The recent mauling of fintech investment giants SoftBank and Tiger Global is raising questions about the future funding of some of Europe’s most valuable fintechs.
SoftBank and Tiger Global, known for their open chequebook and gung-ho fintech funding approach, have both suffered bloody noses, losing billions of dollars as fintech and tech firms take a hammering.
Earlier this week, SoftBank’s mercurial founder Masayoshi Son revealed that its Vision Fund, the world’s largest tech fund, had lost $21.74billion in the quarter, as its bets on unprofitable tech and fintech firms misfired.
The Japanese conglomerate’s Vision Fund 2 is a prolific fintech investor and led multi-million dollar investments into Revolut, Klarna and eToro among others.
But it has been damaged amid a market rout that has hammered the valuation of public and private tech firms amid an adverse economic environment.
Big fintech investors
Rival fund Tiger Global, which has invested in Revolut, Checkout.com and TrueLayer, has also taken a mauling and has lost around $17billion in the first five months of the year.
An indication of Tiger’s prominence as a fintech investor is that during Q4 2021 and Q1 2022, the US hedge fund was the most active fintech investor, backing 37 and 39 startups respectively.
The two fintech investors have both slashed or dumped holdings with Softbank saying it will be ‘more selective’ in its investment moving forward, leading to concern amongst the fintech community. Their bloodied noses also raise questions about the valuations of their fintech investments, which are often hitched to the fintech’s latest funding round.
Furthermore, experts are questioning what impact their fail from grace will have on follow-up funding of fintechs and whether they can still count on support from Tiger and SoftBank.
Plenty of ‘dry powder’ VC investment to go around
Ralph Rogge. co-founder and CEO of Crezco, the payment startup, says Tiger and SoftBank’s expected retreat from fintech investments could present opportunities for other, less prominent, VCs.
Rogge said: “There are many, many other VCs out there, which haven’t struck headlines like SoftBank and Tiger, that have behaved quite differently, that have passed where those guys have bought.
“Perhaps these other funds, the ones that have maybe been less aggressive over the last couple of years, the smarter ones, this is now their opportunity to deploy capital.”
In agreement is Lucas Timberlake, the co-founder of VC fund Fintech Ventures Fund, who points to “plenty of venture capital dry powder to go around”.
However, he cautions that, given the adverse market conditions, investors are not currently deploying capital as actively as before. But he is anticipating a pickup in investor activity later this year.
He adds: “We should remember that VCs still raised over $120billion in the first half of 2022, which was an over 60 per cent increase versus 2021 during the same period, as per PitchBook.
“I think that things will start to pick back up beginning this Fall, but I do not expect us to return to record-setting 2021 levels anytime soon.”
Follow on funding for fintech darlings?
Whether the likes of Klarna, Revolut and Checkout.com can still count on follow-on investment from Tiger and SoftBank will soon play out.
Richard Hoskins, partner at Kin Fund Services, which provides fund management services, said Tiger and SoftBank will “have to make some difficult decisions” about who they will invest in moving forward. Should they look to cut ties, then it will prove a test of these fintechs to bring in additional funding.
But these fintech darlings can point to an eye-catching list of alternative existing funders on their roster while Rogge points out there are “many other VCs out there that would love to be part of the Revolut journey”.
Outside of those fintechs they have invested in, some fintech professionals believe the two investors’ open chequebook strategy was “misguided”.
Hadley Harris, co-founder of Eniac Ventures, the US seed stage investment fund, in particular points to their big bets placed in 2021.
He said: “They were investing as if multiples in 2021 were rational, which I don’t believe is true. I do think current multiples are overly compressed and will bounce back a bit over time but not nearly to the level of 2021.
“We’re already seeing early signs of the funding markets returning but I can’t see them returning to the open chequebook times we saw over the last couple of years.”
However, others think there was value in their approach.
Timberlake said: “These firms were trying to replicate an “index-fund” approach towards private investments, which tends to correlate to public market (e.g. Nasdaq) performances. I still think there is value in this approach in periods of economic expansion.”
More down rounds to come
It’s not just SoftBank and Tiger which are suffering amid a challenging fintech investment market, which has been worsened by a slowdown in M&A activity and IPO listings in the tech sector.
There is now the prospect of more fintechs, including those funded by SoftBank and Tiger, suffering the ignominy of undertaking a Klarna-like down round.
Last month, the Swedish BNPL giant bagged an $800million funding round at a post-money valuation of $6.7billion, a marked drop compared to its 2021 $45.6billion value.
Hoskins points to industry figures showing around half of UK fintech unicorns were born last year, but says the status of “high burn rate” unicorns is “now in doubt”. Those that “adopted the growth at any costs” will suffer the most, he says.
As an example, he points to AI insurtech startup Tractable, which was elevated to unicorn status last year following a $60million fundraising.
He said: “The point is they are going to have to go back to the market and raise more money and the likelihood is they will have to do that at a lower valuation.”
Hoskins believes that down rounds can have a “doom loop” impact on startups, with lower valuations disincentivising staff.
While SoftBank and Tiger have taken a knock, it seems their retreat from fintech is unlikely to have long-term and profound impact on the fintech industry.
As Timberlake says: “Fintech companies with strong fundamentals will continue to get funded. While Harris points out one importance consequence of Tiger’s pre-eminence.
Harris says: “They were totally upfront about the fact they wouldn’t help founders. I think it exposed an uncomfortable truth for many VCs, that some founders just want money and for investors to stay out of the way.