From Europe: Brace yourself; Finch Capital’s new State of European Fintech report warns of 2021 fallout

Radboud Vlaar, managing partner at Finch Capital says, “Although the 2020 situation looks good at first glance, European Governments have provided a huge amount of support for fintech startups. This support offset the decline in institutional funding but this was a one-off initiative.

In the next six to 12 months, startups and scale-ups will face a harsher market test for raising additional funding due as the government funding slows and VCs funds get maxed out, focusing remaining fund capacity on their winners.”

Here are some of the key findings of the State of European fintech report for 2020

• Overall, fintech is a resilient European tech growth engine for now. European fintech funding by VCs and PE firms in H1 2020 is reported to be down by around 10%, but when corrected for Government funding it is up 20%. This is because the funding databases only record publicly announced equity rounds, while most government funding went in as a convertible debt note and so was not disclosed.
• As per the Finch Capital team, the impact of the lockdown on the fintech sectors was in line, except for payments and mortgages that both went up, contrary to what they had predicted. For payments, travel rebounded faster than expected and ecommerce skyrocketed 210%, as brick and mortar shops closed and people were stuck at home. 
• Challenger banks (less travel and FX) and Commercial Real Estate (drop-in use of offices, shops, etc). Trading firms benefited from the volatility, and InsurTech and Enabling fintech (such as AI) performed as expected with continued strong demand for digital solutions.
• Analysis of the top 50 European fintech hiring and firing, showed startups took this chance to reevaluate cost inefficiencies. With the help of government support programs, they reduced headcount on sales teams, given limited in-person sales meetings, and increased customer support.
• The team expects the next 12 months to be dynamic as raising funds could become more selective and may drop in Q4 and 2021. This will be a harsh reality for the many shake out and down round candidates whose runway got extended into 2021.
• European fintech M&A momentum hindered by lack of big bold buyers and fragmentation: Despite the M&A boom in the US, Europe lacks big-ticket M&A buyers for fintechs, and challenger banks in particular. Read more via Silicon Canals