Valuations slide to early 2020 levels as investors grapple with recession fears, KPMG in Canada data shows

Investment in Canadian fintech companies dropped three-fold in the first half of 2023 as valuations continued to slide to levels not seen since the beginning of the COVID-19 pandemic, driven primarily by macroeconomic concerns, according to KPMG in Canada.

In the first six months of 2023, investment (including venture capital, private equity and merger and acquisition activity) totaled US$353.7 million across 57 deals. That's down from the US$1.09 billion invested across 87 deals in the second half of 2022, and US$353.7 million invested across 109 deals in the first half of 2022, according to data compiled by PitchBook for KPMG in Canada.

The first half of 2023 was one of the weakest for valuations since the first half of 2020, when the COVID-19 pandemic rattled global markets and the economy. Geoff Rush, partner and national industry leader for financial services at KPMG in Canada, says it's the continuation of a downward trend that began to unfold last year.

"Investors are still quite concerned about the state of the global economy, with fears of a recession, elevated inflation and interest rates continuing to put a significant strain on valuations, and that's causing them to pause and reflect on their current investments and strategies," says Mr. Rush. "Geopolitical concerns and the failure of several banks in recent months are also playing into investors' decisions. On the latter, the fact that that some loan portfolios and investment teams have been acquired by financial institutions recently illustrates that there are still opportunities in fintech," he notes.

In the first quarter, investment in Canadian fintech totaled US$297.3 million across 30 deals, but it fell more than five-fold to US$56.5 million across 27 deals in the second quarter. In fact, Q2 was one of the weakest quarters for Canadian fintech valuations since the third quarter of 2016.

Mr. Rush says the downward trend will likely play out for the rest of the year. "While investment will continue to be weak in the second half, we will likely see pockets of activity in areas like blockchain, artificial intelligence and machine learning. There are a lot of financial services companies that rely significantly on technology and are looking to adopt more emerging technologies such as generative AI, so that should bode well for the fintech space in the near to long-term," he adds.

Canadian fintech investment in H1'23

Deal Type / Investments by Industry

β€’ 19 early-stage - 15 cryptoassets/blockchain
β€’ 15 seed-round - 7 artificial intelligence/machine learning
β€’ 10 late-stage - 6 payments
β€’ 5 merger and acquisition - 4 climatetech/cleantech
β€’ 3 angel - 4 regtech
β€’ 3 private equity growth/expansion - 2 insurtech
β€’ 2 buyouts - 2 cybersecurity
β€’ 0 initial public offerings - 2 wealthtech

Venture capital funding drops to early pandemic-era levels

Venture capital (VC) firms invested US$260.1 million into Canadian fintechs the first six months of 2023 (across 47 deals), down nearly four-fold from the last six months of 2022, when US$989 million was invested (across 65 deals), and the first half of 2022 when US$805.7 million was invested (across 95 deals). In the first quarter of 2023, VC firms invested US$203.7 million into 25 deals, falling to US$56.5 million over 22 deals in the second quarter.

The majority of deals were early-stage and seed-round investments, followed by late-stage funding rounds. There were no initial public offerings in the first half, continuing the drought from last year.

Georges Pigeon, a partner in KPMG in Canada's deal advisory practice says the early and seed round activity suggests that investors are interested in funding young, innovative companies at reasonable valuations – a positive sign for the health and growth of Canada's fintech ecosystem.

"Right now could be good timing to launch a fintech startup as investors would be coming into the early financing rounds. At reasonable valuations, many investors have time to see their investment through, so it's a good opportunity for new fintechs to emerge," he says.

Mr. Pigeon notes a number of fintechs have managed to preserve or stretch their funding through the year thus far, but for those that need to raise funds in the near future, they might be staring at the possibility of flat valuations or even down-rounds.

"Fintechs that have been able to hold off from raising cash might find a better funding environment towards the end of the year as investors' fears of a recession abate as they anticipate the eventual plateauing of interest rate increases. We could see some stability coming back to financing markets by the end of 2023 or early 2024. Unfortunately, that timing may mean some more mature fintechs that have yet to achieve sustained positive cash flows may be facing very difficult choices by then, such as selling at down-valuation or simply shuttering," he adds.

Global fintech activity plummets, but the U.S. is a bright spot

The first half of the year was challenging for the global fintech market as investment dropped to US$52.4 billion across 2,153 deals from US$63.2 billion across 2,885 deals in the second half of 2022, according to KPMG international's latest Pulse of Fintech bi-annual report.

The U.S. fintech market was the bright spot, with US$34.9 billion invested in 809 deals in the first half of 2023, accounting for more than two-thirds of the US$52.4 billion global total. The U.S. also attracted five of the seven US$1 billion-plus fintech deals of the first half.

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