Restive Ventures is a pre-seed and seed stage fintech fund, providing capital, connections and deep operational support at the earliest stages of company formation. We partner with exceptional founders, and as part of that relationship we look to help them navigate the trends in the fintech industry.
Last year will go down as one of the most remarkable years for fintech. At the start of the year, fintech was the place to build: Q4 of 2021 saw the most capital invested in fintech, across every stage, ever1, and those trends carried into early 2022. The remainder of the year was an increasing downhill slope with every quarter seeing less capital invested, at every stage, than the quarter prior. Meanwhile, regulators and policy makers became increasingly focused on the sector as many of the innovations from the prior decade played out and booming stock prices of 2020 and 2021 made clear that the industry was here to stay. Financial services incumbents increased engagement with fintechs across their investment portfolios, strategic relationships, and as service providers to support their own operations.
To understand what this means to early stage fintech founders, we pored over reports from industry sources and conducted our own proprietary survey of investors, industry partners and regulators. These three pillars (fundraising, regulation, and industry engagement) are the three large “macro” domains that we believe have outsize impact within the fintech industry, and we believe it is imperative for fintech founders to understand the motivations of these actors to more successfully build and grow their businesses.
As we look towards 2023, the results portend an increasingly challenging environment for founders in terms of fundraising and regulation, with a bright spot in the potential for fintech founders to deepen engagements with industry partners. Our goal is to help founders navigate the tumultuous year ahead and, hopefully, arise stronger when the market inevitably recovers.
 Pitchbook. "Fintech Report, Emerging Trends and Opportunities." Q2 2022.
The State of Fintech Investors
Across every stage of fintech investing, both the volume of capital and the number of deals are off significantly. Public market valuations are down dramatically, which has led to an almost complete closure of the fundraising market for pre-public and growth stage rounds. These trends carry forward to the early stages as well: in our own survey of other investors we found that fewer than 25% of investors planned to participate in or expected a post-Series A financing event in their portfolio. As an example of this broader trend, one large global multi-stage fund reported that they only did one Series A in fintech since Q2 and had not participated in a Series B or growth stage transaction globally and did not expect to in early 2023.
In a market with dramatically declining late-stage investment, it’s no wonder that companies are responding by cutting burn and stashing cash. In a recent report authored by Silicon Valley Bank, data demonstrated both declining investment and cash balances.2 For the late stage market, cash balances were declining most acutely in companies that generated more than $25m of ARR, with the companies that generate more than $50m of ARR seeing the fastest deceleration of cash balances. The trends at Seed and Series A are a bit more stable, as cash balances are still trending ahead of where they were in Q4 2019. However, we expect the tumult in late stage fintech to continue to trickle down to the early stages, and that early stage companies will take action to protect cashflow as these trends become more evident to founders in the coming months
For new investments, valuations have begun to retrench at the earliest stages: the average pre-seed valuation among survey respondents is now $9m.3 Seed rounds were estimated to be about 50% higher than this. One notable finding is that some investors view any intermediate round at the seed stage as an extension and perceive it as a somewhat negative signal. If capital continues to retrench and we see less willingness for new investors to jump into intermediate rounds, this could indicate a shift away from fragmented - but quite liquid - early stage funding dynamics that existed over the last couple of years where we had “angel rounds”, “pre-seed” rounds, “seed rounds” (frequently of up to 5-8m), all in advance of a Series A. If seed rounds now need to lead directly to A’s we can expect pricing for both to continue to decline.
Despite the tumult, our survey indicated that investors were still excited to invest. Themes investors indicated they were focused on included: tools for small businesses and B2B payments; climate tech; RegTech and compliance, embedded fintech infrastructure, vertical SaaS (especially ‘unsexy’ vertical SaaS) and, of course, the ever elusive “Web3 with good use cases”.
 We defined a pre-seed round as the first institutional round, often of less than $4m of new capital for a company that may be pre-product or pre-revenue.
The State of Fintech Regulators
In contrast to the declining investment activity in 2022, the regulators appeared to only grow more active. In 2022, there was a notable shift in tone away from “innovation” towards “enforcement”. We expect that dynamic to continue with the attention focused on four Banking-as-a-Service (“BaaS”), Consumer Privacy and data access, heightened enforcement and, of course, the fallout from FTX and related crypto meltdowns.
Banking-as-a-service has helped to democratize access to banking products for third parties and create a number of new and pro-consumer fintech products and innovations. However, regulators are increasingly concerned that the single greatest attribute of technology companies—their ability to scale rapidly—poses considerable risks in terms of compliance, money laundering, and consumer protection. Regulators are posing hard questions about consumer data and are seeking to understand where risk actually lies in the three-way relationships among fintechs, BaaS providers, and the actual regulated bank. With unclear lines of responsibility comes the potential for hidden risk, and regulators simply have never conceived of banks as service providers.
While we expect that BaaS providers will continue to exist, founders should be prepared to go direct. The challenges and edge cases that fintechs often encounter at scale require a direct banking relationship and integration; the presence of the third-party intermediary that saved time early on often becomes a liability. To the extent that founders can build in this direct capability early, they will see major dividends as they outgrow their BaaS intermediaries.
Privacy & Data Access
Consumer data is increasingly on legislators’ and regulators’ minds. While Congress’s ire is mostly focused on the big tech companies, there is a dawning recognition that the absence of any privacy requirements throughout the technology sector is increasingly harmful to consumers. While the likelihood of substantial federal privacy legislation being passed in the next session is low, state-level and executive-branch actions appear increasingly likely, especially in the context of companies that appear to be cavalier with their customers’ data.
We also are likely to see, at long last, a formal regulatory interpretation of §1033 of the Dodd-Frank Act. This esoteric section is critical to many fintechs, as it provides the legal framework for consumers to access banking information via intermediate products and aggregators. Any company that uses a service provider like Plaid or integrates directly with a financial institution is operating under this section. The section itself is very vague but the interpretation here is extremely wide. Banks especially have been reluctant to provoke legal fights, choosing instead to fight fintechs with technological roadblocks. This could change, however, depending on the extent to which the CFPB formally preserves the right of consumers to access their information via a third party, meaning that fintechs that rely on consumer banking information may need to pivot quickly.
Probably the most significant directional change has been at the CFPB. Far from being pro-fintech, the new director wasted little time cracking down on fintech. In April, the bureau put nonbanks on notice and quickly followed up a few months later by making an example of Digit, fining the fintech nearly $3mm for accidentally overdrafting a handful of consumer accounts. While this enforcement decision had been in the works for some time, the amount clearly was intended to send a message. These are not outlier decisions but rather reflect a fundamental change in the CFPB’s view of fintechs and innovation generally: namely that so-called innovation is a method for regulatory arbitrage rather than a genuine means by which to better serve consumers.
Finally, the chaos at FTX has undoubtedly created more legislative and regulatory interest in crypto, but it is unclear what will happen and when. It took nearly two years for Dodd-Frank to make its way through Congress, and the financial crisis of 2008 affected far more people than the crypto crisis of 2022. Initial conversations have tended to reinforce how wide the gap is between the technology and legislators’ understanding of the space, so while there may be a lot of talk about immediate action, the more likely outcome is that we will see a series of moves from both the legislature and executive aimed at reining in the worst crypto excesses. The biggest risk is unintentional spillover into other areas of fintech, and we hope that any legislation to emerge from here is not done as a knee-jerk reaction to the FTX scandal that ensnares unrelated businesses.
The State of Fintech Partners
As fintech has evolved, the perspective of the field from the broader financial services industry has ranged from minor nuisance to catastrophic threat to business catalyst. Today, those within industry are more likely to view fintech in that third bucket: as a business catalyst. Corporate venture arms and digital business development teams have sprung up; fintechs now power some of the operational processes of those institutions as important service providers. We expect these dynamics to only accelerate.
For fintech founders, large players in the financial services industry can serve as an important stepping stone for their business, when the engagement is structured correctly. We recently surveyed our industry partners across the banking, payments, and insurance industries to understand their sentiment and expectations around engaging with fintechs. What we found were a series of encouraging trends for fintechs as they look to engage with the border industry in the coming year.
All of our survey respondents said they expect to either increase or keep flat their partnerships with fintech companies.4 Eighty percent expect their partnerships to increase. The most popular category for partnership reflects the current excitement in the broader tech industry: fully 70% of respondents said they were interested in partnering with fintechs on data & AI. The next most popular category, at 60% of respondents, was fraud - which given the economic climate is likely in response to changing customer behavior. Payments, a theme of evergreen interest, also came in at 60% of respondents.
Another major theme we expect in 2023 is increased M&A activity. A recent McKinsey report surveyed corporate development professionals at banks of different sizes, and 60% said the next 18-24 months will offer banks value creating M&A opportunities that are better than those of the last two years. Many legacy players in financial services are facing outdated infrastructure, slowing growth rates, and inefficient organizations, making M&A an attractive target to address some of these problems. As fintechs come under pressure to raise additional capital, they are likely to be more ready acquisition targets for industry partners that may have been priced out of participating over the last few years. Indeed, our survey found that up to 90% of respondents said there is appetite for acquiring fintech companies over the next twelve months.
For fintechs, this means that forging relationships with industry partners is a strategic endeavor- whether it is to drive short term contract value or cement the path for deeper partnerships or acquisitions in the future.
 For the purposes of the survey, we defined “partnered with” as having a paid contract, investment, or strategic partnership with a fintech.
The Opportunity for Founders
With these changes across fundraising, regulation, and industry partnerships, this can be a challenging time to be a fintech founder. As such, we broke down the advice we’re giving to founders for each of the categories.
With respect to investors: take the money! If you find investors who want to invest in your business and they think the price is lower than you think it should be, (and it’s within reason of course), don’t blow up your deal over price. If you’re successful in building your business you’ll have years to make up for the slightly higher rate of dilution. Of course, one great way to avoid dilutive financing rounds is to make money. As such, founders may want to consider focusing on revenue earlier than they have historically - just keep growing as well!
If you raise a seed round in this climate, assume that it’s going to be very hard to raise an A. As such, avoid business plans that burn a major portion of the round before you’ll have proof points. In a market with few intermediate rounds, next round pricing could be the same as this round if you can’t objectively demonstrate progress to new investors.
With respect to navigating the regulatory cycle, the best advice is above all: do right by customers. Behave ethically and transparently. Don’t hide fees or incentivize customers to make poor decisions. Refund even ambiguous claims promptly. Early engagement with regulators (with the advice of experienced counsel and investors) is almost always better than waiting for regulators to initiate contact. To the extent that a given company or CEO can be perceived as consumer-friendly, that team is less likely to find themselves at the pointy end of an increasingly haphazard enforcement regime.
One practical note on data is to treat it like a volatile fuel: it can power a lot of great things, but it is critical to store it safely and protect it. That can be harder than it sounds so if you don’t have a specific vision for how to use data, just delete it.
Don’t underestimate the power of partnership. A few areas that appear particularly ripe for collaboration include more practical uses of data and AI in fintech: investor interest and industry partner/purchaser interests are aligned. It is possible to scale data analysis and AI much faster in areas that are not highly regulated (e.g. operations, customer marketing, FP&A), and there is less overhead for adoption. However, those that can successfully navigate any compliance hurdles here have a strong moat.
Lastly, some practical advice on navigating industry partnerships: be sure to establish early whether an engagement is truly strategic or not. Large companies employ thousands of people who love talking to startups- and you can spend countless cycles in conversation without the political will to really move forward. Ensure decision-makers are brought in early, and that you understand the real motivation behind a partnership. Form “real” relationships with people so that you can hear honest feedback more quickly, and have a champion inside the organization.
For fintech founders, 2023 will undoubtedly introduce some new challenges – outside of the normal challenges of launching and building a company. However, by understanding the dynamics, risks, and motivations of key pillars of fintech, we hope we can help fintech founders better navigate this new cycle and produce a new generation of successful companies. We can’t wait to see what’s in store for the year ahead!