In recent years, fintech’s revolution has felt like a rising tide.
Behemoths like Stripe and Square edged out banks while newbies like Brex nonchalantly raised nine-figure rounds. Today, however, the state of the financial technology industry feels more wobbly — some healthy startups in the genre are faring better than ever, while others are feeling the strain as consumers tighten their wallets and change their spending patterns.
It’s clear that we’re going to see some fintech startups struggle in the near future, but venture capitalists claim not to think in a short-term manner. We ran our last fintech VC survey in November 2019, so we wanted to get their take on where fintech is today. We turned to eight top VCs to better understand the state of the industry, which market signals they’re tracking and where opportunities still exist within the already-crowded pool of financial services:
- Matt Harris, Bain Capital Ventures
- Charles Birnbaum, Bessemer Venture Partners
- Jackson Gates, Manresa Ventures
- Rob Moffat, Balderton Capital
- Hope Cochran, Madrona Ventures
- Brendan Dickinson, Canaan
- Yann Ranchere, Anthemis
- Cherry Miao, Accel
Next week, we’ll publish the other findings we received from these investors, focusing on fintech’s future in a post-COVID-19 world.
What follows is a collection of themes we noted from the investors, followed by their at-length responses.
Investing pace, flight to quality, varied impacts and uncertainty
Our first theme deals with investing pace. More investors than we expected were willing to note that their investing pace into fintech companies was slowing for one reason or another. While it’s become a cliché for private investors to state that they are open for business as a market signal, that doesn’t appear to mean that investments into fintech won’t slow.
The reasons why investors are slowing their pace of deals is varied, with some noting issues on their end (difficulty to reach conviction while operating remotely, etc.), and some detailing that some fintech companies are more internally focused today than reaching out to raise new capital. Investors also noted an expectation for fundraising to take longer and lower valuations. While that’s not great for founders, it’s also not the worst news; there is still money out there to be raised, and many investors claim they are writing checks of the same size as before.
The second theme deals with an expected flight to quality, with investors stressing that startups in the space should curtail spend that isn’t core to survival (marketing spend around branding was raised, for example), focus on key business metrics (unit economics, aggregate profitability), and monitor leading business indicators more closely. This is not a surprising set of advice, per se, but it is one that matters. If founders will listen remains to be seen, but investor are clearly signaling a return to more sober business operations.
Our third theme deals with how varied the impact of COVID-19 has been on fintech companies. As TechCrunch has reported, fintech companies have seen a distributed set of results since the pandemic closed much of the U.S. economy. However, when reading through investor responses, the true scale of this divergence became clear. The new reality is not merely that some fintech companies are doing a bit better or a bit worse. Instead, it’s that some are sharply down, some are flat, and some are soaring. This is perhaps a good argument for tightening what fintech means, or perhaps dealing with the category on a more tailored basis; fintech may have become too broad a bucket to treat as a group.
And finally, our fourth theme is uncertainty. Our investor group this morning isn’t expecting the economy to snap right back. But when it will return, and in what form, are far from clear. 2020 could be a lost year, said Brendan Dickinson from Canaan. The market recovery will not be swift, said Matt Harris of Bain Capital Ventures. And Charles Birnbaum from Bessemer Venture Partners said that “economic shocks” all “play out quite differently from one another.”
With that collection of notes, let’s begin. Responses have been edited for length and clarity.
Matt Harris, Bain Capital Ventures
What portion of your fintech portfolio companies is thriving? What portion is struggling?
Recently, we’ve started to look at our portfolio along two dimensions. The first dimension is the vulnerability of the company in general, considering things like cash balance and level of burn, fundraising needs and durability of revenue. The second dimension is the impact of COVID-19 on that company. Fortunately, a good portion of our portfolio fell into the positive end of both dimensions, and we were quick to focus our attention on companies with either high vulnerability or high COVID-19 impact.
Businesses that relied more on transactional revenue and exhibited urgent need for capital that couldn’t be solved by cost-cutting measures are the most vulnerable, while businesses centered on consumer investing and spending, or those companies serving highly affected sectors like restaurants and travel tend to be most impacted.
How is the current economy impacting your investment pace into fintech startups? If it hasn’t impacted pace, are you writing bigger or smaller checks to fintech startups than before the pandemic?
Our investment pace has slowed a bit, due largely to time rather than capital constraints. We’re finding that a lot of companies who would otherwise have considered fundraising opportunistically are fully focusing their time on company operations rather than on investor conversations. Similarly, we’ve leaned into being a resource to our portfolio companies during this time.
So while we still remain open to new investments, the opportunity cost of both our time and a founder’s time is higher today than a couple months ago. For that reason, inside rounds are becoming more common because there’s no learning curve needed. We’re also actively engaging with founders we’ve known for a while, who might be in the market for capital soon. It’s hard to build new relationships over video, and so we are leaning into situations where we have pre-existing relationships. But it’s worth noting that just this week we closed one deal and issued a term sheet on another.
Every company is different, but is there a theme of advice that you are giving to fintech portfolio companies lately? Do you anticipate the advice you give changing in the next quarter or two?
The general advice I’ve been giving is to think like a wartime CEO even if the battle hasn’t reached your backyard. The market is evolving every day, and a strong financial footing today is only temporary. Founders need to think strategically about their cash position and may need to get creative when it comes to fundraising over the next twelve months. I recommend starting conversations with existing investors and to the extent that’s not enough, expanding conversations to investors with whom they’ve built relationships over time.
I hope the theme of this advice will change over the next couple quarters, but the market recovery will not be swift, so companies need to prepare for this to last a long time. We recommend that our teams build multiple scenarios and then create the instrumentation required, internally and externally, to learn quickly which scenario is likely to happen. In a fluid situation, don’t pretend you can predict the future, but do focus on constant adaptive learning.
When’s the last time you invested in a blockchain-based fintech company?
We are investors in a company called Digital Currency Group, which itself is a strategic investor in early-stage digital currency and blockchain companies. We at Bain Capital strongly believe that domain expertise is our competitive edge in both the diligence of new companies and the level of support we can offer to our portfolio, so while blockchain hasn’t been an area of focus for us, we’re excited to partner with the team of blockchain experts at Digital Currency Group. Outside of DCG, we’ve also invested in a number of companies leveraging blockchain technology to create what’s called decentralized finance. Commercially speaking, this is a very early-stage segment but with asymmetric upside.
In fintech, what types of problems are you itching to see solved the most?
In the 1990s, one of the first formative moments in my career was being part of the Bain Capital team that purchased what later became Experian. It was a great return for the firm, but more importantly, it taught me how transformative data and technology could be in the financial services space. Since then, I’ve spent over two decades learning about pain points in financial services and trying to find the best companies that bring data and technology to solve them. There’s been a lot of innovation in areas like payments and consumer lending, but I think we still have a ways to go in other areas such as loan servicing, asset management, and insurance.
Charles Birnbaum, Bessemer Venture Partners
What portion of your fintech portfolio companies is thriving? What portion is struggling?
Bessemer Venture Partners has a broad range of companies serving many different aspects of the financial services landscape. We are clearly seeing:
- Some companies severely impacted by shelter-in-place and social distancing measures
- Some that are not yet seeing any impacts on their business
- Some that are seeing an incredible spike in demand due to financial services incumbents finally coming to grips with the fact that modern cloud vendors can help them provide a better digital experience to customers both during this crisis and beyond.
How is the current economy impacting your investment pace into fintech startups?
Like all of our portfolio companies and entrepreneurs right now, Bessemer is studying the various impacts of this epidemic on the economy and various sub-segments within fintech. Despite the clear near and long-term impacts on the economy, we are in the business of making long-term investments in disruptive businesses and are continuing to actively engage with many entrepreneurs across the fintech landscape.
Over the past few years, we have been focused primarily on infrastructure players that allow incumbent financial services providers to manage the shift to the cloud in various industries and only feel that the current crisis will accelerate that shift. It’s unrealistic to continue the investment pace before the crisis hit for a number of reasons, but I do anticipate it’s going to be harder to come to an investment decision quickly without spending a meaningful amount of time with the team, which is usually done in-person.
Every company is different, but is there a theme of advice that you are giving to fintech portfolio companies lately?
At Bessemer, we are encouraging all of our companies to monitor leading indicators in their business on a more frequent basis and keep the lines of communication even more open than usual with their executive team and investors as we gather real-time data in the weeks and months ahead.
All of our companies are focusing their attention on helping their existing customers get through this challenging time; in some cases at the expense of sales and marketing initiatives that were planned if this crisis had not come upon us so suddenly.
Do you anticipate the advice you give changing in the next quarter or two?
Yes. The one thing we know from studying past economic shocks at Bessemer Venture Partners is that they all play out quite differently from one another, and we need to be nimble in and bespoke to how each of our industries is impacted in the months ahead.
There are some businesses that are seeing a significant increase in demand and others that are seeing a freeze of their new sales pipeline that could be temporary, but it seems to be clear that we will need to gather the data and set budgets and plans in place more frequently under these circumstances.
When’s the last time you invested in a blockchain-based fintech company?
An undisclosed investment ~24 months ago.
In fintech, what types of problems are you itching to see solved the most?
Two of the most significant (and unfair) remaining arbitrage opportunities in financial services have been exacerbated during this crisis, namely: 1) small suppliers/vendors waiting to be paid by large buyers, and 2) hourly workers waiting to be paid on the traditional bi-monthly payroll cycle by employers. There have been many players during the last wave of fintech innovation to step in to solve these two problems, but we still expect to see new software and direct to consumer and business players emerge to help close these gaps.
Jackson Gates, Manresa Ventures
What portion of your fintech portfolio companies is thriving? What portion is struggling?
Half of my portfolio recently raised seed funding and are heads-down building product and searching for early customers. Very little impact for most of these startups. And some may benefit as a crisis or slowdown can separate true-early adopter customers that desperately need the product from those who are just kicking the tires and surveying the landscape.
About a third of my portfolio is Series A-stage and looking to ramp sales. None of these companies are specifically exposed to industries directly hit by COVID (e.g., brick-and-mortar retail, travel, events etc). But I am concerned with longer sales cycles, difficulties engaging with new customers, reduced budgets, etc.
There is a small portion of my portfolio that gives me great concern because of either (a) fundraising risk — need to raise in the next six months, or (b) have a customer base that will be deeply affected by a long recession. Few founders have experienced a prolonged recession and difficult fundraising environment. The tools and tricks they learned in the last decade may backfire and hurt their fundraising chances.
How is the current economy impacting your investment pace into fintech startups? If it hasn’t impacted pace, are you writing bigger or smaller checks to fintech startups than before COVID-19?
Top-of-the-funnel deal flow has recently slowed in the last three weeks. However, the type of founders I am meeting are particularly strong and appear to be more thoughtful than those I met in 2019. And I have more time to play offense and seek out companies that are building important innovative products.
My check sizes will remain around $120K per investment, but I do expect valuations and round sizes to come down by 20-40%, e.g. 3-on-12 becomes 2-on-8, and 1-on-6 becomes 1-on-4. In the long run, I don’t think this will hurt founders; conversely, I hope it helps them become more focused and patient when picking a lead investor. This may seem counterintuitive, but in the past two years I think founders were overly worried about dilution because money was flowing fast and loose from inexperienced fintech investors.
Every company is different, but is there a theme of advice that you are giving to fintech portfolio companies lately? Do you anticipate the advice you give changing in the next quarter or two?
The fundraising process is going to be longer and require more effort for founders. Expect Series A process to take 6 months. Expect 20-30% dilution. Respect the firms that ask the hard questions and do their diligence. You want the smart money, so don’t rush your process.
And during this process, founders need to be focused on giving investors the full picture and plan versus trying to answer the minimum number of questions to get a term sheet. That should not have worked in the past and it definitely won’t work now.
I also think founders need to be more confident than ever in this environment, so my previous advice still applies — “you’re going to get a lot of advice and feedback as a founder. 95% of will be inapplicable to you or just plain dumb. The trick is to figure out the 5% you should take and then just ignore the rest.”
When’s the last time you invested in a blockchain-based fintech company?
Never. I am still waiting to find an application that is fundamentally more useful to customers because it’s built on blockchain and/or needs a token to power its network.
In fintech, what types of problems are you itching to see solved the most?
Large-scale systemic problems:
- End of SSN as a unique identifier. Perfect KYC on every transaction and zero fraud.
- Regulatory landscape — we need a national lending license, national money transmission license, national escrow license and specialized modular banking charters, e.g, merchant acquiring, commercial lending, commercial deposits, consumer lending, consumer deposits, etc.
- National regulatory framework for gig-economy workers.
- Consumer T-bills with strong risk-free rates-of-return to encourage consumers to build savings and emergency funds.
Request-for-startups:
- Universal identity network.
- Consumer bill pay — right mix of control, automation and cash-flow smoothing.
- Solvency and health ratings for businesses.
- End of rewards and points for credit cards.
- Transparency in healthcare pricing and reimbursement.
- Better financial tools and services for the aging population.
- Better financial tools and services for K-12 teachers.
- Returns and exchanges for e-commerce merchants.
- Decoupling healthcare from employment/employer.
- Simple, transparent profit sharing for employees of SMBs.
- Help 1099 workers see and choose gigs to maximize take-home-pay per hour.
- Continuing adult education to help with career advancement, career-switching and higher pay.
Rob Moffat, Balderton Capital
What portion of your fintech portfolio companies is thriving? What portion is struggling?
The majority of our fintech portfolio is thriving. Revolut recently raised $500M and lockdown is making even clearer to customers the benefits of a mobile-only bank.
Our investment Wagestream are giving furloughed workers access to their salary and powering crisis communications to enterprises. Cleo are helping Americans manage their money through sudden changes in their financial circumstances e.g. how to make your stimulus relief check stretch further.
One or two companies are being harder hit.
How is the current economy impacting your investment pace into fintech startups? If it hasn’t impacted pace, are you writing bigger or smaller checks to fintech startups than before COVID-19?
We recently closed a new fintech investment. Of the 10-12 investments we make a year, one or two are in fintech, expect this to continue.
Every company is different, but is there a theme of advice that you are giving to fintech portfolo companies lately? Do you anticipate the advice you give changing in the next quarter or two?
In the last weeks, our focus was on ensuring our companies had plenty of cash runway, 18 months plus. Now our focus is shifting to how they can adapt to a different world with a deep recession in some sectors but growth in others.
When’s the last time you invested in a blockchain-based fintech company?
Our last investment in blockchain was Luno.
In fintech, what types of problems are you itching to see solved the most?
I’d still love to see more companies taking on insurance.
Hope Cochran, Madrona Ventures
Every company is different, but is there a theme of advice that you are giving to fintech portfolio companies lately?
Since the coronavirus pandemic began, what we are talking about with all of our portfolio companies — and not just fintech — is to focus tightly on the customers you already have, cash runway and opportunities in your business to address the changing consumer patterns. Consumer and business behavior is adjusting in completely unexpected ways, and to the extent that you can maintain open communication with your customers to better understand their needs is paramount. On the fintech side, we are closely watching developments with the personal lending, personal finance tools and SMB services spaces as consumers’ needs and ability to pay change. On the B2B side, there is an opportunity for fintechs to shine as they out-maneuver larger banking institutions in not only responding to but finding ways to proactively support their customers during this difficult time.
When’s the last time you invested in a blockchain-based fintech company?
We announced our investment in Sila earlier this month, which offers banking, digital wallet and an ACH payments API for software teams. The company is looking to replace ACH as the method of choice for transferring money and blockchain is a part of their solution. So many of today’s businesses use and tolerate ACH simply because it has been around for so long, but it is terrible — both in terms of fees required and time of transfer. Sila’s opportunity lies in helping startups and global companies alike lower the cost and time by increasing the ease of transferring money while meeting regulatory requirements.
In fintech, what types of problems are you itching to see solved the most?
I have been CFO at several companies, including Clearwire and King Digital and currently hold board seats and audit committee seats at public companies including New Relic, MongoDB, and Hasbro. From all of my experience, I know intimately what it means for a CFO to be responsible for making sure their company has enough resources in the right places to support growth and maintain a healthy balance sheet. And yet — the office of the CFO is often very neglected when it comes to cutting-edge tools. I believe there are incredible amounts of opportunity for new technologies to enable better analytics, automate routine processes and enhance decision-making for finance leadership.
I believe the innovations we are seeing in SaaS businesses that are incorporating AI and/or RPA to help predict forecasting, complete manual tasks and change outcomes is coming to fintech. In today’s modern era, it is amazing how many crucial decisions are made, key conclusions are formed and key metrics are created with spreadsheets that are on the brink of breaking — too many links, formulas, dependencies and worksheets! This is a big area for improvement that we believe is ripe for disruption now.
Brendan Dickinson, Canaan
What portion of your fintech portfolio companies is thriving? What portion is struggling?
We are fortunate that our fintech portfolio is faring relatively well. Over the past five years, we have consciously stayed away from sectors that are getting hit the hardest in fintech right now: direct lenders, consumer and small businesses.
How is the current economy impacting your investment pace into fintech startups?
We are continuing to deploy capital and will always look to fund great companies, regardless of the macro environment. Recently we wrote our first lead Series A term sheet for a company we got to know exclusively on Zoom.
If it hasn’t impacted pace, are you writing bigger or smaller checks to fintech startups than before COVID-19?
Same size. We want to make sure our companies (both existing and new) are well capitalized to weather many quarters of turbulence. Sector-wise, I suspect you’re going to see the most impact in direct-lending platforms — at least in the near future.
Every company is different, but is there a theme of advice that you are giving to fintech portfolio companies lately?
Likely similar to most, you need to plan for 2020 to be a lost year. You want to make sure you are well-capitalized in order to be ready to take advantage when the broader markets start to recover – which may be in 2021. In the interim, we inhabit a new normal.
Do you anticipate the advice you give changing in the next quarter or two?
Not really. I don’t think anyone knows when this ends / gets better.
In fintech, what types of problems are you itching to see solved the most?
Platforms and infrastructure. These types of companies will be the most resilient to existing market shifts.
Yann Ranchere, Anthemis
What portion of your fintech portfolio companies is thriving? What portion is struggling?
With the exception of a few companies that cyclically benefit very early from the current environment, most of our portfolio companies are assessing the potential/current impact of a COVID-19 world and setting themselves up to generate growth through this period.
How is the current economy impacting your investment pace into fintech startups? If it hasn’t impacted pace, are you writing bigger or smaller checks to fintech startups than before COVID-19?
The current environment doesn’t prevent us from making new investments and having operated as a mostly remote team for the last couple of years, we can run our processes in a fairly similar fashion, however, we do account for the higher level of uncertainty we are experiencing and set our bar relative to this environment in making new investment decisions.
Cherry Miao, Accel
What portion of your fintech portfolio companies is thriving? What portion is struggling?
There are definitely areas that are thriving. All are benefitting from the fact that their digital channels are open while physical locations are shut:
1. Mobile stock trading
Given the volatility in the public markets and everyone sheltering in place (and perhaps having more time on their hands), it appears that more people are signing up for new brokerage accounts than ever before.
This change seems to be disproportionately benefiting the mobile-first stock trading apps and particularly the ones with the best products. In the U.S., that’s Robinhood (which announced a new round this week) and in Europe, that’s Trade Republic, which we invested in this week.
In less than a year post-public launch, Trade Republic has acquired more than 150K users (the vast majority organically) and it now manages almost €1 billion of assets (one of the fastest to billion dollars-plus of assets of any company we’ve seen globally). The founding team is incredibly thoughtful and has a tremendous mix of finance and tech experience. We think that they have a chance to build one of the most interesting consumer fintech companies in Europe and COVID only seems to be accelerating this.
- Mobile remittance
The remittance market is one of the largest markets in payments but is still, by most accounts, mostly an offline and bank-based market: only 20-30% of remittances globally are processed online or via mobile, with the vast majority still sent via Western Union-type offline services.
COVID is accelerating the pace of this market moving to more digital channels. Here again, we see the shift happening more aggressively to the best-in-class mobile solutions, namely WorldRemit, Transferwise, and Remitly, which just announced this week that they’re seeing a surge in growth.
At WorldRemit, which Accel is proud to back, we’re seeing a similar surge. Activations in April are up over 150% year-over-year and the company is having days of record volume. It’s never been more important to be able to send money anywhere as quickly and safely as possible, and COVID may cause the 20/80 offline/online split in this market to flip quickly.
We would not be surprised that when public markets open back up, some of the first fintech companies to make it to a listing are among these three leading remittance brands.
- Fintech infrastructure that supports digital banking
Here our major bet was Galileo, which was acquired by SoFi last week.
- Automated financial concierge services
Consumer uncertainty has everyone working to better manage and understand their finances. With a multitude of confusing choices before them, people are increasingly turning to trusted “concierges” as guides. We saw this in Credit Karma for credit cards and savings and continue to see this play out for insurance via The Zebra, which has seen revenue increase over 150% year-over-year.
How is the current economy impacting your investment pace into fintech startups? If it hasn’t impacted pace, are you writing bigger or smaller checks to fintech startups than before COVID-19?
We’re not changing the size of investments (we invest at all stages, from seed to $100 million+ rounds), but we are focusing on blue-chip companies, like Trade Republic, that we’ve known and tracked for a long time. We’re also seeing investments and acquisitions completed completely over Zoom. For the SoFi – Galileo acquisition for instance, all of the deal work was done virtually.
Every company is different, but is there a theme of advice that you are giving to fintech portcos lately? Do you anticipate the advice you give changing in the next quarter or two?
There are a number of fintech startups who have spent a lot of money marketing themselves but likely do not have a path to building profitable businesses (or businesses that would stand up to public market scrutiny). Unfortunately, there will be some companies that do not make it through this cycle, so we’re encouraging all our companies to focus on unit economics (as we do in all market conditions) to guarantee long-term endurance and give them the best chance to emerge post-COVID in a better competitive position. For those that are seeing a short-term bump in interest driven by the crisis, we’re encouraging them to think about how to translate that into a long-term relationship that they can expand on.
When’s the last time you invested into a blockchain-based fintech company?
2018.
In fintech, what types of problems are you itching to see solved the most?
We’re going to watch closely to see if post-COVID, small businesses look to new types of relationships with their customers to access capital. Even in good times, small businesses often don’t have great access to capital and have access only to high-cost lending options. Couple that with the fact that the median small business only has 27 days of cash on-hand, and it’s no wonder that all of us know and love a few locally-owned businesses that have really been struggling.
We think there will be new models that emerge that allow SMBs to tap into their most fervent fans for ongoing financing, alongside conversion to repeatable revenue streams like subscriptions. As an example, we’re seeing a surge in the number of small businesses that are raising money on GoFundMe as a fast, easy, transparent way to get “financing” from customers that can be faster, cheaper, and easier than a traditional loan.
Interestingly, we’re seeing some small businesses “hack” GoFundMe to set up recurring donations that lead to specific perks. We’re going to keep an eye on this because we think it may have major ramifications for the small business credit market.
Other companies like Intuit, Venmo and Square obviously are playing a role here, too, and it’s been fantastic seeing fintech startups rally to the aid of SMBs via the distribution of PPP and in a multitude of other ways.
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