Acquirers eager to gobble up cash-strapped fintechs

Turkeys aren't the only things being carved up this holiday season. 

Many fintech startups beset by high interest rates, cutbacks in enterprise budgets and a pullback in venture will have to consider so-called distressed acquisitions over the next four to six months, insiders say.

"The corp dev folks are sharpening their pencils," said Jay Ganatra, partner at Infinity Ventures and former managing partner at PayPal Ventures.

Distressed fintech deals have started to pop up. Take Petal, which was last valued at $800 million and backed by Peter Thiel's Valar Ventures and Tarsadia Investments. The credit card startup is seeking a buyer and its survival is in question, Fortune reported this week.

Investors say the next six months should see a rise the number of fintech-to-fintech deals as founders seek ways to stay afloat.

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Across the board, fintech startups were burned by the bull market's flood of capital slowing to a trickle. VC investment in enterprise fintech startups have fallen 35.2% year-to-date, while retail fintech deal value has dropped 66.7% over the same time period, according to PitchBook data.

"Conversations have picked up in earnest, and certainly we have more of those going on in our portfolio than we had six months ago," said Chuckie Reddy, head of growth investing at fintech-focused QED Investors. That includes more founders hiring bankers to talk through their options, according to Reddy.  

It's still too early to see those deals play out in the data: Fintech M&A has been on a consistently downward trend since Q4 2021, in line with M&A activity across venture-backed companies. In Q3 of this year, M&A deals in fintech globally totaled $3.4 billion across 71 deals, according to PitchBook data.
   

Still, there have been pockets of activity.

Proptech has been one of the hardest-hit verticals in the VC downturn. Real estate company Zillow bought Spruce, an insurance and escrow proptech, for an undisclosed amount in September. Spruce hadn't raised a new round since its $60 million Series C in June 2021, having previously secured funding from the likes of Bessemer Venture Partners, G Squared and Scale Venture Partners. 

Real estate fintechs are one of the most unsteady segments of the market right now, according to Chris Sugden, managing partner at Edison Partners. "You're going to continue to see a real shake-out, a combination of distressed mergers as well as some companies just not make it to the other side," Sugden said. 

Payment processors are also showing signs of strain. Till Payments, an Australian fintech that had raised its Series C in September 2021 at a $395 million post-money valuation, was reportedly sold to payments processor Nuvei for just $30.5 million, having raised a $47 million Series D in Q1 of this year. 

And of course, credit card lending startups, especially ones like Petal which target customers with little or no credit history, have been curtailed by steep costs of lending as well as VCs pulling back. Petal hasn't raised fresh equity since January 2022.  Add-ons add up On the buy-side, the market can expect to see private fintech companies seeking out acquisitions for novel technology or product line add-ons. Those types of bolt-on buys are especially compelling for segment leaders like Stripe or Plaid to position themselves for an IPO. 

"I would expect to see more acquisitions from Plaid, Stripe, Shopify, rather than [a player like] Bank of America," said Lindsay Fitzgerald, managing partner at fintech specialist VC firm Vesey Ventures and former managing director at Amex Ventures. 

Those types of deals, like Stripe's bolt-on acquisition of Okay announced in September, can drive customer stickiness for growth-stage companies at a much better price than they would've seen two years ago. 

For VC investors, even a distressed sale is better than nothing. 

"At least it's not a zero. For VC investors, (selling to a larger fintech) is a more appealing out than selling to a private equity firm. But, the dollar amounts will be peanuts," said Steve Sarracino, managing partner at investment firm Activant Capital.  Frank conversations Banks, for the most part, are standing on the sidelines for the time being. It's more challenging for a bank to integrate a fintech startup into its systems, and they tend to have a hard time absorbing tech platforms. 

Plus, the fiasco of the Frank acquisition has cast a long shadow on M&A talks at big banks this year. (To catch you up: Charlie Javice, founder of financial aid startup Frank, has been charged by the Justice Department with defrauding JP Morgan Chase, which acquired the startup for $175 million in 2021. Javice has pleaded not guilty, and a trial has been scheduled to begin next year.) 

"When JP Morgan does a deal and it turns into this cross accusation of who said what, and what diligence was or wasn't done, that freezes everybody, to be blunt," said Sugden. "No one is willing to take a chance on their job," he added.

That failed acquisition is one factor making buyers much more conservative. "They're conducting more intensive due diligence and they're seeking more protective terms," according to Jeffrey A. Brill, co-head of the fintech practice at Skadden, Arps, Slate, Meagher & Flom. 

Brill is also seeing an uptick in M&A conversations, as well as a narrowing of the gap between sellers' expectations and buyers' willingness to spend. It's easy for a banker to look at a startup's profile and dearth of funding, and then figure out when it'll run out of money. 

For many watching this play out, early 2024 promises to be a late Thanksgiving feast for fintech bottom-feeders. 

Featured image by Jenna O'Malley/PitchBook News
 

This article originally appeared on PitchBook News