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Fintech 2023: From the ‘Butterfly Effect’ to Unicorns and Camels

By Monica Martínez - Vector Casa de Bolsa
Chief Innovation Officer

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By Mónica Martínez | CIO - Thu, 12/08/2022 - 12:00

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We are already ending the year and, taking into account the turbulent international context and the news from the technology sector in recent weeks, making any forecast for 2023 would be a bold call. However, it may be worth reviewing the facts that brought us to the present to understand how fintechs can continue to advance in 2023.

2021: The Hatching

2021 was an exceptional period in terms of venture capital investment in Latin America (and in the world), especially in the fintech sector, with more than US$5 billion invested in one year, which is equivalent to the accumulated total of the last 10 years.

Everything indicates that this investor “explosion” was probably motivated by the great liquidity generated during the pandemic, by the increase in the digital economy/habits and by a regulation that started (and continues) to mature, allowing greater confidence in the digital world, such as fintech. The conjunction of these (and other) factors led many to bet that this would be a permanent acceleration, generating great expectations regarding the return to the "new normality."

This context encouraged a model of rapid growth — some say at almost any price — which encouraged these new companies to survive and expand based on financing rounds among interested investors to attract liquidity.

This “boom” resulted in the region going from two unicorns to about 40 in four years — a new record. Undoubtedly, the main legacy of 2021 is that these fintechs have already changed the competitive landscape: they have solved historical inefficiencies in the financial sector, they have adapted to the unmet demand of the native generations on the internet, and they have begun to provide B2B services to traditional entities, also accelerating their innovation (or at least their interest in it). In other words, they have shaken the status quo: banks want to look like fintechs and fintechs want to attract bank customers. Although there is a slowdown in investment, there are more players competing for the same clients: competition has intensified.

2022: The Implosion?

Those who had already lived through some of the previous technology investment bubbles bet on a freeze in investor appetite this year. For a better understanding, it is convenient to observe the facts, differentiating its two halves, logically interrelated:

• The First Half: The Surprises

The international context became  complicated by unexpected factors: inflation, war, an energy crisis, rises in interest rates, the drop in technology prices, cryptos that did not turn out to be so isolated from equities, nor do they seem to be consolidating as a refuge from inflation as expected.

And the truth is that, yes, investment in fintech fell, but, despite the opinion of well-informed pessimists, they continued to be considerable compared to years prior to the "hatching." During the first half of 2022, US$2.8 billion was raised, compared to US$7.1 billion in the same half of 2021. What is interesting is that the number of deals did not decrease in the same proportion: in 1H22, there were 182 deals, compared to 147 deals in the same period of the previous year. Therefore, a lower concentration of investment is noted, with the objective of dispersing the risk and that the valuations were adjusted to economic fundamentals. There are fewer mega-rounds.

Another fact is that the big ones got bigger: those unicorns that "made cash" last year also went shopping in the market and began to buy other fintech companies to continue growing. Some even bought regulated companies with the aim of further consolidating in some markets.

Summarizing, during the first half of 2022, the “weather” was starting to cloud over, but there were still rays of sunshine.

• Second Half  2022: the ‘Butterfly Effect’

We began to experience somewhat lower "temperatures" and the occasional "storms" in the second half

During the third quarter of 2022, the total added value of venture capital in Mexico was US$405 million, a reduction of 57.41 percent compared to the same period in 2021. In Latin America, the number of transactions also decreased,from around 130 in the third quarter of 2021 to 79 in the same period in  2022, according to Tracxn.

In addition, probably due to the persistence of inflation, the breakdown of supply chains, the chip crisis and global uncertainty, e-commerce has not lived up to post-pandemic hopes. This has also caused a reduction in digital ads, a source of income for many technology companies, cooling expectations for their future results.

Connecting the Dots: This All Leads to the ‘Butterfly Effect’

Let's take a brief moment to remember (and simplifying) that, during times of low interest rates and encouraged by the pandemic-fueled digital acceleration, many companies took the opportunity to inject money, increasing the demand for technological professionals and causing a salary bubble to attract/retain the best talent.

Going back to 2H22, the escalation in the cost of credit to try to cool inflation made investments in US Treasury bonds more attractive; in turbulent times,  some capital moves toward this type of asset as it is perceived as safer. This, in turn, cools the economy and reduces earnings expectations for companies, which makes their shares less attractive and, when expectations change and, on top of that, they are perceived as overvalued, as is the case with technology companies …. wham! We come to the “Butterfly Effect:” In the past 12 months, according to Trueup.io, an estimated 201,455 people have been officially laid off from big techs, unicorns, and startups (dot-coms laid off 100,000 workers when their bubble burst in 2000).

 

In parallel, the crypto world, which seemed like a good refuge, gave us a scare with  the bankruptcy of FTX, although the concentrated money mass is so large that it could be too big to fall. But this is probably a topic for another article.

2023: The Age of Unicorns and Camels

Should  we be, then, pessimistic about next year for fintech?

I firmly believe that crises are synonymous with opportunities.

I believe that the corrections are purges and that they make us "healthier" and  antifragile.

And I think, without logically being able to assert in the volatile times we are living in, that it seems that we are returning to a certain rationality, where economic fundamentals are again basic factors, although the "technological Darwinism" is irreversible.

Camels are animals that cross deserts with water from their only hump, because they get their maximum performance from it. In its hump, it stores up to 36kg of fat, which it can convert into water and energy when it does not have food. And it always crosses the desert in search of new oases to recover and continue.

If 2021 was the year of the unicorns, it is possible that 2023 will be the year of the camels. Fintech companies (and not only them) will have to be efficient with their resources, they will have to know how to take advantage of the availability of talent, go out and cross the "desert" with the water from their hump, always looking for a new "oasis" of customer segments and new markets to replenish their energy. In their favor, they will have a more receptive competitive landscape in need of the efficiency of their solutions and they will find many competitors hunkered down in their winter quarters.

Because the world is already hybrid, 46.5% of the global population is digital native (millennials and centennials) and there is no storm that will change this. So, are the unicorns going to become extinct? Of course not. In the "digital fauna,” they are a natural evolution of camels.

Photo by:   Monica Martinez

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