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7 investors reveal what’s hot in fintech in Q1 2023

Mary Ann Azevedo 1 year

The global downturn has impacted every sector, but fintech bore the brunt of it as public-market valuations fell off a cliff last year.

However, it appears that even though VCs are proceeding more cautiously than before and taking their time with due diligence, they are still investing.

CB Insights recently found that two of the largest global VC firms, Sequoia Capital and Andreessen Horowitz, actually backed more fintech companies in 2022 than any other category. In both cases, about 25% of their overall investments went into fintech startups.

While global fintech funding slid by 46% to $75.2 billion in 2022 from 2021, it was still up 52% compared to 2020 and made up 18% of all funding globally, proving that investors still have faith in fintech’s future.

You could even say some are bullish: “If anything, I expect our investment pace to increase this year as early-stage fintech companies prioritize operational discipline and product differentiation,” said Emmalynn Shaw, managing partner of Flourish Ventures.

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The tougher conditions created in the past year have resulted in down (and smaller) rounds, M&A and an emphasis on fundamentals. Gone are the days of investing on a whim.

But for Ansaf Kareem, venture partner at Lightspeed, the tough times can be seen as a good thing because they often create the best companies. “If you study previous compression periods in the ecosystem (e.g., 2008 and 2000), not only have we seen outstanding companies being formed, we’ve also witnessed great venture firm performance during these windows,” he said.

“The last two years in the venture ecosystem were an anomaly, but I believe we are coming back to a healthy ‘normal.’ Diligence cycles have extended, better relationships with founders can be formed, investors can enter new spaces with more preparation and a thoughtful approach to early-stage venture capital can emerge,” Kareem added.

“Challenging market conditions drive a sense of discipline and perspective that can be a gift.” Emmalyn Shaw, managing partner, Flourish Ventures

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

“Grow in a way that’s smart and sustainable for the long run,” advises Michael Sidgmore, a partner at Broadhaven Ventures. “We can’t control the macro environment, and today’s geopolitical climate means that there may always be the threat of exogenous shocks on the market. But the markets will bounce back at some point. So just grow in a manner that lets you focus on unit economics and profitability so that you can control your own destiny no matter what market we are in.”

To help TechCrunch+ readers understand what fintech investors are looking for right now (and what they’re not!) as well as what you should know before approaching them, we interviewed seven active investors over the last couple of weeks.

Spoiler alert: B2B payments and infrastructure remain on fire and most investors expect to see more flat and down rounds this year. Plus, they were gracious enough to share some of the advice they’re giving to their portfolio companies.

We spoke with:

Charles Birnbaum, partner, Bessemer Venture Partners

Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?

We continue to invest in great companies regardless of the market. However, many entrepreneurs have opted to remain heads down and build more efficiently instead of testing this new valuation environment.

While our investment theses are always evolving, the shift in the macro environment has not changed which areas we are most excited about.

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

We do expect more flat and down rounds to come later this year as runway tightens for many companies that raised more than two years ago.

Private market valuations, at any point in time, are not only a reflection of a team’s hard work and progress but are also impacted by the financing environment.

What are you most excited about in the fintech space? What do you feel might be overhyped?

We see tremendous opportunity for innovation in the world of B2B payments. The infrastructure groundwork laid by modern developer platforms over the past decade and the upcoming catalysts in the real-time payments world, with the launch of FedNow, could spark much faster adoption.

We are excited to see how entrepreneurs leverage these tools to enhance our archaic B2B payments ecosystem.

Consumer fintech businesses without long-term, durable customer acquisition advantages are overhyped and will continue to struggle to live up to the lofty expectations set by investors over the past several years.

We’re expecting to see significant consolidation across the consumer fintech landscape this year.

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

We look deep into all areas of innovation, including fintech, and focus on startups that align with our theses. We try to predict where there will be opportunities for seismic innovation before we find the entrepreneur. This helps us with diligence, as we work to understand the market before we make any investments.

We also work hard to perform due diligence on every investment opportunity we pursue by spending significant time with the company, with a deep market study, and as many references as possible on the teams we back.

Have fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?

Given the sharp run up in valuations over the past few years in the private market and the precipitous fall in the public market over the past year, it is difficult to say how many companies have grown into 2021 valuations.

For the top tier of companies that were able to raise larger rounds, the reality is they don’t need to answer that question for quite some time.

What advice are you giving to your portfolio companies?

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

Rethinking growth targets, in light of the rising cost of capital, to focus more on efficiency in this environment is a consistent thread in board meetings these days.

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?

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

We are also always looking at exciting opportunities that come in through 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 evaluate inbound messages we receive.

Aunkur Arya, partner, Menlo Ventures

Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?

We’re definitely seeing the reset we expected to see after a decade of operating in a macro environment where the cost of capital was near zero. It’s a difficult but very healthy reshuffling of the deck.

I’d say that our core theses within fintech have largely remained the same: We’re investing in developer infrastructure and embedded finance APIs, vertical banking, end-to-end consumer and business financial services, and the Office of the CFO. We’re also looking at thoughtful enterprise applications of AI that intersect with each of these segments of our fintech thesis.

We continue to avoid balance-sheet heavy businesses that take undue risk to generate revenue and ultimately look less like pure technology companies and more like insurance companies or lenders. These are the first businesses to suffer during a downturn because they’re heavily indexed to the macro environment.

We were less active in 2022 but are already seeing an uptick in deal flow in fintech in the first few months of 2023.

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

Yes. Broadly, we expect to see more down rounds in 2023 versus 2021/2022, as some companies will have cash needs they need to service, and they’ll either survive with a down round or won’t.

Some funds may be forced to generate liquidity for their LPs and not be able to time such events, which will continue the reset in valuations we’ve been seeing over the past few quarters.

In our own portfolio, we got an early jump on preparing our companies and evaluating their financial health at the beginning of 2022. The overwhelming majority of our companies have fortunately raised enough capital (24 months+) to safely navigate the current environment.

What are you most excited about in the fintech space? What do you feel might be overhyped?

I remain very excited about fintech infrastructure as a whole. Particularly, we continue to see a lot of activity in the Office of the CFO sector. There is still so much heavy lifting to be done by accountants, engineers and finance teams to reconcile and close books, understand operational and financial data, and keep up with constantly changing business models and compliance surface area.

There are many early-stage fintech companies trying to tackle and compress the workflow between and around disparate data sources and the ERP/General Ledger. We’ve made several bets in this area already in various parts of the workflow stack, from procurement and equity management to SaaS management, compliance and spend management.

The overhyped areas continue to be the obvious ones that we’ve tried to avoid the last few years: BaaS, consumer/business lending marketplaces, revenue finance platforms and other businesses that lack a real technology moat, are balance-sheet heavy and therefore have enormous sensitivity to the macro environment.

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

We have always looked for companies that are fundamentally software-first and have a technological foundation instead of companies that rely heavily on taking risks to generate revenues. This latter category is essentially just financial engineering, which is a category that’s under a lot of stress in the current environment.

Beyond that, we look for stellar founders who understand capital efficiency and have ideally “lived” the problem they’re trying to solve in some way. And of course, businesses that have strong unit economics from the start. I think my previous experience as an operator biases me toward teams that have prior experience building or buying products inside an organization.

In terms of diligence, our bar has always been high, but yes, we’re intensifying every aspect of evaluating businesses and founders in this environment.

Have fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?

Valuations were so high at the peak that many companies won’t reach their 2021 valuations. I think that trend will continue this year. On the bright side, companies being formed now should be fundamentally stronger given the greater level of scrutiny for fundraising.

What advice are you giving your portfolio companies?

The most consistent advice we give to our portfolio companies is to reduce burn and prepare for a bumpy 2023. You want to avoid raising in this environment, if possible, and the best way to do that is to conserve cash by cutting costs and aligning the business around operations that generate revenue or increase margins.

As capital markets tighten, there’s a trade off between growth and burn rate. You’re better off capping your growth rate in order to conserve cash and stay alive. That means deferring experimental projects, managing headcount and making sufficiently deep cuts if required.

CEOs should also get closer to their customers, understand their concerns and try to find ways to avoid potential churn. Everyone is trying to do more with less!

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?

The best pitch is short and to the point. As a former operator, I love it when founders have experienced a “hair-on-fire” problem themselves.

What I really want to know is why they’re the best team to solve that problem. Founders can reach me via email.

Ansaf Kareem, venture partner, Lightspeed Venture Partners

Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?

It’s obvious to state that early-stage venture deal velocity and the dollars at work have decreased over the last year. However, if you study previous compression periods in the ecosystem (e.g., 2008 and 2000), not only have we seen outstanding companies being formed, we’ve also witnessed great venture firm performance during these windows.

The last two years in the venture ecosystem were an anomaly, but I believe we are coming back to a healthy “normal.” Diligence cycles have extended, better relationships with founders can be formed, investors can enter new spaces with more preparation and a thoughtful approach to early-stage venture capital can emerge.

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

With multiples compressing in the public market, there will continue to be downstream ramifications for companies raising venture capital in 2023, especially in the growth stages.

I think many well-performing companies may have opportunities to raise extensions, especially from insiders who have high conviction.

What are you most excited about in the fintech space? What do you feel might be overhyped?

I’m interested to watch the intersection of automation and fintech begin playing out, specifically as it relates to B2B companies and SMBs as enhanced productivity through automation gives smaller teams more leverage.

The “CFO stack” has been a constant area of discussion among fintech investors, but it doesn’t seem to have played out in a meaningful way yet. I think there have been constraints in the space, especially driven by the differing customer segment needs, go-to-market strategies and incumbents across SMB, midmarket and enterprise.

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

Fundraising timelines have extended, which primarily creates more opportunity for relationship building. That is paramount in early-stage venture investing.

This new environment will hopefully give more space for both investors and founders to get to know the other side before choosing to partner together.

Have fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?

Many investors were quick to paint fintech as one monolith, often valuing companies as a multiple of revenue, whereas different fintech sectors should be treated very differently.

Fintech is not immune to the multiple compression that is happening in the tech sector, so companies will need to similarly hit relevant milestones to justify valuations.

What advice are you giving your portfolio companies?

As the bar for fundraising has changed, it has become paramount to understand and evaluate the milestones and metrics a company must achieve. Working backward from this, every founder should talk with their investors about building a plan for cash management that helps them achieve these goals and do so efficiently.

That will inform many tactical and strategic decisions, including whether or not they must consider a fundraise in the near term.

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’m always open to cold outreach and emails, though a warm introduction is preferred. Doing some research on any investor before you speak to them to understand their background, sector focuses, biases, proclivities, etc. will help make the conversation more productive.

Emmalyn Shaw, managing partner, Flourish Ventures

Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?

We invest across a five- to 10-year time horizon against themes that drive transformation in financial services. We are actively evaluating investment opportunities and remain bullish on the sector. If anything, I expect our investment pace to increase this year as early-stage fintech companies prioritize operational discipline and product differentiation.

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

Public-market valuation multiples have declined from an average of 20x in 2021 to 4x in 2023. Growth-stage fintechs that raised large rounds in 2020 and 2021 will experience the greatest impact over the next 12 to 24 months. Some will raise a down round to shore up the balance sheet and reset their valuation to set the company up for future fundraises, as well as economics for employees.

Mature fintechs with proven unit economics and demonstrated operational efficiency will take advantage of valuation leverage.

For earlier-stage companies that raised rounds during the same timeframe, we expect to see more of them raise extensions to create additional runway. These are likely companies that have made progress toward achieving their valuation but are not able to raise an up round based on progress to date.

The variation across fintech is significant and fundamentals are key. These market conditions are driving a true flight to quality. We will see leaders emerge and their ability to remain laser-focused, nimble, achieve strong unit economics and take market share will be greatly rewarded.

What are you most excited about in the fintech space? What do you feel might be overhyped?

We are excited about everything from next-generation B2B payments and verticalized embedded finance platforms to the radical transformation of core legacy infrastructure and associated data analytics across banking, insurance, payments, lending and identity.

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

We look for companies that have both the potential for massive commercial success as well as the ability to drive transformative impact at scale. We have found that purpose-driven companies often have a competitive advantage: High-caliber talent is drawn to fintechs that work on problems that really matter.

We also look for startups that have an unfair advantage on product or distribution and a clear path to solid and sustainable unit economics. Finally, it is important to us that the company’s monetization strategy is aligned with positive outcomes for the end users.

Have fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?

It will remain difficult for some growth-stage fintechs to grow into their 2021 valuations. While many later-stage fintechs will be unable to drive sufficient performance against adjusted multiples to justify their frothy 2021 valuations, those with solid underlying fundamentals are poised to gain significant market share and a valuation premium.

Earlier-stage fintechs are better positioned to grow into their 2021 valuations. While many will struggle and some copycats will go out of business, as they would in any market downturn, a significant premium will be placed on those able to demonstrate reasonable growth, product-market fit and operational efficiency.

What advice are you giving to your portfolio companies?

Challenging market conditions drive a sense of discipline and perspective that can be a gift. It forces a maniacal sense of prioritization across employees, customers, product roadmap and go-to-market; a sense of urgency to achieve true product-market fit; and a deeper commitment to the company mission.

Not only do some of the best companies emerge from these downturns, but some of the best leaders come to the fore through these market cycles.

We have worked closely with our teams to prioritize key initiatives and identify opportunities for improving unit economics and extending runway. However, given that execution expectations are sky high with little room for error, it is imperative that founders and executives prioritize their mental health.

We’ve developed a founder wellness program that focuses on leadership coaching and founder networks to provide support and share knowledge about navigating internal and external change.

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 value developing a relationship early with the company, as it gives us an opportunity to explore the many ways we can work together. We highly value clear articulation of the company’s mission and vision for transformation. Please feel free to contact via LinkedIn, Twitter or email.

Michael Sidgmore, partner and co-founder, Broadhaven Ventures

Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?

Our investment thesis hasn’t changed drastically. We invest in early-stage fintech companies globally, and there’s still plenty of room for innovative fintech companies to eat into the more than $6 trillion gross profit pool that incumbents still own.

We’re excited about the private markets. Private markets are undergoing a market structure evolution from pre- to post-investment as companies build infrastructure that unlocks access to alternative investments. They’re creating the data solutions that will provide insights into this market, much like we’ve seen happen over the years in public markets.

We are also interested in markets in other parts of the world, like Europe, where we believe the startup talent is very strong, particularly in fintech across hubs like London, Paris and Berlin. There’s enough growth-stage capital in the region and from larger U.S. funds to support future capital raises.

A big difference in the current climate is that rounds are taking longer to come together. Anecdotally, round sizes are coming down.

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

Companies that have less than 12 months’ runway need to figure out how to extend their cash position. This means raising capital any way they can to extend the time horizon for hitting the milestones required to get to the next round.

What are you most excited about in the fintech space? What do you feel might be overhyped?

Private markets are undergoing a very exciting market structure evolution from pre- to post-investment that will enable alternative assets to become mainstream. Platforms like iCapital, Republic and Allocate have unlocked access to private-market investment opportunities.

Now that more investors have access to private markets, the data problem is being solved. Better data, transparency and networked communication enable price discovery, which enables liquidity. There are some exciting companies working on post-investment solutions.

We believe the digitization of the post-investment process is critical to enable the next evolution of private markets. From fund closing and fund accounting to more real-time valuation and monitoring, private markets are witnessing innovation that will make them look more like public markets over time.

In many ways, fintech feels underhyped right now. There are quality companies at all stages that are now undervalued. This period has been a good reminder that many fintech companies in the public markets will often trade more like finserv incumbents than tech companies.

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

I wouldn’t say our diligence process has changed much, but we now have more time to make a decision. Rounds are taking longer to complete, so there’s more time for diligence, which is a welcome and necessary departure from the past few years.

Have fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?

Companies are now required to focus more on unit economics and profitability than growth at all costs. Companies that have strong unit economics and balance sheets should be able to grow into their valuations over time.

The big question for many companies is their runway. Companies that have runway or the discipline to manage their burn well will have time to grow into their valuations. Those that don’t could suffer.

What advice are you giving to your portfolio companies?

Grow in a way that’s smart and sustainable for the long run. We can’t control the macro environment, and today’s geopolitical climate means that there may always be the threat of exogenous shocks on the market.

But the markets will bounce back at some point. So just grow in a manner that lets you focus on unit economics and profitability so that you can control your own destiny no matter what market we are in.

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?

Founders are always welcome to reach out to us. We truly care about helping companies. Of course, we want to understand the business and the founder’s “why,” but we also want to know what the founders think we can do to help their business.

Ruth Foxe Blader, partner, Anthemis

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

We are sector-focused investors working on a horizon of more than 10 years, so we don’t change our thesis on the basis of short-term economic cycles.

That said, the macro environment is kinder to certain business models. So we look at that in terms of a company’s likelihood of hitting near-term goals. For example, lending becomes challenging in a high interest rate environment, so we’ll subject the story of midterm profitability and scale to greater scrutiny.

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

I’m seeing more flat rounds than down rounds. I suspect this will evolve over the course of 2023. Good founders are realistic about the funding environment, which has changed pretty substantially for growth-stage companies and not much for early-stage companies.

We are seeing funding rounds get a lot of new names like “A4” and “B extension,” But the bottom line is: It’s the CEO’s job to keep money in the bank. I think it’s a big mistake to get married to a valuation. The only one that matters is the last one.

What are you most excited about in the fintech space? What do you feel might be overhyped?

It feels like fintech is experiencing a generational shift. Some cool companies are going to get washed out because their valuations are unjustified, not because their tech is bad or the market isn’t there. That’s a shame.

My enthusiasm is not so much sectoral as it is attitudinal: Right now, founders are in wartime mode, which means companies that are founded in or surviving this period are focusing on fundamentals.

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

We tend to invest in companies that are innovating across multiple vectors simultaneously: For example, companies using tech to enable superior underwriting, distribution and product design.

We haven’t changed the way we’ve done due diligence. Being sector-focused, we have the advantage of a prepared mind and a good network. We are quick, but thorough.

Have fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?

It’s very uneven. But I’d argue that it doesn’t matter. The sooner founders and investors get out of the 2021 valuation trap, the better. Some companies will continue their pre-2022 valuation trajectory and others won’t.

This asset repricing exercise is likely to be a multiyear phenomenon. We won’t be out of the woods in 2023.

What advice are you giving to your portfolio companies?

Obviously, the tactical advice is case-specific. Generally, I recommend building something you are really excited about. Enthusiasm is infectious. Hopefully, that results in something investors are excited to back.

At the stages I invest in, you still need to suspend a bit of disbelief. I trust founders to make good choices about how much to focus on the core and how much to dream about the future. That balance is really hard.

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 prefer for founders to reach out with a quick note and whatever materials they have. Keep it pithy; 800 follow-ups do not help. I’m reachable via email or on Twitter.

Miguel Armaza, co-founder and general partner, Gilgamesh Ventures

Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?

We are still closing deals, but the due diligence period has probably doubled. We are also seeing fewer deals.

However, the entrepreneurs launching companies these days are much higher caliber than the average founder in 2021. It’s like fishing in a smaller pond, but with excellent quality fish.

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

We certainly do expect down rounds, but mostly for Series B companies and later. We are seeing a good number of flat seed and Series A rounds. 2022 was the year of the extension round. We expect to see much less of that in 2023.

What are you most excited about in the fintech space? What do you feel might be overhyped?

Capital-light business models that truly leverage the deflationary power of technology. We are focused on companies building software for the office of the CFO, SMBs and financial infrastructure.

That said, we are not completely dismissing consumer-focused businesses and still believe there’s room to innovate in that space.

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

I wouldn’t say we are conducting more or less due diligence, but it’s taking a bit longer on average to make decisions.

We are focused on capital efficiency and unit economics, in addition to making sure the company has a viable path to raise subsequent rounds in a high interest rate environment.

Have many fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?

It’s very hard to put a number, but I would say a majority will not get there. Building startups is extremely hard and the failure rate has always been high even when times were booming.

What advice are you giving your portfolio companies?

Narrow focus, extend runway and adjust your growth targets.

However, for the minority of companies that have found PMF and are well capitalized, consider doubling down and gaining market share.

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?

The best way is a warm intro from someone we trust and value. That said, we are proud of our track record of investing in founders that reached out cold via LinkedIn messages, cold emails or Twitter DMs. In fact, about 20% of our portfolio is tied directly to a cold LinkedIn message.

We’d like founders to know we live and breathe fintech and only invest in fintech companies. So when we get on the phone with them, odds are we will already understand their business model before the call and can go into a more substantive conversation from the get-go.