As venture capitalists and PE investors tighten their purse strings, wealthtech firms will need more than a sexy pitch
Amid a quick acceleration in interest rates, valuations of growth and tech stocks have taken a severe beating so far this year. And that carnage in the market for public tech stocks has spilled over into the private space.
According to newly released research from KPMG, 2021 was a breakout year for the Canadian fintech space, which saw more than US$7.3 billion in investment, including a record US$5.4 billion across 108 deals in H1 2021.
But in the first half of this year, only 85 deals have materialized with a total investment of US$810 million between them.
“The market downturn and ensuing lower tech valuations caused investors to hit the 'pause button' over the last few months,” Geoff Rush, National Industry Leader for Financial Services at KPMG in Canada, said in a statement. “We expect fintech to continue to draw interest in the second half of the year, but investors will be more selective about where they deploy capital.”
The picture is similarly grey in the world of wealthtech.
According to the most recent figures from Fintech Global, global wealthtech investment totalled US$8.8 billion across 531 deals in H1 2022, on pace for a full-2022 total of US$17.6 billion. That’s compared to the US$24.9 billion record that was documented for the whole of last year.
Brad Joudrie, the chief revenue officer at financial planning software firm Conquest Planning, says wealthtech firms are having to work harder to attract investment from venture capitalists and private equity investors.
“We've been very fortunate with the investors that we've been able to bring in as part of Conquest's previous growth,” Joudrie told Wealth Professional.
“We have strategic partnerships with Portage Ventures, Fidelity International Strategic ventures, and IGM Financial,” he says. “We were set up for success, because we chose some some very good partners from the start.”
Joudrie says VC and PE firms still have capital that they’re waiting to deploy. But with markets being as soft as they are, he says firms are being more judicious about the opportunities they are willing to put their money behind.
“Where I've seen wealthtech firms struggle [with getting investors] is when they've lacked a clearly defined product-market fit,” he says. “A lot of the venture capital and private equity money is looking for firms that have a very clearly defined product-market fit. They have to have a product that the market is interested in and wants, and some initial sales or revenue success to back it up.”
As tightening monetary policy puts the squeeze on discount rates for tech firms, private-market investors are picking their spots. Rather than giving companies with big ideas the benefit of the doubt, they’re now looking for the minds and management behind these firms to prove that they have a solid business plan and robust operational systems, to name a few requirements.
“Those firms and investors are doing further diligence than had previously been done before,” Joudrie says. “Ultimately, what they're trying to do is maximize successful outcomes.”