8 fintech VCs discuss the shifting investing landscape and how to pitch them in Q3 2022

Last year, more than 20% of venture dollars went into fintech startups globally, according to CB Insights. Equally notable:
One-third of all unicorns created in 2021 were fintech companies.

This year, market conditions are dramatically different in every sector, including fintech. But while this year’s pace of funding in the fintech space is noticeably slower — and falling — the fact remains that the sector still accounts for a significant share of venture funding globally. In the second quarter, for example, about 18% of global venture dollars went into fintech startups.

To give TechCrunch+ readers specific knowledge about what fintech investors are looking for right now and what you should understand before approaching them, we interviewed eight active venture capitalists in the sector over the last couple of weeks. Their answers have been edited for brevity and clarity.

Here’s who we surveyed:

Paul Stamas, managing director and co-head of financial services, General Atlantic
Alda Leu Dennis, general partner, Initialized Capital
Michael Gilroy, general partner and co-head of fintech, Coatue
Justin Overdorff, partner, Lightspeed Venture Partners
Addie Lerner, founder and managing partner, Avid Ventures
David Jegen, managing partner, F-Prime Capital
Nik Milanovic, general partner, The Fintech Fund
Jay Ganatra, co-founder and managing partner, Infinity Ventures

Paul Stamas, managing director and co-head of financial services, General Atlantic

Globally, fintech startups raised $131.5 billion in venture funding in 2021. As a firm that has been investing in the space for a while, what differences in the landscape have you seen since this time last year? Were deals much more competitive last year?

There is no question that the deal environment is slower now than it was this time last year, particularly with respect to late-stage growth. Many companies are rightly focused internally on optimizing their business and waiting to test the market. There still appears to be a bid-ask spread in private market expectations relative to, say, public market valuations.

Deals do feel a little less competitive, but there are still a lot of capital providers — General Atlantic being one of them — who are excited to continue to invest in great opportunities and back great entrepreneurs. The environment has caused the pace of a deal to slow down, which, honestly, is probably a good thing. It gives companies and investors more time to get to know one another and perform diligence, in both directions.

“Adversity breeds tenacity, and we predict some exceptional companies will come out of this market cycle.” Justin Overdorff, partner, Lightspeed Venture Partners

Many people are calling this a downturn. How has your investment thesis changed in the last several months, and are you still closing deals at the same velocity?

Our thesis has largely remained the same. We’re still excited to invest in longstanding themes related to the transition to the digital economy and the globalization of entrepreneurship, and we are actively pursuing opportunities to back visionary entrepreneurs with proven business models. What has always been the case is that we gravitate toward situations where we believe, and where the company believes, that we can be a trusted partner and add substantial value. As we enter a more challenging macro environment, maybe that promise resonates even more. We’d like to think our 40-plus-year track record through some complex operating environments puts us in a position to help.

Fintech companies often have multiple revenue levers — adding new product lines, building in payments, etc. How viable will these levers be for fintech companies in 2022 looking to defend their 2020-2021 growth rates?

It is very hard to generalize across all fintech companies, products and customer types. Some companies were funded on the promise of future cross-sell and are heavily reliant on that cross-sell to have viable unit economics; those businesses may find it especially difficult to raise in the near term and will struggle to maintain growth as they wisely conserve cash. Companies with sound existing business models, which streamline their organizations quickly and prioritize properly, are well positioned to grow nicely through the cycle.

Have burn rates come down enough that most consumer fintechs are safe? How are you advising your fintech portfolio companies at the moment beyond the obvious (i.e., conserve cash, don’t plan on raising more on the same terms)?

Again, it is very hard to generalize. In our experience, the best consumer fintechs are taking this opportunity to optimize their models so they are positioned for profitable growth. Those companies are arguably safer now than they were six months ago, and we think they will be rewarded in the long term.

One important consideration for fintechs right now is whether it makes sense to modulate certain growth or new product ambitions and focus instead on ensuring they have fully funded business plans. We are also supporting our companies in strategically evaluating vertical and horizontal consolidation opportunities.

Have many fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2022?

For many fintechs, it is going to take some time to grow into their 2021 valuations. Not only were some companies being funded at very high revenue multiples, but in some cases, the businesses had low gross margins or unproven unit economics — at times, it felt like all revenue was being valued equally highly. That’s going to take some time to sort out.

While challenging, the current environment will ultimately allow for the eventual winners to further distance themselves from competitors — and frankly, this is also true of investment firms who do right by their portfolio companies during this time.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

We love meeting entrepreneurs. Founders should know that despite market uncertainty, we remain very active and have a long history of advising business leaders through complex market environments. Please reach out to me or our team via LinkedIn or email, and I’ll likely quickly pivot to a Zoom or, hopefully, even meet up in person (how 2019!).

Is there anything we didn’t ask about that you want to comment on?

Fintech remains exciting and underpinned by immense innovation — the future is very bright and that has not changed regardless of shifts in market valuations over the last six months.

Alda Leu Dennis, general partner, Initialized Capital

The fintech startup market has shifted increasingly away from lending businesses toward infrastructure, crypto and consumer fintech. As we prepare for more economic volatility, we’re pleased with our investments in companies that help bring economic opportunity to underserved groups like The Mom Project and CapWay.

Many people are calling this a downturn. How has your investment thesis changed in the last several months, and are you still closing deals at the same velocity?

It’s definitely a downturn, but that doesn’t change our job, which is to find the best founders and back them. We are still deploying capital and looking for great companies.

Many fintech companies will shift to maintaining fundamentally sound business models rather than chasing growth, and that is a positive development because it makes these companies more sustainable in the long term.

We can’t predict the future and the only sure way to be safe is to be profitable. However, at early-stage companies, being cash flow-positive or even breakeven is rare.

I published a blog post with some of our firm’s advice recently here. It includes some specific guidelines for the metrics enterprise SaaS, marketplace and consumer companies need to raise a Series B, adjusted for a downturn.

I also advise founders to think about creative ways to extend runway instead of rushing to raise capital because that can be viewed as negative signaling for VCs who are scrutinizing new deals from a more defensive position.

My suggestion would be to explore creative ways to extend runway — hiring freezes, cost-cutting, staff reduction, debt — and take a couple of months to work on your pitch and wait for the markets to settle down. Of course, if you are presently at a three- to six-month runway, you have already probably been planning your fundraise, and I am certainly not saying to stop the processes.

Have many fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2022?

I think 2022 will mostly be treading water for valuations, especially as companies trade growth for stability.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

I like to see their deck first, then a Zoom or a call. I tell founders to lead with their background and the problem they are trying to solve, minimize buzzwords and convey how their company can be a fund-returner for Initialized.

Michael Gilroy, general partner and co-head of fintech, Coatue

While the investing landscape is seeing a slowdown in deal volume this year, fintech remains one of the most competitive sectors with an abundance of opportunities for venture investors. While the round pace has slowed down, the interesting deals are no less competitive today than last year.

There is an $11 trillion public financial services market globally today. Private market cap accounts for less than 5% of that today. Investors know this and understand how large the opportunity remains.

Many people are calling this a downturn. How has your investment thesis changed in the last several months, and are you still closing deals at the same velocity?

Coatue’s thesis and deal-making motion have not changed. Business model quality has always been one of the most important criteria in our investing process and, consequently, neither our thesis about fintech nor our investing process has changed.

This downturn has uncovered the highest-quality business models in fintech. There is a high correlation between cohort retention and gross profit perfect, as well as multiples in the public markets today. We believe the best business models on those core metrics are in payments and software, two of the largest historical target markets for Coatue.

Adding new products in consumer-facing fintech is existential. Unit economics simply do not work if you don’t. We firmly believe a fintech business’s greatest strength over legacy financial services is the ability to leverage tech-driven infrastructure and launch new, gross-margin-producing products quickly. Thankfully, fintech infrastructure has seen strong investment over the last decade, so consumer-facing businesses are more equipped than ever.

A core part of our diligence in fintech today is to understand the product DNA of the teams we invest in. Is it ingrained in the DNA of the team to build and test products frequently? We’ve found that if it’s not part of the day-one plan and effort, it will likely never happen.

The best founders understand that the key at this moment is to survive to fight another day. A key difference with this downturn is that private companies have more runway than ever before. Most of our companies have three or more years of cash, and a handful have over five.

Advice varies based on the stage and health of the business. At Coatue, we invest pre-seed through pre-IPO and advise our companies accordingly as board members and in our capacity as value-add partners. We examine our portfolio companies’ financial health, product-market fit and competitive landscape, and customize the guidance and partnership with our founders.

Have many fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2022?

The variance is huge. There are some companies who could be three-plus years away from their last round valuation assuming public comps remain unchanged. In terms of managing the task in 2022, we believe the vast majority of companies will not reach it in 2022. From our perspective, the median time to reach that last round will likely take one and a half to two years.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

Coatue is a lifecycle investor and we welcome founders at any stage to reach out to us with their ideas. We have all enjoyed meeting founders in person again. The energy in the room is palpable and something you cannot recreate on video.

The most important thing to know about us is that we love big ideas. We want to understand what your business can look like in the best-case scenario. We’re optimists and love founders who think big and aggressively!

Justin Overdorff, partner, Lightspeed Venture Partners

Seed hasn’t changed that much, but Series A and Series B round sizes have definitely compressed. Companies are raising less money at lower valuations than in 2021, which reflects the market sentiment.

Many people are calling this a downturn. How has your investment thesis changed in the last several months, and are you still closing deals at the same velocity?

We’re long-term investors. Yes, valuations will fluctuate up and down, but if you look at the last two to three downturns, those are times when some of the best companies were formed. Adversity breeds tenacity, and we predict some exceptional companies will come out of this market cycle — we’re excited to continue to do the work with our existing founders through it and meet the new generation of founders and their companies that will be forged from this downturn. If the question is whether we are open for business, the answer is “yes.” We are not only making new investments, but we are hiring for the fintech team here in New York City.

In terms of velocity, we’ve always been conscious of investment pace. Venture is a business that is relationship-driven, and we continue to invest deeply in the relationships we choose to focus our time on throughout upward and downward markets.

Many companies in our fintech portfolio have multiproduct strategies and we think that is a good approach. Not only does this allow for companies to cross-sell into their existing customer base, but it makes them nimble in times of uncertainty. The key is to not move to a multiproduct approach until you are at scale or have strong product-market fit.

One area that could see trouble going into a potential recession is consumer-facing credit. Default rates increase, cost of capital increases and lending unit economics get quite difficult. With that said, we’re optimistic about the potential for opportunity during a downturn and believe startups can emerge stronger.

Companies are operating differently as a reaction to the market reset, yes. Despite the current market sentiment, our bias at Lightspeed points in the direction of optimism. That doesn’t mean we’re sugarcoating things for our founders — to be clear, the road ahead will be hard. But we see the silver lining for companies who don’t let a good crisis go to waste, revisit their assumptions on talent, cut non-essential activities, hone their business model and consolidate their lead. Those who do survive whatever comes next will emerge stronger. We view the current dynamic as an opportunity for companies to increase their operating excellence.

Have many fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2022?

It’s hard to say — like in any market, some companies will succeed and some won’t. We are seeing a lot of strength across many areas in fintech and less strength in others. The bigger issue is that a lot of companies that overcapitalized their companies (relative to their stage and traction) at 2021’s heady valuations raised the expectations on their operating output. The more over your skis you are, the higher the expectations are and the more difficult it will be to execute to meet those expectations. The margin for error is very small for companies in those positions.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

I don’t have a strong ethos on “you must do it this way to get my attention.” There are a million ways to get in touch and we are focused on finding excellent founders working on innovative ideas, wherever they are. My general advice is to be concise, have a clear vision and be genuine. You can reach me @jmover on Twitter and jmover@lsvp.com.

Addie Lerner, founder and managing partner, Avid Ventures

Globally, fintech startups raised $131.5 billion in venture funding in 2021. What differences in the landscape have you seen since this time last year? Were deals much more competitive last year?

Valuation: Last year, investors were routinely investing in early-stage companies at roughly 50x to 100x ARR multiples and growth-stage companies at 30x to 50x ARR multiples. Given very low interest rates, investors were seeking yield anywhere they could find it and paying a premium for growth. Now, in a rising interest rate environment, investors across stages are valuing companies based on fundamentals and prioritizing capital-efficient growth, while looking more closely at public market comps for valuation guidance. Additionally, investors are increasingly differentiating between tech-enabled financial services companies and true software/technology businesses — with their respective business models and margin profiles — and valuing them as such (i.e., a neobank or tech-enabled vertical insurance carrier, which previously were valued at software multiples, are now getting valued similarly to their more true bank or insurance public comps). These dynamics are evident in the massive correction in public fintech valuations, which has started to impact private market valuations, especially at the growth stage.

Deal process and competition: There are a few drivers of the slowdown in deployment and deal processes, and thus reduced competition, that we have been seeing over the past few months:

Investors across stages generally don’t know what fintech companies are worth right now. Valuations have been contracting in private markets for the deals that are getting done, but the more notable dynamic is the effective “freeze” of deals happening across stages; especially at the growth stage. So, investors are hesitant to deploy.
Related, given this valuation and market uncertainty, companies — especially the best ones — are only raising larger rounds right now if they must, which can lead to adverse selection, causing investors to lean out of the market further. And, investors are advising their founders to wait to raise until the fall/winter — or later — if they can.
Many venture capital firms that raised large funds over the past 12 to 18 months — and who have already deployed a significant portion — are realizing they won’t be able to raise the next large fund as quickly as they were able to over the past few years (i.e., a 12- to 18-month fundraising cycle had become the “norm” versus a more traditional two- to three-year cycle), so they need to make their remaining capital “last.” As a result of these dynamics that have caused a “freeze” in investment activity, there is less competition for the deals that are still happening, allowing investors who are staying active across stages to have more time to conduct meaningful due diligence before committing to an investment.

Many people are calling this a downturn. How has your investment thesis changed in the last several months, and are you still closing deals at the same velocity?

We started slowing our investment pace in early Q3 2021, while many other firms were continuing to deploy rapidly, given the exacerbation in the disconnect we were seeing between valuations and traction achieved by early-stage companies. We have been measured in our deployment since our first investment in February 2020, and Avid Fund I will actually have a four-year deployment period given our unique investment strategy.

We believe our investment approach is uniquely suited for the current market environment. Our strategy is to get to know the best founders well ahead of their Series A, back them before or at the Series A with a flexible “toehold” check alongside top-tier lead and/or insider investors, and then add meaningful value as a “strategic finance adviser” post-investment. This enables us to earn the ability to write a much larger “double down” check in the next round, once we’ve built conviction over time. In a market environment with more time between rounds, as well as founder and insider openness to round “extensions” and “in-between” rounds, our flexible and patient investment strategy will enable us to pursue unique opportunities. So, we are actively making new investments at the same measured pace.

Key fintech revenue streams will come under meaningful pressure given the changing macro environment, including rising interest rates and a slowdown in commerce. For example, adding a credit or lending offering may have previously been a “low-hanging fruit” revenue driver for consumer fintechs (e.g., neobanks offering credit lines or BNPL products, payroll companies offering earned wage access) or for B2B-focused fintechs (i.e., payments companies offering instant payments, expense management software companies offering working capital lines). With rising interest rates and a potential recession driving consumer defaults and SMB bankruptcies, these product lines will suffer from worse unit economics due to higher cost of funds (potentially not offset by increasing interest rates charged) and/or higher default rates. Similarly, monetizing payments in GMV-driven businesses by capturing a take rate on transaction volumes (which has also enabled certain vertical software companies to expand their revenues meaningfully) will likely drive less rapid growth as e-commerce and overall spending slows in a recession environment.

Additionally, one of the biggest challenges for fintechs sustaining rapid growth rates will be fintech companies that heavily rely on other fintechs as their main customers (particularly for transactional or usage-based revenue models and embedded fintech models). Some of these customers will suffer from slower growth, net revenue compression and churn from their own end customers, as well as financing challenges, in this new market environment, and many will ultimately get acquired or shut down. Having a diversity of end customers will be essential for these kinds of fintechs in this new environment.

VCs across the board have been advising their companies to cut costs and conserve cash — including those that are already capital-efficient and have two to three years of runway or more. This can be challenging for consumer fintechs who have clear PMF and want to lean into efficient growth — not back away from it. So, we are advising our consumer fintech companies with compelling, efficient unit economics to keep building momentum through sales and marketing spend, especially if LTV/CAC is >3x and organic growth can scale with the user base.

Have many fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2022?

Public fintech company multiples have meaningfully compressed since their peak in fall 2021, making it especially difficult even for fast-growing fintechs to “grow into” their 2021 valuations. We regularly track overall and sector-specific fintech comps, and our analysis shows that the fintech sector overall has compressed from an approximately 11x average LTM revenue multiple in November 2021 to a roughly 5x average LTM multiple today. Some more tech-enabled financial services subsectors have compressed significantly (i.e., insurtechs compressed from about 7x to 2x; BNPL compressed from about 15x to 4x), while the financial SaaS subsector has also seen multiple compression from about 16x LTM to 6x over that time horizon. If you are a private fintech SaaS company doing $20 million of ARR growing 2.5x year on year with a 60% run rate gross margins and you raised at $1.5 billion in mid-2021, it might take a year to grow into that same valuation assuming your 75x multiple has compressed by about 60% (to 30x) as financial SaaS has in the public market. That said, private growth companies will likely see even more severe multiple compression on a percentage basis than public companies given the much higher 2021 multiples they raised at (i.e., 75x in our example will probably contract to a lower 15x to 20x multiple). As a result, it will actually take this private fintech SaaS company closer to 18 to 20 months to grow into its mid-2021 valuation.

Given how much capital fintechs raised in large rounds in 2021, many companies will have two to three years to grow into these valuations ahead of their next round (especially the cash-efficient, software-led businesses, as well as those that have recently implemented cost-cutting initiatives). That said, many companies will be forced to raise down rounds, which will enable some significantly overvalued companies to reset their valuations (and employee equity).

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

We are extremely founder-driven investors. It is important for us to build conviction in why we should invest in a founder and their team well ahead of going deep into a business and market. We can listen to podcasts and read up on a company on our own time (and we love to read blogs, memos, decks, market research, etc., ahead of meeting a founder for the first time) so that we can spend our dedicated time with a founder learning about them, their background, their motivations, their team and their unique insight on the product and company they are building.

David Jegen, managing partner, F-Prime Capital

The wistful response would be “things are 85% different.” That’s how much public fintech stocks are off from last year, according to the F-Prime Fintech Index. In the private markets, round sizes and time-to-fundraise corrected quickly, followed by Series B and C valuations. Pre-seed, seed, and to an extent Series As, are a little congested as investors and founders are searching for a new norm. It’s worth noting, however, that fintech is still a vibrant sector, with great tailwinds and 30x more investment dollars in just the first half of 2022 than in any 12-month period before 2014.

Many people are calling this a downturn. How has your investment thesis changed in the last several months, and are you still closing deals at the same velocity?

The downturn has not changed our investment themes at all. We invest on five- to 10-year themes, not one to three years, and the digitization, democratization and encapsulation of financial services are only beginning. However, the market correction has definitely reduced investment volume. High-performing companies that do not have to raise are not raising in this environment.

Fintech companies will still be able to add financial products to their offerings, but the macro environment will affect transaction volumes and hence revenue. For instance, lending and equities/options trading have fallen quickly (e.g., Robinhood’s Q2 trading revenue was down 52% year on year) but, conversely, interest income and float are rising with rates and will provide a nice lift to players like Bill.com and the neobanks with revenue sharing on their deposits.

It’s very company-specific, but nearly every venture-backed fintech startup has gone through the exercise of extending its runway. Many will be just fine, but there are failures coming. I’m most concerned for business models with capital markets exposure — the proverbial run on the bank. It’s already happened in crypto and is bound to happen to some in lending and real estate.

Have many fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2022?

As of today, probably very few. You could think of it this way: 12 months ago, public investors were paying 25x revenue for fintech companies growing at greater than 40% year on year. Today, they pay 5x. We’re seeing similar shifts in the private market — though more like 10x to 12x ARR today. So, if a fintech startup raised in 2021 with a 24-month runway, then they need to grow 45% to 60% annually just to get back to their 2021 valuation. High-performing startups grow 50% to 200%, depending on their size, so most strong startups will be fine. It’s the startups without that runway or who were still searching for “go-to-market fit” that will struggle.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

I can be most helpful and efficient with an entrepreneur’s time when I read their pitch deck first. We’re also very thematic investors and we go deep in some verticals. So if we’re meeting an entrepreneur, it generally means we know something about their space and we’ll be excited to dig into their strategy and the bigger challenges they’re facing.

Is there anything we didn’t ask about that you want to comment on?

The last few years were incredible, and we should appreciate how lucky we were to experience it. But as tough as things are now, it is still an exceptional time to be an entrepreneur. Plus, one’s character is defined through adversity, so the next couple of years offer founders the chance to show their true strength and capacity to lead.

Nik Milanovic, general partner, The Fintech Fund

The public equities dip during COVID in March 2020, followed by the immediate V-shaped recovery and federal stimulus packages, combined to have a drastic effect on tech valuations. At every stage, it became easier for managers to raise funds and invest in private tech companies, which drove up both the number of companies being founded and the terms that those companies were able to command. From early 2020 through Q4 2021, the landscape was very founder-friendly. This effect was particularly pronounced in fintech and crypto: Multiple companies were started at the same time to pursue each novel idea in both spaces (and many tried-and-failed or fast-follow ideas). Investors became increasingly price-insensitive, which allowed founders to set fundraise terms. The feel of “missing out” on the No. 1 team building a given product led investors to pile into the same product being built by the Nos. 2, 3, 4 teams, which in turn drove up competition in every fintech vertical.

This year, the tide has largely gone out in terms of the number of investors, price insensitivity and the number of new founding teams in fintech. This has made the environment more fund-friendly and less competitive (to invest in deals). We are likely in the middle of a six-month nadir at the moment, and my expectation is that there will be a rebound in early-stage investing in early 2023. Later rounds will take longer to rebound.

Many people are calling this a downturn. How has your investment thesis changed in the last several months, and are you still closing deals at the same velocity?

There is definitely a downturn in late-stage public markets, which has cascaded through private valuations, though the percentage impact is more and more muted the earlier you go. This has not affected our investment thesis or deal velocity. We continue to look for great founding teams, building new, innovative and novel fintech products at reasonable valuations.

We avoided much of the FOMO-based investing in unproven models, markets and products of the last two years, so the downturn has (so far) been mixed to positive in that we are able to retain our strategy while investing in a more fund-friendly environment.

It entirely depends on the product. In fintech, unlike SaaS, account growth and revenue often come at a significant cost (acquisition + servicing + fraud + compliance, etc.) The 2020-2021 market rewarded growth rates with little regard for other metrics, but path to profitability is once again in the spotlight due to the valuation downturn, so companies will likely counterbalance the pursuit of growth with unit economics more than in the past two years. On the plus side, slashed marketing budgets imply that acquisition costs should generically drop, which will create a growth opportunity for enterprising fintechs.

We think the generic “target runway” and “burn rate” advice from VCs is overblown, not particularly useful, and to some extent misses the point. Runway and burn rate are important, but they do not guarantee successive rounds. Building unique products with significant competitive moats that continue to acquire users at increasingly favorable cost structures will determine whether a company can raise again. If a company can do those things, they are likely to raise another round (while their competitors who cannot, will not).

That said, companies should always seek to have conservative runways, which vary in length by stage. We generally suggest that our portfolio companies have a “Plan A” runway for ordinary operations and start their fundraise envisioning three to six months after the round’s expected close to continue business-as-usual operations, and a “Plan B” reduced burn rate runway in case the fundraise takes much longer than expected.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

We make a commitment to review 100% of the pitches that founders submit to us via our pitch form! We are also available at fund@thisweekinfintech.com. It’s important for founders to know that we are looking for businesses that have a real use case today.

Jay Ganatra, co-founder and managing partner, Infinity Ventures

Globally, fintech startups raised $131.5 billion in venture funding in 2021. What differences in the landscape have you seen since this time last year? Were deals much more competitive last year?

The market has certainly slowed down significantly this year. Deals are taking longer to get done and many founders are waiting to raise due to market conditions. We have also seen generalist funds pull back on their fintech efforts. For deals that are still getting done, they are generally of smaller size where valuation has decreased and dilution is creeping up.

Many people are calling this a downturn. How has your investment thesis changed in the last several months, and are you still closing deals at the same velocity?

Our investment thesis has not changed. We are still long-term bullish on B2B fintech infrastructure. In regards to our near-term outlook on deal velocity, we have the benefit of being a relatively new firm (and fund) with the majority of our dry powder remaining. We have historically taken a very disciplined approach and will continue to do so. With that said, we do anticipate our deal velocity to slow slightly for the foreseeable future.

We believe embedded fintech platforms (e.g., payments, lending, payroll, insurance) can provide their customers (fintechs and ISVs) the ability to extend their value proposition, elevate engagement with their core offering, increase revenue monetization, accelerate acquisition and reduce churn. We think that this is actually a great time for many of these companies to look to these embedded or white-label platforms to help weather the storm of the economic downturn.

While our fund focuses on B2B and not consumer/DTC opportunities, we expect to continue to see DTC companies partnering with larger platforms (like Greenlight’s partnership with Morgan Stanley) to shift customer acquisition from paid advertising to channel partnerships.

Beyond cash conservation, we advise our portfolio companies to focus on improving unit economics and investing in their competitive moats (product, distribution or otherwise). While the current fundraising environment is not ideal, we believe the next 12 to 24 months will be an optimal time to build more durable, cash-efficient businesses.

Have many fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2022?

For growth-stage fintechs, it will be challenging to grow into their valuations in 2022 as public-market valuation multiples have contracted 50% to 75% and demand is also slowing. For those companies, the ideal outcome is to focus on improving unit economics, extending their runway and growing into their valuation over 18 to 24 months versus a year. While easy to say, these are difficult operating plans to execute on and we suspect that, unfortunately, many companies will struggle to get to the other side.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

We love to receive pitches either over Zoom or in person (either is fine for a first meeting) after having 24 to 48 hours to review the pitch deck. We really like to walk into the meeting with a good grasp of what the company is working on so that the pitch is more conversational and tailored to answering specific questions that we have about the opportunity, not just hearing the 30,000-foot overview. Our favorite pitches turn into brainstorming sessions on the “art of the possible,” where we are working from the same side of the table.

The most important thing to know about us is that our goal throughout our process is to be transparent thought partners with founders. We obviously can’t invest in everyone we meet with, but we do legitimately try and help every founder that we chat with. Feel free to reach out to us with pitches at contact@infinityvc.capital.

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