7 Investors Reveal What’s Hot in FinTech in Q1 2023

Global collapse It has affected all sectors, but fintech has taken the brunt of last year’s fall in public market prices from rural areas.

However, it seems that VCs are still investing more carefully than before and taking their time with due diligence.

CB Insights recently found that two of the largest global VC firms, Sequoia Capital and Andreessen Horowitz, will back more fintech companies than any other sector by 2022. In both cases, about 25% of total investments went into fintech startups.

And, while global fintech funding will slip 46% to $75.2 billion in 2022 from 2021, it’s still 52% higher than in 2020 and 18% of global funding, proving investors still have faith in fintech’s future.

You could even say some are aggressive: “If anything, I expect our investment pace to pick up this year as early-stage fintech companies prioritize operational discipline and product differentiation,” says Emmaline Shaw, managing partner at Flourish Ventures.

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The headwinds of the past year have resulted in lower (and smaller) rounds, M&A and an emphasis on fundamentals. Gone are the days of investing in passion.

But for Ansaf Karim, a venture partner at Lightspeed, tough times can be seen as a good thing because they often create great companies. “If you study earlier compressed periods in the ecosystem (eg, 2008 and 2000), we’ve seen great companies get established, and we’ve seen great venture firm performance during these windows,” he says.

“The past two years in the venture ecosystem have been extraordinary, but I believe we’re returning to a healthy ‘normal.’ An approach may be developed,” Kareem added.

So if you’re looking to raise your first round or third, make sure you focus on the basics, save cash, and don’t shy away from raising a lower round if you think your idea could change the world, several investors said.

“Grow smart and sustainably,” advises Michael Sidgmore, a partner at Broadhaven Ventures. “We cannot control the macro environment, and today’s geopolitical climate means there is always the risk of external shocks to the market. But the markets will come back at some point. So no matter what market we’re in, grow in a way that allows you to focus on unit economics and profitability so that you can control your own destiny.

We’ve interviewed seven active investors over the past two weeks to help TechCrunch+ readers understand what fintech investors are looking for (and not!) right now, as well as what you should know before approaching them.

Spoiler alert: B2B payments and infrastructure are on fire and most investors expect to see more flat and lower rounds this year. Additionally, they were kind enough to share some of the advice they are giving their portfolio companies.

We talked to:

• Charles Birnbaum, Partner, Bessemer Venture Partners
• Aunkur Arya, Partner, Menlo Ventures
• Ansaf Karim, Venture Partner, Lightspeed Venture Partners
• Emmaline Shaw, Managing Partner, Flourish Ventures
• Michael Sidgmore, Partner, Broadhaven Ventures
• Ruth Fox Blader, Partner, Antimis
• Miguel Armaza, Co-Founder and General Partner, Gilgamesh Ventures

Charles Birnbaum, Partner, Bessemer Venture Partners

Many people call this failure. How has your investment research changed in the past year? Are you still closing deals at the same rate?

We will continue to invest in great companies regardless of the market. However, many entrepreneurs choose to keep their heads down and build efficiently instead of trying this new valuation environment.

While our investment horizons are always evolving, the changing macro environment hasn’t changed which areas we’re most excited about.

In the year Do you expect to see more down rounds in 2023? Are you seeing more companies raising extensions or rounds compared to 2021 and 2022?

We expect more flat and down rounds to come later this year as the runway narrows for many companies that were raised two years ago.

Private market valuation, at any given time, is not only a reflection of the team’s hard work and progress, but also influences the financing environment.

What excites you most about the fintech space? How overrated do you feel?

We see great opportunity for innovation in the world of B2B payments. With the infrastructure built over the last decade by modern developer platforms and the upcoming incentives in the world of real-time payments, with the launch of FedNow, adoption is likely to be much faster.

We’re excited to see how entrepreneurs use these tools to improve our legacy B2B payments ecosystem.

The long-term and sustainable customer acquisition benefits of consumer fintech businesses are overstated and will continue to struggle to live up to the high expectations placed on them by investors over the past several years.

We expect to see significant consolidation in the consumer fintech landscape this year.

What criteria do you use when deciding which companies to invest in? Would you say you are doing more due diligence?

We analyze all innovation, including fintech, and focus on startups that align with our disciplines. Before we meet the entrepreneur, we try to predict where the opportunities for seismic innovation will lie. This helps us diligently as we work to understand the market before making any investment.

We work hard to do due diligence on every investment opportunity we pursue, spending significant time with the company, in-depth market research, and as many references as possible on the teams we’ve backed.

Are fintechs about to grow in value by 2021? How many will not control the task in 2023?

It’s hard to say how many companies will advance to 2021, given the price growth in the private market over the past few years and the steep decline in the public market over the past year.

For the top tier of companies that have been able to raise large rounds, the reality is that they won’t need to answer that question for a while.

What advice are you giving to your portfolio companies?

The most important thing for me is not to give the same advice in different companies. There is no one-size-fits-all solution. Every business is at a different point in their journey to find product market fit, ensure business model sustainability, execute go-to-market activities, etc.

Rethinking growth targets, in light of rising capital expenditure, placing greater emphasis on efficiency in this area is a consistent thread in board meetings these days.

How do you prefer to receive leads? What’s the most important thing a founder should know before calling you?

From my experience, you often have to find the most interesting companies and get the right to invest. We are always proactively reaching out to founders who are building in areas where we have active investment ideas.

In addition, we are always looking at exciting opportunities that come from referrals from entrepreneurs we work with or have worked with in the past and other investors in the ecosystem. We do our best to review and review incoming messages.

Aunkur Arya, Partner, Menlo Ventures

Many people call this failure. How has your investment research changed in the past year? Are you still closing deals at the same rate?

We are definitely seeing the reset we expected to see after a decade in a macro environment where the cost of capital is zero. Changing the deck is difficult but very healthy.

I’d say our core lessons in fintech are largely the same: we invest in developer infrastructure and embedded finance APIs, vertical banking, end-to-end consumer and business finance services, and the CFO’s office. We are also looking at thoughtful enterprise applications that connect to each of our fintech thesis areas.

We continue to move away from balance-sheet-heavy businesses that take undue risk to generate revenue and end up looking more like pure technology companies and more like insurance companies or lenders. These are the first businesses to suffer during a downturn, as they point heavily to the macro environment.

We didn’t have much activity in 2022, but we’re seeing increased deal flow in fintech in the first few months of 2023.