, while fintech customers are particularly sensitive to any rate or fee increases that companies might use to generate extra revenue. Wealth management firms are likewise affected as the young, new-to-the-market consumers they court feel less flush and thus shy away from risky investments like meme stocks or crypto.
Then there’s the fact that fintechs collected about 20% of venture capital funding last year. The fintech sector may simply have had further to fall even more as investors came to terms with the fact that fintechs cannot achieve the growth entrepreneurs' pitch decks promised.
Jason Mikula, a consultant and publisher of Fintech Business Weekly, said that fintech is a diverse sector and includes many different business models, but the fintech "bucket" has many firms whose "core economics are derived from financial services businesses, which tend to have fairly low multiples.”
Andreessen Horowitz isn't exactly tightening its purse strings. While late-stage firms like SoftBank and Tiger Global are taking a step back from startup funding, a16z has continued at full speed, announcing a new $600 million fund for Web3 gaming investments just last week.And yet, the a16z partners’ advice to startups is in line with what a lot of VCs are saying right now: “Reevaluate your valuation, understand your burn multiples, and build scenario plans.”