WealthTech Funding Down 85% What Founders Can Do

WealthTech funding rose slightly in the US last quarter, rising 9% from the prior quarter. But that wasn’t the problem. The problem was that early-stage deals (under $100mm) were off 35% from the prior quarter and dropped a whopping 85% compared to 1Q2024, according to a report from FinTech Global Research. The overall gain seems to have come from investors piling into later stage deals (over $100mm).

There are several possible reasons for the preference for later-stage investments. We have seen some anecdotal evidence that venture capital funds, who have been having trouble raising money from their LPs, are preserving their capital to re-back the winners in their portfolios in later-stage deals. Additionally, with fewer new funds in the venture capital space, the existing funds are seeing their time horizons approaching, so they may look for later-stage deals where they can get their money back faster. Lastly, strategic investors who are active in the market tend to favor solutions with proven traction, in our experience.

This is a fairly distressing situation for early-stage founders (and their bankers), but it is what it is. Here are some thoughts as to navigating these waters:

1. The market is soft, but not dead. It’s going to be more work, take longer, and have more drama than before, but there is still a chance to raise funds. You will need to pull out all the stops on the capital raise and budget for a longer time to funding.

2. Revenue is the best financing. Try to bootstrap as best you can. You may have to accept a slower growth rate than you were hoping for, but if you can keep costs low and pipeline up, you may win the race to breakeven.

   
   

3. Think strategic. You certainly will want to get in front of the venture capital community, but you should focus heavily on the strategic community. It’s a longer sales cycle, but they have capital and are generally looking for solutions to pull forward their roadmaps or fill a product feature gap. It’s a different pitch than a venture capital pitch, but even if you don’t get funding, you might get a client.

   
   

4. Explore co-development opportunities. You are a nimble, tech-forward entrepreneur with a clean tech stack. There are many financial services firms that are excellent in many other ways, but not in those ways. Lining up a financial services firm to fund the development costs for the exact solution they need is a possible path forward. Just beware of negotiation traps.

   
   

5. Don’t categorically rule out a sale. At the moment, strategics are the more aggressive source of capital. While they will make minority investments, they often prefer to acquire rather than invest. It’s just their nature. Three of our clients this year have flipped from a fundraising mentality to company sale mentality (out of 8). Keep in mind that you can structure transactions so that you still maintain some of that entrepreneurial upside.

Being a founder is never easy and the current funding environment certainly is not making it easier. The fundamentals of the WealthTech market are ever changing, but opportunity is still there, particularly if you have a solution that fits into one of the WealthTech Themes of the Decade. As usual, we are here to help in any way we can, even if you just want to chat about WealthTech for a while.