Funding winter – fixing the damaging valuation gap in APAC’s ailing Fintech companies

Amid a climate of high interest rates and other macroeconomic challenges, are APAC’s Fintech companies really unable to attract new investors and capital?

The answer is that it depends. While some companies navigated the "tech funding winter" by relying on investment raised during easier fundraising climates, others have had to undergo significant internal reorganization and restructuring before attracting new investor interest.

As M&A lawyers representing Fintechs and investors into Fintechs across the APAC region, we share some strategies which we have deployed to help put out the fires in Fintech companies during the “tech funding winter” and unlock the funding that can allow rehabilitated Fintechs to thrive.

1. Cleaning up broken cap tables

Across the board, most Fintech companies have, at best, maintained stable valuations during their capital-raising efforts over the past 12+ months.

Fintechs that were forced to raise further capital, have found that new investor interest has only been possible to implement where the capital table itself has been rationalised.  Usually this is to correct a disconnect that has arisen between shareholders’ ownership and their contribution to the company’s growth.

Scenarios include where a historic strategic investor has been no longer able/willing to continue to help be a lead investor in a company’s funding round, or where a founder split has left the remaining founders with an insufficient shareholding in the company to truly incentivise them to fix and grow the business.

Cap table clean-ups can be difficult to engineer, and often need fast and creative solutions.  Examples include facilitating secondary exits for investors and strategies to help key employees to participate meaningfully in the company’s future. More often than not, these plans need to be worked through in detailed discussion with a new anchor investor, whilst simultaneously balancing the financial and legal requirements of existing investors.

That said, in many cases, the ongoing fundraising headwinds have helped to rationalise stakeholders’ expectations, and our role has been to offer solutions and help shepherd stakeholders to resolve economic misalignment.

2. Stabilising problematic partnership deals

At Series A and B stages many Fintechs relied on commercial partnerships with financial institutions or ecosystem players for commercial, product distribution, and funding support. The legal letter of these arrangements has tended to include overreaching provisions, whilst the actual value delivered under these arrangements has often been negligible and therefore a potential source of value leakage.

As Fintechs look to progress further funding rounds, the question has arisen on whether earlier partnerships truly add value for key product lines or markets, or actually have a foreclosing effect on the Fintech’s future success.

Some promising Fintech companies have dedicated months to rescoping and reworking ailing strategic partnerships deals.  Our role has been to bring commerciality and pragmatism.  The objective has been to carve out clean space to help enable new investors to understand that the Fintech has the strategic support to grow, but is not shackled to the specific requirements or growth trajectory of its strategic partners.

3. Extracting non-performing business lines

Cost controls at Fintechs have led to elimination of non-performing business lines.

Why did inefficient business expansion practices proliferate in APAC’s Fintechs and can they survive with much leaner product line ups?

Across APAC there has also been a widespread theory that simply expanding into new countries will immediately deliver scale, revenue growth and ultimately profitability.  This theory has yet to materialise for most Fintechs: specialisation appears to be a more successful strategy than commoditisation.

Many Fintechs have pivoted their ethos from scaling at all costs in multiple markets and product lines to instead focus on streamlining operations and concentrating on core products.  Whilst all rationalisation exercises involve pain, if implemented correctly, this can increase Fintechs chances in achieving successful exits to financial services industry buyers (or perhaps to future acquirers contemplating roll up strategies from best-in class players across the region?)

4. Injecting new lifelines

Over the past 12+ months, many Fintech companies have undergone a transformation in their funding strategies, shifting away from a heavy reliance on equity financing, to incorporating debt and other alternative sources of private credit that are aligned with financing their working capital.

Rethinking commercial structures to inject new capital lifelines has had a positive impact on companies, resulting in more mature and resilient business models.

Consequently, the necessity for as many additional equity rounds has diminished.  Some of these structures include private capital instruments such as warrants, lending or receivables financing structures and our role is to help the company ensure that the debt and equity funders can co-exist in the company’s capital structure and achieve appropriate risk-adjusted returns.

With many Fintech companies now rehabilitated through the above structural, commercial, legal and financing changes over the long funding winter, there is renewed hope for an uptick in valuations as macroeconomic conditions ease.  For other Fintechs who have survived thus far without raising capital, a question might be whether the future fundraising market will demand such changes to be made as a pre-requisite to further funding?