Fundraising for Fintechs: is it all gloomy?
The fluctuating landscape raises specific concerns among GCs in series C stage companies and later due to the likelihood of them wanting to IPO before the downturn is over. Pre-seed and Series A companies are less concerned, but this has led to a number of later stage fintech businesses delaying their timelines for IPOs, and looking to existing investors to keep the business going with smaller internal rounds. Are alternatives available?
The initial outlook on the M&A and fundraising climate has proven to be a little gloomy. Peak valuations in 2021 now mean companies are having to work twice as hard to match their valuations then, and the current macroeconomic situation means many companies who had been hoping to IPO in the next 18 months face a tough road ahead.
Another important observation was that money coming into series C or later stage companies is there “to keep the lights on”, rather than for growth. Internal rounds are still proceeding at flat valuations, and convertible instruments being used to defer the valuation discussion until the market picks up. It is a period where GCs are facing challenges getting their companies to weather it out and make funds last – something which founders may not be experienced in. As a result of these factors, many lawyers in the ecosystem are advising their founders to delay raising if at all possible.
“If you raised money in 2020, or 2021, you almost need to have doubled your revenues to get the same valuation again now. And that's quite a brutal realisation for any company who did raise at that time.”
- Tom Judge, Head of Legal, Fidelity International Strategic Ventures
Attendees' company stages*
*indicative data
"Think about the things which are relevant to a fintech, which might be different compared to a standard company just raising money. So on the technology side, do you understand your software? What lies behind your software? Is there open source underneath it? Have you done the work to see what the licensing rights are around that?"
- Dipali Sahni, General Counsel, Demica
Differentiating between stage and sector, however, shows that the downturn is not necessarily affecting everybody equally. Investors report strong demand at the Seed stage in particular with such companies likely to scale and exit at a point when the market environment may have significantly improved.
There are also previously less-used sources of liquidity that are beginning to fill some of the funding gaps in the current climate. Funding of fintech platforms is increasingly an area of focus for the credit arms of private capital, i.e. financial investors such as private equity and hedge funds. Soojean Choi, senior associate from Clifford Chance explains how fintechs are turning to these alternatives for funding in the current fundraising climate and how firms can best prepare themselves for these funding opportunities.
How else can lawyers help their companies be ready for fundraising or exit opportunities even in this uncertain environment? Some advise their peers to be in “constant due diligence mode” and to have a data room open and being regularly updated so that everything is in one place when things start moving again. Getting your governance and diligence in order before time is best practice at any point, and the earlier the better in terms of minimising the overall burden.
