Investments in fintechs dropped in the first half of 2022 compared with high funding volume in 2021 as interest rates continue to rise. However, investors are setting their sights on financial technology firms that have strong proven business models.

Fintech startups raised $50.7 billion in the first half of 2022, down 23% year over year, according to a report from CB Insights. Projected funding for the year is $101.4 billion, which would sit 27% below total funding in 2021.

However, the decline in funding is “all relative,” Stephanie Khoo, partner at venture capital firm Nyca Partners, told Bank Automation News, noting that investors haven’t completely pulled back the reins and are still interested in fintechs that can demonstrate growth potential.

For example, earlier this year the New York City-based Nyca invested in cyber insurance provider Cowbell Cyber, fraud compliance platform Sardine and AI-powered decision tool FairPlay, Khoo said.

Similarly, fintech investor Fin Capital has the mindset that “this, too, shall pass,” Ren Riley said during the recent Bank Automation Summit Fall 2022. Even in today’s challenging macroenvironment, the firm participated in 50 companies’ pre-seed funding rounds over the past 12 months, he said, adding that although funding is down, “the innovation engine continues.”

Financial discipline

The key for today’s fintech investors is to remain strategic, Khoo said, noting that investors have become more attuned to a fintech’s business plan when considering investment. Nyca, for one, is looking for companies with a strong burn rate, a 12- to 18-month runway of funds, and proof of growth.

“Investors are now much more focused on the financial model behind the business and the unit of economics, and making sure that companies are growing,” she said.

Companies that are burning a lot of cash but only growing 10% to 20% will be in a challenging position “and they’re going to have to make some tough changes,” Adam Hallquist, principal of financial services and payments and transaction processing at FTV Capital, said.

‘Safe’ investments

Areas of funding that continue to be a safe bet include cybersecurity, developer tools, customer-facing functionality and human resources technology, Matt Carbonara, managing director of venture investing at Citi Ventures, said at the Summit.

While there are areas that continue to receive investment in spite of an uncertain economy, some fintechs focusing on innovation have been avoided as of late — cryptocurrencies, in particular, Hallquist said.

Meanwhile, acquisitions are starting to pick up again post-Labor Day after a slow summer, he said, adding that there’s only so long investors “can sit on their hands … we have to move forward.

“I do anticipate the investment volumes will be higher between now and the end of the year,” Hallquist said. He further noted that FTV Capital will strategically focus on investments in contactless payments technologies and sustainability-focused fintechs.

Looking forward, interest in fintechs is likely to pick up amid conference season buzz, and some investors, like Citi Ventures, have already shared their investment plans in software supply chain security, developer productivity and cybersecurity automation for 2023.