New Silicon Valley Bank Report Finds that Frugal Fintechs Have the Best Survival Rates
By W.B. King
During FinovateFall 2023, Silicon Valley Bank (SVB), a division of First Citizens Bank, launched its new advertising campaign, “Yes, SVB,” which demonstrates its commitment to the innovation economy.
“Despite what you might have read or heard, SVB is open and operating with the largest teams of dedicated bankers serving private equity, the innovation economy and the wine industry. We continue to support our clients as we always have,” said Marc Cadieux, head of SVB commercial banking. “What our clients need and expect from SVB is still here – dedicated and knowledgeable teams, comprehensive products and services, exceptional service, and a deep understanding of their unique businesses. Our new parent company, First Citizens, recognizes SVB’s critical role in the innovation economy and is backing and investing in the SVB business so it can continue to support our clients’ growth.”
On the heels of this announcement, the company released Future of Fintech: SVB’s Outlook on Innovation in the Fintech Industry (October 2023). SVB report co-authors Nick Christian head of National Fintech and Specialty Finance and Brian Foley, market manager, Fintech and Warehouse Lending, explained that while venture capital (VC) investors are “pulling back on deployments generally, fintech valuations still hold a premium compared to tech overall.” The authors added this bodes well for the future of the fintech space.
“The same can be said for blockchain and digital assets. While this space has weathered challenges in the last year, rising asset prices and commitments by institutional investors suggest that blockchain technology may be entering a new phase of development,” they continued. “While it’s easy to get distracted by the hype of short-term volatility, we remain committed to the lasting viability of the fintech space. Innovation isn’t always a straight line, but our enduring view remains optimistic.”
Parsing the Tech Economy
The report examined subsectors, finding that industries “more prone to changes in interest rates, such as personal finance, lending and real estate,” have seen “dramatic decreases” in activity. There are, however, subsets doing much better. These include insurtech, infrastructure and financial business process software.
“Commercial payment deal activity has remained slightly more robust than consumer payments, due to the growth potential of embedded payments. In addition, insurtech has seen some positive momentum recently, with Chicago-based D2C homeowners insurtech company Kin raising a $33 million extension Series D round ($142 million in total for the series D) at a $1 billion valuation,” the report continued. “This funding round should help provide additional runway, allowing the company to cut a path to profitability, as it has just reached positive operating income — indicative of the trend seen recently favoring profitability over growth at all costs.”
Pointing to the $6.9 billion Stripe fundraising win in March 2023, the report underscored that this wasn’t just the biggest deal of the year but the largest in VC tech rounds history. Founded in 2010, the Irish-American multinational financial services and software as a service company (SaaS) company is dual-headquartered in San Francisco and Dublin, Ireland.
“The commercial payments app was valued at $50 billion, down from $95 billion in 2021, but still good enough to maintain the company’s position as the second most valuable U.S. unicorn after SpaceX,” the report stated. “One way to see the deal is that it underscores the immense promise and optimism investors have in the payments and embedded finance space.”
Digital payments surged during COVID-19, but unlike other short-lived pandemic spikes, this trend has maintained, the report stated. “As many as 69% of consumers preferred contactless payments in 2022, up from 22% in 2020. Tap-to-pay technology is on the rise, and embedded finance transactions, including embedded banking, lending and insurance, are expected to top $7 trillion by 2026, the report continued. “The pool of potential revenue is ripe for companies across the embedded finance value chain, from the consumer apps providing the customers to the banks settling the transactions.”
The report offered a five-year time horizon, which projected the embedded finance market opportunity. In 2021, for example, consumer payments were valued at $1.7 trillion. This figure is estimated to be $3.5 trillion in 2026. Embedded banking, which barely registered in 2021, is estimated to grow to $750 billion in 2026. Point-of-sale and buy now pay later, and business lending will rise from nominal amounts to $349 billion and $75 billion in 2026 respectfully.
Survival Means Cutting Talent
Over the last 18 months, the report found that most fintech startups have been in survival mode. In order to continue, these companies have been cutting their biggest expense: employees.
“While minimizing items such as travel and expense (T&E) and reducing spend on SaaS can help reduce burn at the margin, head count is among the largest line items for many startups, making it a core focus for cuts,” the report noted. “This is especially true for many fintech startups that over hired in the high-growth environment of 2020-2021 and now face excess head count amid slower than expected growth.”
As these fintechs look to the future, SVB’s proprietary data shows these types of cuts can positively impact the bottom line.
“The median fintech burn multiple has fallen nearly 60% to 1.2 times — 25% lower than the rest of the tech industry. Improving burn multiples not only extends the runway, but it also puts the company on a better path to profitability,” the report noted. “With the current investment pace continuing at a slower clip, U.S. fintech startups have quickly pivoted away from growth and toward profitability.”