State of the Market 2025

We expect 2025 to be a banner year for fintech. Shifts in technology, consumer preferences, regulation and the economy (trends we first highlighted a year ago) took off in 2024 and are poised to only accelerate in the year ahead. In the past year, fintech went from the doldrums of mainstream investor sentiment to, by the end of 2024, being one of the best performing segments of the market (Dave.com is a Restive portfolio company). We saw dedicated founders launching new companies and exceptional performance from companies that have been started in just the past few years. At the same time, the hangover of 2021 loomed as we saw ongoing low IPO and M&A activity for venture-backed startups. As we enter 2025, we expect a more open regulatory climate, ongoing consumer resilience, and continued AI momentum. 

The unsung winners of AI are early-stage startups

AI tools have supercharged talented early-stage teams. Code generation tools have an extreme impact on the productivity of engineers, with the most talented engineers getting the biggest gains. Widely available LLMs allow startups to quickly generate needed documentation, respond to RFPs, streamline and enhance customer service and, above all, rapidly iterate and test. In short, these AI tools allow even the smallest startups to operate faster and across a broader set of functions than ever before. When your only advantage is speed and creativity, these tools advance both. In comparison, within more mature enterprises, AI tools tend to be more solutions-oriented. For example, if you’re mostly editing existing code, code generation tools don’t have the same bottom line impact. If you already have a customer service function, AI tools might allow you to cut costs, but a scaled operation is unlikely to completely retool how a core functionality works. 

This has resulted in the need for fewer startup hires, especially within the engineering and customer success departments – typically the largest teams in any startup. With payroll expenses reduced and better tools available to scale more efficiently, teams are able to come to Series A and growth rounds from a position of strength, resulting in the founders’ suffering much lower levels of dilution. Going forward, we expect funding rounds beyond the seed to sustain much lower dilution to the benefit of founders. 

The application layer takes center stage

As the explosion in LLM technology settles into something resembling a steady state, further attention will turn to the application layer. While 2023 and 2024 were characterized by breathless excitement for OpenAIs next model release, the next major innovations are likely to be less about the LLMs themselves but rather the ways in which they are exploited to do interesting things. Put another way, 2025 will be the year of the application layer, similar to how 2008 was the year of the App Store coming after the year of the iPhone in 2007. 

We’re bullish on what this means for fintech. The most exciting application layer technologies we’ve seen have been those where specific domain knowledge can be coupled with tech advances, and there are few markets where there is more regulatory, tech, and market nuance than financial services. For example, Restive portfolio company SPRX takes deep tax domain knowledge to bring faster, cheaper, and effective R&D tax credits to small businesses – including new markets that have historically not been profitable to serve. 

We also believe AI Infrastructure investments are being made now that will create a boon for startups in the future. Large companies are deploying enormous capital to build out the new infrastructure of AI, even in the absence of concrete use cases. There is a chance that we will look back on this period as one of overbuilding, similar to the laying of “dark fiber” in the mid ’90s, when enormously capitalized businesses built the foundation of the modern internet before it was apparent what, exactly, this “information superhighway” would do. While a number of those players ultimately suffered bankruptcies and capital destruction, the infrastructure that they built ended up being critical to the explosion of IT in the 21st century. The current flood of investment may or may not pay off, but the existence of this infrastructure ultimately will unlock extraordinary value for the founders who can piggyback on this incredible quantity of investment.

Regulatory risk, what regulatory risk?

For the first time since 1999’s Graham Leach Bliley Act, the American banking industry is facing the real possibility of a deregulatory agenda. This would be a remarkable turnabout from the country’s regulatory posture since 2008, a timeline that also includes almost the entire history of “fintech”.

Furthermore, the impact of the crypto industry on the 2024 election cycle has put a host of new issues on the agendas of policy makers. We find it very hard to imagine a scenario where the exceptionally well-organized banking industry agitates for reforms that would advantage banks and harm non-bank fintech firms. Instead, we expect to see new legislation and rule-making over the coming years that creates greater certainty for non-banks and that makes it easier for banks and non-banks to work together. There is even the possibility the regulators may again pursue a “pro-innovation” agenda, something that would be a boon to fintech and anyone experimenting with new ways of doing business.

For the most part we see these reforms as being good for consumers and business. But we will also likely see a significant reduction in enforcement actions. This will likely embolden some bad actors. However, much like a pendulum swings, the enforcement environment can also change very quickly – and the statute of limitations for most regulatory violations and financial crimes is extremely long. As such, over the next few years, it is critical that startups continue to invest in legal and compliance. Like good insurance, these investments pay off in bad times allowing well run companies to capitalize on their competitors' failings.

Realigning spheres of competition

Perhaps the most bullish sign for startups is that many traditional incumbents no longer seem to think that startups are a thing they need to be concerned about. As a sign of that, in December the Wall Street Journal ran the headline that “The coolest job in tech was banking.” This is obviously not true: for WSJ writers out there, a poll of the actual coolest jobs in tech would likely reveal that those jobs are working at fast growing AI firms, helping hyperscalers scale and being in the trenches of a startup with explosive growth. But it also shows that the incumbents are increasingly confident that they’ve beat the startups. If past is prologue, this is a very good sign for today’s fintech startups as it shows the incumbents may not see startups as a viable competitive threat, a dynamic which gives smaller firms more time and space to iterate.

At the same time, we see more startups, emboldened by AI, to take on the “unicorns” of the prior era of fintech. Their teams and infrastructure cannot compete against the new, nimble upstarts. This trend includes both some very public “deaths” of former fintech darlings this past year, but also large funding rounds of companies with fintech unicorns in their sights. We expect this competitive dynamic to further play out as more cash-efficient, AI-enabled startups secure money to compete head to head with their larger counterparts. 

M&A and IPOs are poised to open up

In December 2024, Chime filed for their IPO, and we expect that to kick off a slew of other later-stage fintechs pursuing that path in 2025. We believe that many companies will be buoyed by strong public market performance of fintech companies at the end of 2024, as well as the benefits of a new regulatory regime. We should note under the hood that strong fintech performers have continued to excel over the past number of years, but a variety of factors (ample private capital, negative investor sentiment, broad reluctance to go public) have dampened the motivation to go public. 

We also expect the M&A environment to improve. For companies that raised in 2020-2022, bid-ask spreads will finally come into alignment between acquirers and founders, which has been one of the main drivers of reduced M&A activity. Second, companies that were born after the bubble, and that had much more measured valuations, will reach a point of maturation where they will become interesting acquisition targets. Third, we expect the new administration to pursue a pro-business agenda, which will contribute to improving stock prices for acquirers, more cash via new tax policies, and a more favorable view on acquisitions. We started to see some of these trends emerge in the last months of 2024 (Bridge, Brigit, and MoneyLion being notable examples) and only expect this to continue.  

Investor sentiment and funding

Within fintech today, mainstream investor sentiment is a lagging indicator of the market. We believe that as the trends above compound over the course of the year and beyond, the perception of fintech as a strong, enduring investment area will shift into focus and sentiment will become warm once again. Indeed, we know that many generalist investors and allocators have noted the strong, continuing performance of fintech companies in their portfolios, but it is not yet part of the mainstream discourse. 2025 will be the year that the pendulum swings.  

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Broad funding will follow. We’ve already seen large rounds driven by AI-enabled services with the financial services market (per the changing competitive landscape section above), but we expect to see large stablecoin deals being done in light of Stripe’s acquisition of Bridge and other non-AI deals getting done as well.                                                                                                                             

Clean up from past era

That said, we don’t expect the year to be completely rosy. There will continue to be unwinding from the Synapse debacle, with ramifications in terms of partnerships, new business models, and regulation. Companies that have been continuing to ride out their cash reserves from 2021 will go out of business. AI will introduce more powerful challenges for financial services, especially in the realm of fraud and cybersecurity. The dismantling of the Chevron Doctrine will create a period of regulatory uncertainty within the industry, which might disadvantage consumers. And a broader loosening of the regulatory and legal requirements will open the risk for fraudesters and con artists to take advantage of this more permissive environment. For those startups trying to build large, scalable solutions, it will be more important than ever to invest in compliance and legal early and to maintain a steady hand on the long term future of the company. 

An exciting future ahead

2025 is poised to be a year of dramatic shifts within fintech. New technologies – from AI to AR to quantum computing – will take root within the sector. Major regulatory shifts are ahead. Startups are better equipped than ever to build, scale, and win in this environment. We can’t wait to see what early-stage founders will emerge and succeed in the year to come, and we are excited to support, partner with, and fund those leaders looking to shape the future. 

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