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

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.