Plummeting FinTech IPO Index Carries Warning for Future Startup Funding

There are downturns, and then there are the routs signaling that something’s changed.

Changed in the minds of retail investors, and also for the institutions and the investors that ante up the capital that helps startups make the leap onto the public markets.

It seems that the Nasdaq has a reliable trend — down — and Monday’s latest rally that then fizzled through the end of the session offers proof positive that the trend has staying power. The PYMNTS FinTech IPO Index offers a way to connect data to those sentiments.

As noted in this space in recent days, the Index was trading at all time lows, and now stands, year to date, off 50%. The most recent readings are also 75% off peaks seen last year.

Investors’ trading of publicly listed issues can stand as a proxy of where they think these disruptive firms are headed — and giving plunge after plunge, the disruptors may themselves seem headed for what might charitably be termed a nuclear winter. Stock prices tend to be a reflection of top line and bottom line expectations, and these expectations are not sanguine ones.

Reckoning With Macro Pressures 

Companies like Upstart have shown, through the latest commentary on earnings calls, that rates are rising for would-be borrowers and approval rates are ticking down. That’s a sign that in at least some respects, the data-driven, high-tech models that have been such a staple of our FinTech class are in for a challenge.

See also: Upstart, Billtrust, Bill.com Drag FinTech IPO Index to New Lows

Cautious forecasts are the name of the game, at least for now.

In triangulating some other data points, The Wall Street Journal noted Monday that expectations that funding would come through for some privately held firms, did not in fact happen. Anecdotally, eCommerce startup Thrasio might have, at least recently, been valued at $10 billion (at least) before moving to the public markets.

However, that didn’t happen because the funding did not come through — and now the company is burning through its own capital that had been previously raised. Layoffs have been a fact of life among firms such as these (20% of the staff was laid off at Thrasio), and Better.com and other companies have done the same.

Pick your stories, it seems, and the refrain is similar. High-flying companies are crashing to Earth, at least in equities. The private markets have to gird for a a pullback in funding. On the one hand, as noted by the Journal, venture capitalists (VCs) want to see these companies break even at least.

Related: SoftBank’s Vision Fund Suffers Amid Tech Stock Slide

On the other hand, we contend, the volatility of Wall Street darlings that are now Wall Street scapegoats may give VCs and other investors pause. It’s a common exit strategy to head toward the public markets and cash out. That avenue seems a bit, well, dicey now.

Alternatively, the idea of hanging on to a company as an early-stage investor and selling to another (larger) competitor also seems less a sure bet than it once was — after all, an acquiring firm wants to see steady top line and operating metrics, too. But in this macro climate, they might prefer to hang onto their cash hoards for a rainy day.

The halcyon days are over and what comes next is no sure thing.