Data Drop: The State of Early-Stage Fintech Funding
By Clare McKee and Jaclyn Winkel — March 9, 2023
It’s no secret that venture capital has seen a decline in investment over the past several quarters, returning to (perhaps) normalcy from unprecedented heights in 2021 and 2022. The fintech space was not immune to this: by illustrating the investment activity from 2016 to 2019, it’s easy to see how crazy early-stage funding had become by early 2021.
But what else happened over this period? We dove into fintech funding data to understand what was happening beneath the surface.
Setting the stage
Series A fintech funding in the US averaged $235M a quarter from 2016 to 2019 before peaking at $1.6B in Q3 2021, a 589% increase vs. the baseline period.
Seed fintech funding in the US averaged $131M a quarter from 2016 to 2019, before peaking at $630M in Q2 2022, a 381% increase vs. the baseline period.
Early-stage fintech investment is on the path of “round-tripping” back to pre-pandemic levels, with room to get there in the quarters ahead. In Q4 2022, Seed fintech funding totaled $359M (a 174% increase vs. the 2016–2019 baseline level), while Series A fintech funding in the US totaled $509M (a 117% increase vs. the 2016–2019 baseline level).
Graduation rates
The elevated pace of fintech Seed deals in the US is particularly interesting. From 2016 to 2019, the average deal pace for Seed was 43 deals per quarter. In Q2 2022, Seed deals peaked at 159 deals per quarter.
Seed deals peaked later than Series A deals, as they were perhaps deemed “safer” investments, particularly for mega funds.
The “graduation rate,” or % of fintech Seed deals that raised a Series A, saw a significant spike between the Q3 2019 and the Q1 2020 cohorts.¹ Fintech companies that raised a Seed round in Q1 2020 graduated to Series A 40% of the time, compared to an 18% graduation rate for the Q3 2019 cohort. Heightened graduation rates continued for the cohorts of companies that raised a Seed round in Q2-Q4 2020. Based on graduation rates in recent history and a reversion to the mean, there could be a painful funding gap for many Seed companies funded in 2021 and 2022.
A geographic shift
From 2010 to 2020, San Francisco was the place to start a fintech company. Sparked by the pandemic, San Francisco has seen its role gradually diminish, despite maintaining its spot as an important hub for innovation in the US.
Seed Funding²
The SF Bay Area experienced a 9 percentage point (pp) decline in fintech Seed deal (#) share and an 11pp decline in fintech investment ($M) share between 2019 and 2022. During that same period, NY’s deal share increased by 5 pp, and investment share increased by 8 pp. The number of Seed deals and the dollars invested also shifted towards Florida, Texas, and other parts of California (primarily LA) at the expense of the SF Bay Area.
Series A Funding³
Despite the geographic shift in fintech Seed deals, the Bay Area appears to have “staying power” for fintech Series A deals. At the end of 2022, the region’s share of fintech Series A deals was 11 pp above the next largest region (NY), and the share of investment was 19 pp greater than NY. From 2019–2022, California-Other and Florida also saw a significant increase in the share of fintech deals and investment (CA-Other had 14% of the deal share at the end of 2022; FL skyrocketed to 10% of the investment share).⁴
We interpret the rise of NY seed stage fintech as a natural evolution of the pandemic remote work phenomenon, in which companies can start from anywhere. While seed investor activity may be more distributed now than in the past, cities with more established investor and talent ecosystems, like NY and the SF Bay Area, have the resources to better “graduate” and scale starlings at later stages. In the last two years, more Bay Area-native firms have opened offices in NYC which could improve NYC graduation rates. In 2023, we expect to see the headquarters “shake up” become clearer.
What data should we dig into next?
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- Cohorts are based on the quarter when companies raised (announced) Seed funding, according to Pitchbook. A company is considered “graduated” if it raised Series A funding within 2 years of Seed. 2-Year periods were used to normalize dataset for comparison.
- Fintech vertical Seed rounds of $1M to $10M.
- Fintech vertical Series A rounds $3M to $100M.
- In 2022, CA-Other had 7 20M+ Series A deals including companies like MachineFi, Jadu AR, Galaxy, and Warbler Labs. Significant FL deals in 2022 include companies like Finally, Boopos, Metaversal, and Meow.
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If you’d like to chat about fintech funding trends or hear more about our work at Propel VC, reach out on LinkedIn! Clare is an Investor and Jaclyn, Chief of Staff, at Propel.
Propel is investing in “the new financial economy.” The opportunities to accelerate, enable, and deliver financial services are large and diverse. Entrepreneurs create the future — and we seek to work with those that will leave the biggest impact. Propel is focused on companies in the US and LatAm, primarily at the Seed and Series A stage. Portfolio companies include Coinbase, Groww, SumUp, Newfront, Neon, Guideline, and Brave (see complete list).
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None of the above is investment, business, legal, or tax advice and none of the financial information that might be contained has been verified or officially endorsed by Propel. Full disclosures available here.
