Fintech and Insurtech in 2022

January has been a long month but we still have 11 months ahead of us so it is hopefully not too late to write about the year ahead. Particularly as the correction in public tech company valuations over the last few weeks may have changed this outlook.

It has been an ugly January for public tech companies and we are starting to see this spread to late stage private market valuations where multiples are no longer aligned:

• Adyen stock is down 28% in the last month as I write this and its market cap of $52B is only slightly higher than Checkout’s recent private round at $40B.
• Robinhood is down 33% in last month and 66% in the last year. Its market cap is now $10B. For reference Trade Republic raised from Sequoia at a $5.3B valuation on AUM of $6B, less than 10% of the AUM at Robinhood.
• Lemonade is down 27% in last month and 68% on last year, now at $1.7B market cap. Root insurance is down 48% in last month and 92% (!) in last year, valued at $400M.

The obvious consequence is that late stage fundraising is going to be harder and valuations are going to be lower. Certainly for the next few months.

Why are valuations decreasing?

The fundamentals haven’t changed: tech is eating the world and that applies even more so in financial services. Great fintech and insurtech companies are going to continue growing fast. They are delivering better products at lower costs and that is disrupting trillion dollar markets. Reaching profitability in this sector takes time, as it does in most SaaS businesses, but if the unit economics work then it is a matter of reaching enough scale.

The challenge is that the risk-adjusted cost of capital is increasing: partly due to higher inflation and interest rates, but mostly because institutional investors are becoming more risk-averse. Investors are going to be less tolerant of companies that make a loss for many years with the expectation of turning a profit, and they are going to be more focused on “how does this go wrong” than “how does this go right”.

What does this mean for a fintech startup or scale-up?

• At seed/A stage, focus on how you can quickly demonstrate strong product-market fit with more modest amounts of capital.
• Unit economics really matter once you are at series B and beyond.
• Productivity of your product and engineering team matters. It is impossible to perfectly quantify the RoI of your product team but the exercise is worthwhile. What should the impact of your product roadmap for 2022 be on the bottom line, and how does this compare to your spending on product and engineering? Small teams can be extremely productive. Growing headcount by 200%+ each year puts enormous pressure on this
• Underwriting matters. We are already seeing this in insurance where low loss ratios in the pandemic (as people drove less and stayed at home more) have gone back to pre-pandemic levels, leading to prices hardening. In lending not so much yet (apart form a blip as stimulus payments in the US stopped) but it will probably come.
• As a result of this funding a debt book at a sensible price may be becoming more of a challenge

Enough on the market backdrop and back to sector trends.

What are some of the areas I am excited by in 2022?

• The payments tech stack moving from lock-in with one provider to a payments automation framework such as Primer
• Open banking payments (finally) taking off across Europe, creating an opportunity for a payments-focused player who can handle all the edge cases, refunds etc.
• The financial operations of large companies. So much still to be done here. My prior article on this. Our recent investment in the sector: Numeral
• Employers becoming more involved in the financial lives of their employees, going beyond wage streaming into a range of products where they can get their employees a better deal (lending, insurance etc). Payroll innovation as part of this.
• Financial wellness and fairness, helping people make the right financial decisions and improve their financial situation over time e.g. Cleo
• Driving cost out of the insurance stack, either as a ‘bare metal’ insurer, SaaS, claims, or attacking brokerage.
• Fintech businesses which can be global from day one, levelling the playing field in countries where payments and debt remain overpriced

I plan to expand on some of these with blog posts which will be slightly more frequent over the rest of the year. It is going to be an interesting year and I am looking forward to it…