Fintechs hit by capital raising cracks, talent shortage

Cracks in the capital raising landscape and talent shortages are the big near-term risks facing fintechs, according to a new report.

Cracks in the capital raising landscape and talent shortages are among the big near-term risks facing Australian fintechs, according to a new report.

Cracks in the capital raising landscape and talent shortages are among the big near-term risks facing Australian fintechs, according to a new report.

While close to 80 per cent of the nation’s fintechs are now generating sales, up from 70 per cent in 2021, founders are bracing for significant headwinds in the year ahead, according to the latest EY FinTech Australia Census.

The report, released on Tuesday, shows that the fintech sector continues to grow but talent remains scarce, with rising salaries a further challenge. In another worrying trend, a third of companies failed to meet their capital raising expectations this year.

But on a positive note, the number of paying customers has continued to increase among post-revenue fintechs (those generating sales), with 45 per cent reporting more than 500 customers in 2022, up from 41 per cent in 2021.

The percentage of post-profit fintechs, meanwhile, remained steady at 30 per cent.

EY Oceania fintech leader and Asia-Pacific payments leader May Lam said fintechs should consider collaborating both within and beyond the sector to weather the coming storm.

“In the current environment, fintechs have a vital role to play in unlocking innovation-led value from local and global economies, and in helping to unbundle traditional value chains and create new business models,” Ms Lam said.

“To weather the market challenges ahead, fintechs can further improve the sector’s resilience by focusing on greater collaboration and partnerships both within and beyond the sector, investing back into the ecosystem, strengthening their ESG capabilities, and opening up the talent pool by considering diverse and alternative hiring strategies.”

An uncertain capital raising outlook comes as the tech sector more broadly wears the impact of a crushing combination of inflationary pressures and rising interest rates, with investors putting a greater focus on profitable businesses.

Over the past year, 45 per cent of respondents to the EY Fintech Australia census raised more than $10m, broadly flat on a year ago. But in a worrying sign, the proportion of fintechs exceeding their raising requirements fell, from 21 per cent in 2021 to 17 per cent this year.

Payments, wallets and supply chain fintechs were most successful in this area, with 21 per cent raising more than $100m, compared to the 13 per cent sector average.

The funding is still to be had but is being deployed differently, Ms Lam told The Australian.

“What we’re seeing from an investment perspective these days is not only are investors more prudent and doing more due diligence, but the valuation bubble has been reached, so really focusing on cash flow (is important).”

Outside of founder funding, at a little over 50 per cent, capital raising came largely from venture capitalists, angel investors and strategic corporate investors, EY and Fintech Australia found.

But fintechs are increasingly turning to alternative funding sources, including government grants such as the R&D tax incentive, the census found.

A second focus for fintechs should be to diversify their revenue streams, she added.

A third is establishing an ESG agenda.

“Our report showed that only 30 per cent of fintechs currently measure their business sustainability or carbon footprint, so there’s still more work to do.”

Focusing on ESG will attract more funding, she said.

In the VC and private equity space there is increasing attention on the ESG agenda … what fintechs need to do is work more on their own sustainable goals and also implement more (ESG) onto their business practices.”

On talent acquisition, Ms Lam said software engineering, data engineering and product management were the three segments facing the biggest challenge.

“Through the pandemic we’ve seen that hybrid working, is here to stay and it does work. So we‘re encourage to be more creative, using regional resources and not just the metro cities, but also tapping in early into students from universities as well.”