AI frenzy bites into fintech

AI took over at this year’s Collision conference, held in Toronto last week.

Why it matters: Artificial intelligence has become the must-not-miss technology for investors following the explosive success of Open AI’s GPT-4, sucking some air out of other venture-backed categories.

Driving the news: Fintech has been a primary victim. Some 64% of investors at Collision said AI/ML could become the most disruptive technology in the next five to 10 years, per a Pitchbook survey. A year ago, the hottest category was fintech/blockchain, with some 29% of investors. Dollar figures reinforce the narrative.

• In the second quarter of the year, venture investors poured roughly $7.9 billion into fintech deals (excluding Stripe's $6.9 billion round, which was announced in Q1 but which Pitchbook counts as having closed during the second quarter), and $20.2 billion into AI-related startups.
• For perspective, even if you include Stripe, AI grabbed $5 billion more than fintech in the quarter.

Zoom in: It’s not just numbers showing AI’s dominance.

• “I was at the Fintech Meetup conference a few months ago and asked some [investors] if they were going. They said, ‘No, we're not sure we're gonna do any fintech this year,’” Sheel Mohnot of Better Tomorrow Ventures said during a panel discussion that Lucinda moderated at the Collision conference. “And these are people that had been at all the fintech events the last several years.”
• Even funds with dedicated fintech practices have been shifting gears, he said.

The big picture: Non-traditional investors (crossovers, etc.) were already trickling out of the system. Now generalist venture capital firms are adjusting focus from the hottest category of 2021 into sectors like AI and climate tech, says Pitchbook lead VC analyst Kyle Stanford.

• Investing titan Insight Partners notably has shifted resources to focus on AI/ML as well as its bread-and-butter subscription software, sources say.
• The firm has made some $4 billion in AI bets since 2018, one source says. Insight declined to comment.
• That has slowed its fintech investing at the same time the firm cut the target for its next fund from $20 billion to $15 billion.

Between the lines: Part of the broader fintech pullback is due to consumer-facing fintech businesses losing steam.

• "We're not really investing in consumer fintech right now," says Yatong Li, managing director of Sixty Degree Capital, which invests in companies Series A and above.
• Rising interest rates and the capital-intensive nature of consumer-facing fintechs — like lending startups — have made it a challenging space to bet on, he notes.

Yes, but: AI has the potential to boost fintech advancements, making areas such as fraud detection even more attractive for investors. AI could also prompt automation inside fintechs, cutting expenses.

• "As AI continues to grow and there's more risk around people being tricked ... we're going to see a lot more innovation around the compliance and fraud space," Jillian Williams of Cowboy Ventures said at the Collision panel.

Bottom line: Fintech isn't as hot as it was in 2021, but it's still one of the most well-funded VC categories.

• "This happens constantly when there's a next hot thing," Cambrian's Rex Salisbury said during the panel discussion. "I think people get distracted by the next shiny object, but there's always going to be capital in fintech.”