Three regulatory questions shaping fintech VC

The state of fintech VC is not what it was even a year ago. Major fintechs like Klarna have been forced to accept down rounds in order to sustain their runways and weather current conditions. However, not all fintechs and VCs have been affected equally by this crossroads.

“There are no headwinds: There are only tailwinds for fintech venture right now at the pre-seed and seed stages,” Rex Salisbury told The Financial Revolutionist. “These are net new companies that are recently capitalized at reasonable valuations.”

Nevertheless, a confluence of regulatory variables do affect the quality and quantity of capital available for fintechs in 2023:

Interest rates

The most apparent factor driving fintech VC is interest rates. The Fed has ratcheted up the interest rate several times over the past year in an effort to curb inflation. And that isn’t going away anytime soon. Fed Chair Jerome Powell said yesterday that interest rates are “likely to be higher” than anticipated to continue battling rising prices.

This reality affects fintechs and VCs on several fronts. For one, rising interest rates (theoretically) move consumer dollars out of the market and into savings vehicles, which can cause public-market activity as well as consumer-facing fintech and spending activity to dwindle. This can negatively affect the projected revenues sustaining fintechs’ missions and temper VC interest in those sectors.

Interest rates also affect the cost of debt and capital. With the cost of a dollar therefore increasing, VCs may be more prudent about the kinds of startups they invest in, while fintechs who depended on cheap debt to sustain their work may encounter new challenges in executing their previous business strategies. 

Private credit

Interest in private-credit markets has boomed over the past year. The industry, now worth more than $1.4T, has seen its size almost triple since 2015, and is expected to grow to more than $2.3T by 2027. Rising interest rates have forced banks to extend fewer loans, given over $40B in debt imposed on banks due to the Fed’s measures. 

While the sector has seen investment from major players like Blackstone, analysts caution that private credit is subjected to fewer regulations than public markets. Most private-credit funds and business development corporations only send quarterly disclosures to the SEC, and are not subjected to banking-regulator oversight. Lawmakers may take private-credit compliance seriously in the coming years, creating more oversight that may level the playing field in terms of cost and transparency between public and private markets. 

Crypto regulation

The continued uncertainty around crypto—both in terms of price volatility and regulatory status—in addition to high-profile scandals like FTX’s collapse have pumped the brakes on crypto-focused VC interest. And the high-profile investments that have been made have received notable public blowback, such as a16z’s $350M investment in Adam Neumann’s blockchain-forward commercial real estate startup.

Crypto may eventually be regulated as securities in line with SEC Chair Gary Gensler’s vision. And the legal status of crypto will invariably affect public interest in the alternative asset class, affecting market appetite as well as crypto startups’ valuations in the face of VC scrutiny.