With over $9 billion in assets under management, GGV Capital is one of venture capital’s largest and most prominent players. The 22-year-old firm invests in startups from seed to growth stages across a variety of sectors, including consumer, internet, enterprise/cloud and fintech.
This year was one of the most difficult the startup world has seen in some time, as it forced investors and founders alike to adapt to a drastically different market than they enjoyed in 2021.
To better understand GGV’s position during a challenging venture environment, I sat down with managing partner Hans Tung to get his thoughts on the state of investing today, why he believes that there are “many more large fintechs yet to be built” and that raising a down round “is not the end of the world.”
“It’s not the end of the world if you raise a down round. The only thing that matters is that you end up having a good outcome.” GGV's Hans Tung
Principal Robin Li also joined the conversation, sharing why she thinks embedded fintech is going to play a crucial role in financial services in the coming years.
An investor for over two decades, Tung has backed the likes of publicly traded BNPL giant Affirm, real estate fintech Divvy Homes, IDwall, Karat, Rupeek, Mexico’s Stori and Turtlemint. Having seen a few cycles, Tung is perhaps less spooked by the current downturn than some other VCs. Li has led Karat Financial and Novo.
[Editor’s note: This interview has been edited for clarity and brevity.]
GGV’s Robin Li and Hans Tung. Image Credits: GGV Capital
How has this year been for you as an active fintech investor?
Tung: We don’t try to time the market. So last year, we didn’t over-invest. There was a lot of internal push away from keeping up pace with others. I think it worked out well since we have plenty of dry powder left and more time to be deliberate this year. We also have time to double down on our existing portfolio as well. That said, we have probably slowed our pace of investing in our global portfolio by about 50% this year versus last year.
Last year when we were in the thick of everything, and there were just so many fundings left and right, and crazy valuations — it felt like there were a lot of follow-on rounds happening very quickly. I personally felt like, ‘OK, this isn’t sustainable.’ I know you said you don’t try to time the market, but did you also feel that way at all as an investor?
Tung: I started investing even before 2000, in 1997. I’ve seen a cycle, so we know that there will be ups and downs. When things are just too hot, you know at some point that there will be a correction. But I think even we were kind of surprised by how severe this correction has been. The degree of this correction is definitely one of the biggest that we have seen, comparable to 2000. But the underlying economic drivers are maybe more comparable to an earlier time, pre-Clinton. So that’s the part that’s kind of tricky. Along with wondering — “How long will it take for a rebound to happen?”
I would agree about the severity. I feel like yes, we knew that a slowdown of some sort would be coming but didn’t quite expect it to be this sharp, especially in fintech. It’s still hot, but certainly things have cooled.
Tung: It is still hot; companies are growing. The companies that Robin and I are backing — many of them are doing well even in a high interest rate environment and as the cost of capital has gone up. Value gets dragged out very quickly with a higher discount rate, and that’s just simple math. It will take time for the rebound and recovery to happen, given the state of the major economies around the world and how they’re performing right now. So that’s what the big debate is, whether it’s going to be a soft landing or a hard landing.
How many investments did you make this year?
Tung: We did two or three double downs. And we signed term sheets on four new investments. The dollar amount was probably slightly smaller. And some of them were earlier stage. Investing earlier gives more time to grow and therefore by the time the company is ready for expansion stage or even for IPO, hopefully we will be out of this current situation. Given the current market, we are spending time with existing portfolio companies and also raising the bar for both new and follow-on investments.
Traditionally we have relied on banks for financial data, but now a new generation of fintech companies are emerging that are leveraging real-time transaction data to make better decisions on lending and so forth. So that makes it easier for us to find companies that are taking advantage of this increasing number of transactions and real-time data that’s available, whether that’s through open API or through collaboration. There is more room to build companies that we think can grow over the next decade.
What has been the impact of this downturn on startup valuations?
Tung: Valuation is just the top part. We’ll see more flat rounds than before. We haven’t seen a lot of down rounds yet. We’re starting to. We expect that 2023 will be a year of down rounds and that a lot of companies that had raised money in 2021 are kind of waiting for the market to be better before they raise again. If they have enough cash flow, like if they have 24 months or more of runway, they have a better chance of waiting it out. [ … ] But you don’t want to raise money when you’re running out of money in two months. You want to raise five or six months ahead of time.
Starting in Q2, you’ll probably start to see some action. And if the market hasn’t turned by then, the chances of having down rounds are a lot higher. At that point, the founders and the investors will have to make that decision inside a boardroom whether you take that down round or take a chance. We will caution all companies to not worry about it as much but make sure they have plenty of cash flow to run a successful business.
It’s not the end of the world if you raise a down round. The only thing that matters is that you end up having a good outcome.
What other advice are you giving your portfolio companies to try to weather this downturn?
Tung: Obviously managing cash more thoughtfully, whether it’s being more stringent, which is the most important thing you can do. You can cut costs and do less marketing, but those are all means to an end and to have a company that’s more efficient, you have to cut marketing spend.
For every marketing dollar you spend, when you’re growing fast, you can deal with only a 2x kind of return on revenue, but you want to have that be 3, 4, 5 or 6x when you can. Those are the things that companies really need to dig deep and figure out how to deal with. [ … ] Some companies are trying new things [ … ] so there’s going to be a premium on talent and teams that have done successful, large-scale modeling and machine learning. This is the type of talent that will be more needed than ever. Given that there are a lot of job cuts even at big companies like Meta, it will be interesting to see if some of that talent is willing to leave because they’re not so safe anymore and join startups that are promising.
I think that we’ll see a lot of transitions from the traditional industry to some of the new fintech players — whether it’s from Silicon Valley and New York, and now to the rest of the U.S. and other emerging markets. Seeing these kinds of shifts of talent is actually where we spend most of our time because the talent flows. We want to see the best companies, including some of our portfolios, be able to recruit and retain that talent. So we spend a lot of time on building up our own platform team to provide common services both on the recruitment side as well as on the retention side to our portfolio companies. I think you’ll definitely see a lot more emphasis on talent during the next few years.
Overall, what do you think are the more resilient types of businesses, or where do you see more promise in the fintech world right now?
Li: One of the things that we’re super excited about is this concept of embedded fintech. For us at GGV, we’ve done a lot in the past around consumer and commerce, particularly around e-commerce and marketplaces and SMB tech and powering offline industries. I think the next wave of evolution is actually embedding financial services into that flow of commerce itself and in B2B solutions. If you think about what has happened for consumers in the last few years, we’ve had Afterpay, Affirm and the like — where you are actually meeting the consumer at the point of checkout — that is an example of embedded finance. What’s happening now is that the shift is happening along the B2B side, whether it’s healthcare or property tax or retail or transportation services.
For more on what the GGV team sees ahead for fintech in 2023, head to the firm’s latest blog post here.