Boasting a $2 billion (£1,588,894,546) split across 184 deals in 2024 alone. However, while fintech continues to disrupt traditional financial services, the increasingly complex funding landscape has created challenges.

Venture capital investments have cooled, with Q1 2024 being its lowest level of funding in the past five years, and angel investors like me have stepped up to bridge the gap. Although this has been a lifeline for pre-seed and seed rounds of start-ups, can they truly replace VCs in scaling fintech businesses?

The evolution of UK fintech funding

Historically, fintech funding in the UK has been characterised by strong venture capital backing, with high-profile investors eager to support the next generation of financial disruptors. But a combination of economic uncertainty, higher interest rates, and shifting investor priorities has led to a decline in VC activity.

Enter the angel investors, offering critical early-stage funding to promising startups. These individual investors provide flexible capital, often making faster decisions than traditional VC firms. Their ability to support fintech startups in the early phases of development has become increasingly important, but their limitations also raise concerns about long-term scalability.

The changing investment landscape may not just be a temporary shift but a fundamental reshaping of how fintech startups secure funding.

Angel investors vs. venture capital

Both angel investors and venture capital firms play vital roles in the fintech funding ecosystem, but their approaches, resources, and impacts differ significantly.

Angel investors typically invest their personal funds in exchange for equity, often at the pre-seed or seed stages. They offer greater flexibility and faster decision-making compared to venture capital firms, allowing startups to secure funding with fewer bureaucratic hurdles. In addition to financial backing, angel investors provide personalised mentorship and take a hands-on approach to supporting early-stage businesses. That’s the aspect of angel investing that has really drawn me to it.

However, for many angel investors, financial resources and networks are limited, making it challenging for startups to scale rapidly without additional funding sources.

Venture capital firms, on the other hand, provide significant financial backing, often in multi-million-pound funding rounds. Alongside capital, they offer strategic guidance, industry expertise, and extensive networks to help startups expand. But they typically require substantial equity stakes and may exert greater control over the company’s direction. Securing venture capital can also be highly competitive, with firms favouring startups that demonstrate strong traction, making it particularly difficult for early stage fintechs to access this level of funding.

With VCs pulling back, fintech startups must evaluate whether angel investment alone is enough to sustain their growth – or whether alternative funding avenues need to be explored.

Key factors in angel investor decision-making

For fintech startups looking to attract angel investment, understanding what drives individual investors’ decisions is crucial. Unlike VCs, who may have a more rigid investment thesis, angel investors like me often rely on a combination of market potential, founder vision, and personal interest.

When evaluating a fintech startup, investors consider several key factors. First, they assess the market opportunity, ensuring the startup is addressing a clear gap in the industry. Founder expertise and vision are also crucial investors look for leaders with the knowledge, resilience, and leadership skills needed to navigate industry challenges. Scalability potential is another important aspect; while angel investors focus on early-stage ventures, they still seek long-term growth prospects.

Additionally, competitive differentiation plays a role, as startups must stand out in an increasingly crowded fintech space. Finally, exit potential is a key consideration – although angel investors tend to be more patient than venture capitalists, they still look for a viable exit strategy, whether through acquisition or future VC funding rounds.

The economic landscape and investor behaviour

The current economic climate is playing a major role in shaping investor behaviour. Higher interest rates have made debt financing less attractive, while economic uncertainty has led to more cautious investment strategies across the board. Angel investors, while still active, are becoming more selective with their capital deployment, favouring fintech startups with clear revenue models and strong paths to profitability.

For VCs, the focus has shifted from high-risk, high-reward investments to more sustainable, revenue-generating fintechs. This means that while capital is still available, the bar for securing later-stage investment is now higher than ever. Startups must demonstrate not just potential, but tangible traction and financial resilience to attract institutional investors.

Given the current funding landscape, fintech startups must adopt a strategic approach to securing capital. Fintech startups should leverage angel investment wisely, using early-stage funding efficiently to build strong fundamentals and demonstrate market traction before pursuing larger rounds. Diversifying funding sources is also crucial – beyond angels and venture capital, startups should explore grants, crowdfunding, revenue-based financing, and strategic partnerships to create a more resilient financial strategy.

Additionally, a strong focus on profitability and sustainable growth is essential, as investors are increasingly prioritising fintechs with clear revenue streams and a viable path to profitability. Building and maintaining strong investor relations is equally important; whether engaging with angel investors or venture capitalists, founders must effectively communicate their vision and provide clear growth roadmaps to secure long-term support.

Finally, adaptability is key in an ever-evolving investment landscape, requiring fintech startups to stay agile and adjust their funding strategies in response to market realities.

The future of fintech funding

While angel investors are playing a vital role in sustaining early-stage fintech startups, it’s unlikely they can fully replace the scale and strategic support that venture capital provides. The real question remains is whether we’re seeing a temporary downturn in VC investment, or a permanent shift in how fintech funding operates.

As economic conditions stabilise, we may see a resurgence of VC activity, albeit with a greater emphasis on sustainable, revenue-generating fintechs. In the meantime, startups must navigate this changing landscape with agility, leveraging angel investment where possible while preparing for the long-term challenges of scaling without traditional VC backing.

The fintech funding ecosystem is undoubtedly evolving, and while the road ahead may be uncertain, it also presents new opportunities for innovation, strategic partnerships, and alternative financing models. The key for fintech startups is to stay ahead of these changes, ensuring they are well-positioned to thrive in this dynamic environment.

Further Reading

Venture Capital Trusts Guide – What are VCTs? – Venture Capital Trusts currently manage £6bn worth of investment in UK start-ups invested in more than 1,000 companies. But what is a VCT and how does it differ to regular venture capital?

Angel investing in Britain – a Growth Business guide – Angel investors put £2bn a year into early-stage UK start-ups – here’s what angel investing is and how to get it.