As I stated at the end of last year, sentiment ended the year across the industry with a bit of an uplift, but underlying macro conditions, and tight funding conditions are still prevalent, and thus at best, most informed financial service leaders I am in contact with are starting the year with a sense of optimism, but overlayed with cautious and deliberate execution.

So what does this broadly mean?

One of the inescapable realities about fintech investing, particularly prevalent in Europe is that somewhere between 2/3rds and 7/8th of companies that have been founded in the last decade, and go out and start the venture capital journey don’t execute a new funding round beyond series A. This doesn’t, on the surface appear to be that different a percentage from North America in terms of the overall deal volume, but the truth in the data available is that the quality of fintech firms that have emerged for scale up in Europe since just before Covid has significantly their counterparties across the Atlantic. Since many VC backed firms actually don’t reach cash flow breakeven until they are working on their series B rounds, this implies that many firms are operating with severe investment constraints or with the presence of debt provision with demanding and penalizing covenants.

This fact also reveals a couple of important things on top of this. First, it underscores the fact that the homogeneity and breadth of the institutional landscape in North America provides a much more substantive addressable market to support the belief that early-stage traction can be converted into scalable growth. In some fintech segments, where SMEs are the primary client target, cross border related solutions may support the notion of a large addressable “European” market, but in many other instances, the true SAM on offer may ultimately be too small.

Second, the smaller cohort of firms achieving later stage financing suggests that identifying and developing enterprise level relationships, and accompanying commercial agreements in Europe may be much more challenging than in North America. As I have been engaged with conversations with firms in the Series A segment, it has been noticeable that they often face very stern resistance from internal IT and procurement resources who often equate fintech firms with a triad of risks across security, operational scale, and financial resilience. Alongside this, fintech firms in Europe more often will encounter incumbent service providers that operate as a not for profit organizations for an entire market segment. These firms aggregate IT and Operational budgets of many smaller financial entities, acquiring economies of scale in the process. While the operational profile of North American Tier 1 and Upper Tier 2 firms is generally no different, there appear to be larger innovation budgets designed to nurture and collaborate with Fintech firms. Further, while there are certainly some very substantive IT service providers, they haven’t evolved with the same sort of “socialist” mandate to limit the commercial scope of opportunities for Fintech firms.

Finally, if my observations above are correct, venture capital firms in Europe, versus their US counterparties will often concentrate on a much smaller number of portfolio bets, thus limiting the contribution that they can make in both financial and operational terms to many of their early-stage companies. This means that early-stage companies in Europe can’t necessarily rely on the same type of follow-on funding support that their US counterparties can, nor for the presence of a network effect that links successful early stage backed companies with mid stage growth-oriented investors.

So, returning to the opening question, what does all of this tell me about the outlook?

First, 2024 will still see more consolidation via different types of corporate activity as well as more public failures. The sheer number of early-stage firms still out there, and the volatility in market conditions that persists all suggest that without a significantly loosening in the credit market, these will be the headline items more cases than not in Q2 and Q3 2024. This is going to take a number of different forms and will either lead toward more fintech m&a activity that consolidates the value chain and improves operational leverage or toward strategic buyers taking promising but underutilized solution design in-house. Alongside this I expect we may witness more inter-portfolio activities in which more profitable and scalable fintech activities, i.e. in areas like payments or unsecured credit are merged with less profitable ones, like PFM and savings.

Second, where we do see significant new financing in the growth stage, it will be driven most probably by one of 3 thematic topics, both presented in isolation, as well as in combination. This will be revealed in situations that are centred on open finance as it relates to payments and transaction management, an area where positive regulatory developments operate in a supporting role, ai led innovation as it translates into measurable operational improvement and new scalability, developments which should take place throughout the value chain, with new impetus in enhanced rpa, and finally, sustainability as it clearly demonstrates impact, often enabled through a direct investment approach or through initiatives that really enable improved accessibility.

Finally, this year will see ever more emphasis on companies building profitable businesses, based on scalable and sustainable operating models, than ever before. This will mean much less investment ahead of execution, and far more caution when it comes to investing aggressively in different talent segments, such as product development, client success, and marketing. Creating positive cash flow will be particularly mission critical for both B2C direct and B2B2C indirect business ventures, as most of these were built on the assumption that 5 to 7yrs in they would start to turn the corner in terms of their cost of acquisition, as well as discover, through a combination of pivots and tweaks a profitable and exploitable situation. The timeline of these businesses is now, after the explosive investment pre-pandemic coming to an end, and now firms will either start to deliver on their promise (as we are seeing time to time in neobanking, digital asset management, and business insurance for example) or fail.