All good times eventually end—it’s a lesson that fintech startups are currently learning.

According to technology intelligence firm CB Insights, fintech businesses raised $20.4 billion in Q2 2022—a 33% drop on Q1 and the lowest quarterly amount since Q4 2020, the height of Covid’s second wave in the US. A big reason for the drop, as explained in this article we published recently, is due to rising inflation and interest rates. (SPAC activity has also fallen off a cliff, according to the Wall Street Journal.)

“There’s no question that higher rates are starting to have an effect on fintechs,” said Jezri Mohideen, wholesale chief digital officer and co-head of global markets for Emea at Nomura. “Funding models have been very friendly, but the next 12 months will be challenging. A lot of fintechs will have cashflow issues and fundraising pressure.”

And Mark Beeston, founder of Illuminate Financial Management, a financial markets technology-focused VC firm, said, it’s likely to be a tough environment for very young companies. “The ‘let’s raise now at high levels, burn aggressively to grow, but don’t worry, we’ll just back up the truck and raise some more money at fantastic market levels in 12 months’ time’ model—that party is clearly over.”

Perhaps to help illustrate the current climate, startup geolocation data providers—such as Thasos Group, Gyana, and SafeGraph—have faced varying degrees of difficulty in recent years, with Thasos’ assets getting acquired by Market Service, Inc.; Gyana shuttering; and SafeGraph laying off a quarter of its workforce. Even before recent inflation and rates concerns, alt data providers (which has been a popular sector for startups) were facing difficult conditions as a result of the pandemic.

Now, the term “fintech businesses” encompasses a lot. Of that $20.4 billion estimated by CB Insights, I’d wager a fair amount of that went to companies specializing in the worlds of blockchain/distributed ledger technology, crypto, and digital assets. The 20 companies I list below are mostly in the worlds of trading tech, traditional financial technology, and data management. If I included crypto-related startups, I easily could’ve added another 50 names to the list.

Everyone is writing about DLT/crypto/DA, but I’d argue we’re the last publication left that solely focuses on traditional trading tech and market/reference data issues. If you’re reading this column, you’re likely a subscriber, so that’s what I’m going to focus on. Anyway, blockchain startups often don’t succeed.

Now, 20 companies is a relatively small sample size—I fully understand that. It’s also not an apples-to-apples list—some are focused on equities, others on fixed income, some are not solely focused on the capital markets. Also, I simply looked at January 1, 2022, through August 19, so this excludes companies that might’ve “recently” received funding last year. But I do think that the list helps to show broader trends that have been developing since July 2020, when I wrote the first Waters Wrap about established vendors racing to move their legacy platforms to the cloud.

For this exercise, after I put together the list, I then went through each press release announcing the funding round and picked out the major terms that these companies were trying to promote as being core to their value proposition. (You can find that list below the “funding list”. Also, it was made by me and some might not agree with it, or think it’s lacking.) With that disclaimer, I’ll get into what I think this list shows, but if you think I’m off base or am missing something, please do let me know: anthony.malakian@infopro-digital.com.

The first thing that I’d note is that of those vendors that are focused solely on the capital markets, the majority are targeting buy-side firms, and a good number of those are focused on solving issues in fixed income. This makes sense to me. But they make sense because of the new technologies being incorporated by the other firms on the list, but that aren’t focused on fixed income.

With that said, let’s start here: It’s difficult to break into large investment banks and the sales cycle is drawn out on the sell side—in tough market conditions, that can spell doom for a startup, hence the buy-side love. While a startup might not be able to break down the walls of Renaissance Technologies, AQR or Bridgewater, there are nearly 4,000 registered hedge funds in the US. Granted, most of those simply want a Bloomberg Terminal, but there’s a sizeable enough market, it would seem, that it makes sense to roll the dice on mid-sized hedge funds, rather than spending years trying to convince JP Morgan or Goldman Sachs to roll the dice (assuming no pre-existing relationships).

Second, fixed income is the perfect market to approach with products that incorporate new technologies, specifically around cloud/SaaS, machine learning, interoperability, and open-source. (But, again, while fixed income might be the popular market to attack, these tools are, in some degree or another, being incorporated by everyone on the list.)

Let’s start with cloud—and if you’re creating a startup and not architecting it for the cloud…I mean, why? For many, the idea of leaning heavily on a public cloud provider was a scary proposition for trading firms just five-or-so years ago. Today, Amazon, Microsoft, Google and IBM have become as important as Bloomberg, SS&C, Ion and Broadridge, especially as end-users want tools delivered via a SaaS or managed service model. Cloud allows firms to store and run analytics on massive amounts of data, but on top of that, thanks to open-source tools geared toward machine learning and natural language processing, AI is becoming more accessible to a wider range of firms, both vendors and end-users, alike. And helping to tie all this together is the field of interoperability—and some people (me) might say that fixed income is the perfect spot for the interop movement. Additionally, firms are increasingly developing APIs to deliver data and services. And at the same time, low-code development is becoming an increasingly popular topic for banks and vendors, alike.

To wrap it up in a bow, because of how fragmented the fixed-income marketplace is, these tools, when combined, can open up new avenues for alpha generation that were dead ends just a few years ago. But, again, every vendor below touches on at least one of the trends I’ve just mentioned above.

Blockchain, crypto and digital assets tend to suck all the air out of the room when talking about fintech funding, but when we’re looking at institutional trading, risk and data systems, the markets do not rely on DLT. No, it’s because of advancements in the fields of cloud, AI, open-source, interop, API and low-code that there’s a chance for innovative firms to break into a marketplace that is dominated by stalwart providers.

NOTE: This list was made using our weekly “This Week” press release round-up and the Forefront Fintech Digest, a curated newsletter compiled by Forefront Communications. In some instances, I made my best judgment as to the type of funding round that transpired. If any information provided below is incorrect, simply let me know and I will amend: anthony.malakian@infopro-digital.com.

• Word Cloud (Please note that while I might not have listed “cloud” next to a company’s name, that does not mean they’re not cloud. Rather, it’s a term that they did not promote in their press release announcing the funding round. Some terms, i.e. buy-side tech, are me simplifying terms used in the release to mean asset managers and hedge funds. Hopefully that makes sense, and hopefully I did a good job.) 

Appital: buy-side tech, equities, liquidity

Ataccama: data management, governance, cloud

BigPanda: AI, operations, analytics, big data

BondCliq: Fixed income, pricing data

CAIS: Alternative investments, cloud

Claira: Document intelligence, fixed income, AI

Clear Street: Cloud, API, back-office, broker tech

ESG Book: ESG, analytics, sustainability, cloud

Finalis: Private markets, broker tech,

FundGuard: AI, SaaS, asset servicing, buy-side tech

Genesis Global: Low-code, automation, efficiency

Hive: Cloud, compute, storage, peer-to-peer network

Infima Technologies: Fixed income, AI, analytics, risk management

OpenBB: Open-source, alternative data, research, AI

OpenFin: App interop; operating system, productivity

OpenGamma: Collateral management, portfolio management, buy-side tech, SaaS

Overbond: Fixed income, AI, automation, cloud

Plenitude: Regtech, compliance, financial crime

TransFICC: Fixed income, low latency, connectivity, API

Velox: Low-code, fixed income, HTML5, workflow automation

The image accompanying this article is “Game of Backgammon” by David Teniers, courtesy of the Cleveland Museum of Art’s open-access program.