Pulse of Fintech H2‘23
Country Insights Germany
After several quarters of lucrative investment in fintechs in 2021 and 2022, market uncertainty and intensified competition take a toll. In 2023 German fintech funding hits lowest levels since 2014, Corporate Venture Capital (CVC) takes center stage in Venture Capital (VC) funding in H2’23.
Key Takeaways
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Although standout deals can still occur in the Germany venture ecosystem, with AI companies like Aleph Alpha raking in hundreds of millions of dollars of investment capital recently, the fintech environment has grown more competitive.
That degree of competition as well as regulatory challenges have diminished growth plans for prominent German fintech‘s, such as N26, which recently left the Brazilian market due to fierce competition in the retail account business.
Navigating Headwinds
Contrary to the global trend, German funding fell from $697.36 million across 66 deals in H1’23 to $413.31 million across 47 deals in H2’23. In an overall assessment, the year 2023 witnessed the completion of only 113 deals, a number not seen since 2018 (99 deals). As a result, the aggregate funding sum for 2023 amounted to $1.11 billion, representing the lowest since 2014 ($0.99 billion).
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In addition, as market uncertainty has increased in lockstep with concerns around weakened economic growth and volatility in global equities as a backdrop to overall financial transactional volume, dealmakers have withdrawn from the venture scene, while Mergers and Acquisitions (M&A) and Private Equity (PE) playmakers have done the same.
That said, innovation continues apace, with improving access to a variety of bespoke financial products for wealthy investors a key niche, e.g., BlackRock’s recent backing of digital wealth tech provider Upvest.
The fintech market in Germany was very cautious in H2’23 as many investors held back from allocating capital given the breadth of headwinds. As Inflation slows down and interest rate development remains uncertain, fintech valuations saw significant downward pressure. Investors enhanced their due diligence processes and an explicit focus on profitable business models. In the face of uncertain funding and rising debt expenses, many fintech‘s adjusted their strategies by tightening financial measures. Their primary focus shifted towards improving operational performance and cash flows, aiming to successfully navigate the downturn and enhance attractiveness to potential investors.
Q3’23 fundings were particularly modest, with just $117.92 million invested – the lowest level of VC fintech funding seen since Q1’20. However, in accordance with the EMEA trend Q4’23 saw a paradigm shift with VC investments reaching $ 295.39 million through 20 strategic transactions
Later Stage investments dominated the fintech funding landscape in H2’23, securing the largest share of financial backing. Notably, the top three of later-stage investment transactions during this period culminated in an impressive aggregate of $133.3 million. This sum represented a significant portion of the overall $245 4 million invested into the fintech sector
Remarkable: During H2’2023, Corporate Venture Capital emerges as a pivotal player in the German venture capital market. An impressive 85% of the entire venture capital pool, amounting to $391.35 million, is ascribed to Corporate Venture Capital In contrast to the global and the U.S. trend, CVC surging
even further to encompass a remarkable 97% of all venture capital investments in Q4’2023.
In H2’23, the German cryptocurrency startup landscape witnessed a significant downturn, marking a severe contrast to H1’23.
While the initial six months of 2023 saw a influx of investment, totaling an impressive $131.4 million, the momentum took a notable dip in the second half, with only a fraction – specifically, a reduced sum of $10.7 million – being injected into the sector. The focus of these investments shifted towards seed rounds and early-stage initiatives, indicating a strategic redirection within the cryptocurrency ecosystem during H2’23.
Fintech, specializing in cryptocurrencies, can now set up an appropriate business model aligned with the recently introduced regulatory framework in Europe.
Regulatory frameworks offer fintechs a platform for growth. A good example is the Markets in Crypto-Assets Regulation and the DLT Pilot-Regime – the regulatory benefits have sparked optimism in the token economy due to their regulatory advantages. Nevertheless, investments in fintech‘s specifically centered around cryptocurrencies saw a slowdown in H2’23. When the acceptance of distributed ledger technology in financial services is significantly promoted by supportive regulatory conditions, fintech‘s focusing cryptocurrencies might benefit.
Contact KPMG AG
Wirtschaftsprüfungsgesellschaft
Bernd Oppold
Partner, Financial Services
T +49 174 3368139 boppold@kpmg.com
Philipp Kielholz
Manager, Financial Services
T +49 151 11520274
pkielholz@kpmg.com