Inversely, although there has been a boost in growth for the fintech industry as a whole, there has been a notable decrease in the amount of funding made available to individual fintech businesses. The pace of growth has outpaced the amount of funding made available to these budding companies, resulting in what we call the ‘the fintech funding dilemma’.

Traditionally, venture capitalist (VC) investors were happy to provide funds into the legacy financial services which have operated in this ecosystem. However, in recent times we have seen a dramatic fall in the value of funding for fintechs. Between 2021 and 2023 saw a fall of 61% in the global venture capital investment for fintech companies. This has created space for other forms of finance, such as angel investments, to step up into the breach for startups. The question is, can these alternative sources of funding completely replace the work of VC investors?

The evolution of UK fintech funding

From its inception, funding for fintechs in the UK and Europe has been strongly dominated by venture capital institutions and private equity. VCs have been known to invest mostly in seed and early-stage deals eagerly aiding the upcoming generation of legacy disruptors  whilst private equity firms have targeted more mature companies for investment rounds.

However, a mix of factors such as higher inflation, changes in the economy, and overall evolving investor sentiments and priorities, have caused a general reduction in venture capital investments in fintechs compared to previous years.

This is where angel investors come in and are proving extremely important in sustaining the growth of capable startups in fintech. Angel investors provide capital to businesses, especially startups, in exchange for convertible debt, royalties, or equity. Because they are individual investors, angels have the flexibility to make faster decisions, which can prove helpful for startups and the landscape at large.

Angel investors vs. venture capital

Angel investors and venture capital firms play distinct yet complementary roles in the fintech funding ecosystem. Angels provide early-stage funding, often at the pre-seed or seed level, with faster decision-making and more flexible terms. They also bring valuable mentorship but typically maybe restricted by the size of funding they could provide for long-term scaling.

Venture capital firms, in contrast, offer significant financial backing, often in multi-million-pound funding rounds. In addition to capital, they provide strategic guidance, industry expertise, and extensive networks to help startups scale. However, VCs often require substantial equity stakes and may exert greater control over a company’s direction.

What drives angel investment decisions?

For fintech startups seeking angel investment, understanding the motivations of individual investors is essential. Unlike VCs, who follow strict investment theses’, angel investors assess startups based on market opportunity, founder expertise, and scalability potential. They look for businesses solving clear industry problems with strong leadership and a competitive edge. While angels may be more patient than VCs, they still consider exit strategies, whether through acquisition or later funding rounds.

The economic landscape and investor behaviour

Macroeconomic factors are perhaps top of the list of things that currently shape investors’ decision making. Rising interest rates have made debt financing less attractive, while economic uncertainty has led to more cautious investment strategies. Angel investors remain active but are prioritising fintech startups with proven revenue models and clear paths to profitability. Meanwhile VCs are shifting their focus to later-stage, revenue-generating companies, raising the bar for securing institutional investment.

In this current environment, fintech startups must be very strategic in seeking out investment and funds. Early-stage funding from angel investors should be used efficiently to establish a solid foundation and show market traction before seeking larger investments. It's also vital to diversify funding sources – beyond venture capital and angel investors, startups should consider grants, crowdfunding, revenue-based financing, and strategic alliances to strengthen their financial position.

Moreover, prioritising profitability and sustainable expansion is key, as investors are increasingly drawn to fintechs with clear revenue models and a well-defined path to financial stability. Maintaining strong investor relationships is just as critical – whether working with angels or venture capitalists, founders must clearly articulate their vision and present compelling growth strategies to secure ongoing backing. More than ever, it is necessary for fintech startups to demonstrate not just potential, but tangible financial resilience.

The future of fintech funding

While angel investors are playing a crucial role in fintech’s early-stage funding, they are unlikely to fully replace venture capital in scaling businesses. The question remains: is the current VC downturn temporary, or are we witnessing a long-term shift in fintech funding? As the market stabilises, we may see a return of VC investment, albeit with a greater emphasis on sustainable and revenue-driven fintechs. In the meantime, fintech startups must remain agile, leveraging angel investment where possible while preparing for long-term growth without relying solely on traditional VC backing.

The fintech funding landscape is evolving, presenting both challenges and opportunities. Startups that can adapt to these shifts, explore alternative funding sources, and focus on financial sustainability will be best positioned to excel.