As the fintech industry continues to experience rapid growth and disrupt traditional financial institutions, venture capitalists (VCs) are actively seeking the next big thing in 2023 in the realm of fintech funding.
With emerging technologies such as blockchain and AI already creating waves, VCs are looking for innovative fintech startups that can provide solutions in payment processing, financial management, lending, and many more areas.
However, VCs are not solely interested in the latest tech buzzwords, as most are also keen to invest in fintech startups that focus on implementing new and alternative financing solutions.
According to Kamen Bankovski, founding member of Bulgarian VC Vitosha Venture Partners, the past few years have shown that tough times also have a role in shaping the industry, as previous downturns have created great companies, along with great venture capital returns.
“Globally speaking, frictionless payments and embedded finance have seen resilience in terms of venture funding during the past year or so. The CFO stack will remain relevant, from automation, expense management and payroll, to business banking and alternative financing solutions, as cash flow management and tightening are in focus during the downturn. SME software in general, core infrastructure plays and things with a strong value prop will continue to attract investor attention. Consumer finance products with a weak value proposition will continue to suffer,” Bankovski tells The Recursive.
Embedded finance to continue attracting funding in 2023
Embedded finance is one of the areas that has attracted big fintech funding in the past, and it is a trend that is very likely to continue during 2023, Apostolos Apostolakis from the Greek VC VentureFriends agrees.
“One area where we see a lot of interest is embedded finance. Marketplaces or large e-commerce companies realize that they can offer fintech products to their customer base. This way they can better serve their customers by addressing their needs and at the same time monetize this extra revenue stream. This also applies to the B2B space. There are companies like Embat or Barte that help SMEs with cash flow management or payments but then they can also offer factoring to their customers,” Apostolakis tells The Recursive.
Additionally, VCs are also interested in fintech startups that develop robust cybersecurity measures to protect customers’ financial data, with an increasing need for fraud detection, secure payment transactions, and data privacy.
“In fintech startups we also need to see that the team has a strong understanding about regulation and security. As an example, in the case of a saving and investing subscription product like Plum the company needs to get an EMI and an AISP license from the FCA, the UK regulatory body, and similarly for its activity in European Union countries they need licenses from ESMA and possibly other relevant country specific financial regulatory bodies. Additionally, security becomes an important topic from day one for fintechs dealing with money and deposits and the team needs to build that additional skillset early on,” Apostolakis adds.
For Prague-based VC Presto Ventures, fintech funding in 2023 is all about payment infrastructure startups, as their solutions provide the foundation for launching new fintechs and building infrastructure stack for banks.
“Aside from that, with the AI hype, new fintech use cases are starting to emerge – for example those related to credit scoring, credit counseling, and AI implementation in customer-facing fintech investment products. With further NLP improvements, we’re likely to see new ways of automating even more manual tasks, mainly in insurance and processing,” Roman Novacek, partner at Presto Ventures, explains.
Strong business model and growing market opportunity
When looking into a fintech startup, what Vitosha Ventures Partners focuses on is a strong business model, as well as a big and growing market opportunity, Bankovski points out.
“We like to see an edge, an unfair advantage of some sort, whether that’s product, technology, or go-to-market oriented. Moreover, they have a strong business model and solid unit economics to support it. We bet on the team that is perfect for executing this idea and scaling it into a large and sustainable business that has a clear track for future fund raising and is clear on the milestones needed to get there,” he tells The Recursive.
For VentureFriends, it’s all about the team and their capabilities to be able market their solution.
“Fintech startups are more complex and as such need to fulfill all the requirements that generic software startups do and then some. Like in all startups we initially consider whether the space needs the proposed solution (product/market fit) and what the level of current competition is. Then we examine team/market fit, so we need to get convinced about the team having the required product DNA, and the marketing/sales capability to spread the usage of their product,” VentureFriends’ Apostolakis tells The Recursive.
Presto Ventures believes that fintechs with a strong value proposition are more likely to succeed than those that compete solely on price.
“Typically, their product is not easily replicable by someone coming in with more money and taking the market purely because of that. If that happens, you might be stuck in an environment where no one makes money until others leave the market,” Novacek concludes.