The global uncertainty in 2022 brought decades-high inflation rates with an uncertain macro environment, resulting in central banks using every tool at their disposal – both fiscal and monetary – to fight inflation. This led to public market crashes and impacted valuations in public and private markets. Fintech, adversely affected by higher cost of capital and underwriting challenges, was significantly impacted, with valuation multiples following suit.

Unemployment and inflation are causing consumers to have lower disposable income, leading them to increasingly rely on credit cards and, ultimately, give rise to higher credit card balances. Further, the lowering budgets of consumers and businesses led to a vicious cycle of lower revenues and lower business spending; SMBs and the B2B sector were especially hurt because they rely on the spending of other SMBs.

With the global IPO market drying out, private Fintech investments were also on the decline throughout the year, falling from $35.9B in Q1 to $13.3B in Q3. This decrease is consistent across geographies, and while the overall 2022 investments are still higher than the 2018-2020 average, there’s a clear decline from the record-breaking 2021 through 2022, with a worrisome downward trend.

However, not all verticals were hurt the same. Banking, crypto/blockchain, financial management, and payments remain the most funded sectors within global fintech – both in terms of capital volume and in number of transactions.

How Israeli Fintech Reacted

Throughout last year, the Israeli ecosystem followed the global trends. In 2021, many Israeli fintechs (including Payoneer, Lemonade, and Hippo) went public, but only one company did in 2022 (Pagaya).

Due to the macro trends of the public markets, many of the public Israeli companies saw valuations plummet in 2022, with a 70% average drop in market cap.


Mega Rounds Screech to a Halt

Private Israeli fintech investments were impacted by public markets as well, and trended back to their 2018-2020 averages, which signaled a big drop compared to 2021. Total capital raised for Israeli fintech companies went from $6.1B in 2021 to $1.6B in 2022. This decline was primarily caused by the essential disappearance of “mega rounds,” or funding rounds totaling $100M or more. Only two mega rounds took place in 2022, compared to 17 in 2021.

Within smaller-scale investments, 2022 saw a shuffle in sub-sector activity, with payment, financial software, and insurance down significantly, while banking and trading showed resilience (driven by one-off deals).

Fintech Makes Way for “Recession-Proof” Verticals

Traditionally, private investments in the Israeli fintech sector came second only to Cyber; unsurprisingly, that pattern ended when the macro environment led DevOps/IT, a more “recession-proof” sector, to climb up to second place. While 20% of private investments went to fintech in both 2020 and 2021, last year only reached half of that pace.

Return of the M&As

In the second half of 2022 – after global IPO markets dried out and companies needed to fundraise on private markets – M&As started to grow significantly. We expect this trend to continue into 2023 as (i) companies will look for alternative ways to finance themselves after such a significant decrease in private investments and valuations; (ii) acquirers will find prices more reasonable with strong balance sheets at their disposal.

The Fintech Opportunity is Still Massive

A lower number of new fintech startups does not inherently signal negativity: the teams and ideas that are willing to take a risk in this environment are truly the cream of the crop. Moreover, layoffs mean more talent that is readily available to join early stage companies, and plummeting stock prices means that many “big tech” employees feel that they can take risks again because they have less to lose and more to gain by joining or starting a startup.

With all of the challenges of 2022 come extensive new opportunities in fintech. The vertical is expanding and growing in new existing areas – some of them thanks to the challenges which the past year posed.

In our next post we outlined some of these opportunities and the investment theses and trends which keep us excited and bullish on Israeli fintech.