6 fintech investors sound off on AI, down rounds and what's ahead

At the height of the funding boom in 2021, no single sector enjoyed as much VC money as fintech startups did. But in 2023, it appears that fintech companies have to work harder to get funding.

Global funding in the space hit a six-year low in the second quarter, according to CB Insights. Specifically, following a spike in funding in the first quarter driven by Stripe’s outlier $6.5 billion round, global fintech funding declined 48% to $7.8 billion in Q2 2023.

Valuations have also taken a hit. With only a few exceptions, once-valuable fintech firms have seen their valuations drop significantly, based on secondary share activity as analyzed by Notice.co, which offers a pricing tool for the private markets.

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As such, it’s no surprise that artificial intelligence (AI) is a hot topic of conversation in the space, as companies work to incorporate it into their offerings — some more meaningfully than others — in an attempt to stand out.

“We’ve seen many of our portfolio companies adopt AI to increase efficiency, improve automation, and enable faster communication with their customers,” said Lizzie Guynn, a partner at TTV Capital.

But Hans Tung, a managing partner at GGV, warned that just because AI is the hot sector of the moment, investors should not invest in it blindly. “AI is . . . overhyped. AI is central to the core business in some companies, and in others it is simply a supporting character,” he said. “We value domain knowledge and information on how to best apply technical solutions to solve customer pain points, be it consumers or enterprises.”

Overall, navigating the venture landscape as a fintech startup in today’s market requires resilience, perseverance and a more responsible frame of thinking around growth. It’s clear that investors are taking more time to evaluate deals than they were during the funding boom.

Aditi Maliwal, a partner at Upfront Ventures, explained how investors in the space are thinking: “We’re able to take a little bit more time to get to an investment decision, as processes aren’t happening in 24 hours like they did at some point in 2020!”

To help TechCrunch+ readers understand what fintech investors are thinking these days, as well as what you should know before approaching them, we interviewed six active investors over the last couple of weeks. Plus, they were gracious enough to share some of the advice they’re giving to their portfolio companies.

We spoke with:

Mark Goldberg, partner, Index Ventures
Aditi Maliwal, partner, Upfront Ventures
Hans Tung, managing partner, GGV Capital
Lizzie Guynn, partner, TTV Capital
Ed Yip, partner, Norwest Venture Partners
Lauren Kolodny, co-founder and partner, Acrew Capital

Mark Goldberg, partner, Index Ventures

Everyone is talking about artificial intelligence. If a company isn’t already using it, they’re looking for ways to incorporate it into their operations. What is getting the thumbs-up and what’s not in the theme of the moment?

What’s been surprising to me about AI in fintech is how much of it seems to be under the hood (automating rote internal tasks) rather than facing externally (flashy new features). This means that many of the most AI-forward companies may not be the most obvious ones.

Over the years, we have seen many startups, especially neobanks, focusing on very niche segments of the population. What are your thoughts on such specific offerings? Is it a good strategy to be so specific and what do you need to do to be successful if so?

The biggest evolution in consumer finance in the last decade has been for people to see their banks as extensions of their own personal brand, like their clothes, car or music. So, it’s a great strategy and we’ll be surprised by the depth and loyalty of these “niche” communities.

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?

More down rounds are coming. Supply and demand are still out of equilibrium, and I expect that will change as company balance sheets dwindle.

What are you most excited about in the fintech space? What do you feel might be overhyped? Is anything hyped at this point in the cycle?!

I think the fintech tourists are gone, and it takes real conviction in this market to build and invest. Banking today is harder than it should be, especially for the tens of millions of people who don’t have access to traditional financial services.

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?

There’s often one chart or slide that defines a pitch. Cut the noise (and the 30-slide deck) and focus on the one thing that matters most to your story.

Aditi Maliwal, partner, Upfront Ventures

Everyone is talking about artificial intelligence. If a company isn’t already using it, they’re looking for ways to incorporate it into their operations. What are your thoughts on this? What is getting the thumbs-up and what’s not in the theme of the moment?

Every company will adopt AI as another technology that enhances their existing offering. I don’t think of investing in AI companies as any different from people saying in the mid-2000s that they were investing in the internet or investing in mobile. AI is now a new paradigm that everyone is going to adopt. We know that most companies have already been using data to make decisions, so now they are going to be using open source models to help make faster and more efficient decisions.

That said, a couple of categories are getting a lot of attention in and around the fintech ecosystem:

Copilot solutions for everyone in financial services: While I’m not sure a lot of them are getting funded, I still think the biggest companies will come after this category and provide solutions.
Creating synthetic users for fraud detection: This is a really big use case that can provide a lot of value. We basically have generative fraud at this point, so you need the right type of generative software to combat the constantly changing fraudulent activities/players.

My biggest questions for direct-to-consumer fintech companies are:

Have you figured out acquisition strategies that are truly differentiated?
Do you have a product that creates a much better user experience that can be a hook for acquisition?

Nowadays, all the same dollars are being thrown at the same users, so if you don’t have a differentiated customer acquisition strategy, you are basically lost in the noise.

A bank for X works if you know exactly how to get to X. That is what I am constantly asking the D2C fintechs I come across.

Funding recently reached a six-year low. How has your investment thesis changed over the last year? How much slower is your investment cadence?

We are actually at the same pace as we’ve always been, which is two to three deals per partner, per year. As a firm, we have a concentrated approach, where we want to help our founders go from zero to one, and we just can’t do that with five to ten investments per year. We like to be an active partner throughout our founders’ entrepreneurial journey, and we stay disciplined with our check sizes to achieve this.

The only real change I see is that we’re able to take a little bit more time to get to an investment decision, as processes aren’t happening in 24 hours (as they did at some point in 2020). We can spend more time getting to know the founders and know if all parties want to go on this journey together.

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?

There are many scenarios we are seeing today. Some examples:

Company A raised a lot of money at a high valuation and had consecutive rounds but didn’t make a lot of progress to validate the larger valuations: Likely to raise a down round because those valuations shouldn’t have been as high.
Company B raised some amount of cash but needs more time for more progress: More likely to raise a seed extension.
Company C raised their first round of funding and is starting to show progress and hitting some milestones: The next round of funding will be at a 2023 valuation, not 2020.

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

I’m currently most excited about two things:

Figuring out what needs to change from a distribution or software perspective in order to make B2B cross-border payments (leading to the next theme I’m spending time on).
How can software be used to combat leaks and attacks on the pipes for money movement?

Things that I feel are overhyped: copilot solutions for anyone in the finance/financial service verticals, in addition to financial planning and analysis (FP&A) software. People may not love Excel, but they trust it.

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

One of our core missions has always been to back founders who have inspiring stories. As an investor, I like to pay attention to a few key things that help me decipher this:

Are they mission-driven?
Do they have founder-market fit? Did they do something relevant in their past that made them the right person to build this business?
Are they self-aware? Will they be the first to tell you what they don’t know and what they need to figure out?
Do they have a laser focus? Do they know where they want to start and do they want to keep building on that?

In the market/tech category, I ask myself:

What has changed in the market that has made it possible for this software company to exist, and made it one that people want?
Why now?
Why this?

What advice are you giving to your portfolio companies?

There are three pieces of advice I give my portfolio companies:

If processes are working, keep fueling those processes. Investors want to see a growth story, where you have figured out the right levers and are pushing them.
If things aren’t working, go back to the drawing board and give yourself time-boxed experimentation time. There isn’t an endless supply of cash, and things that aren’t working will not continue to get funded. Time-box everything.
Take a vacation (even if it’s just a weekend off). It is absolutely one of the most refreshing and rewarding things you can do for yourself right now. It never feels like the right time, but the reset allows you to refocus and get your head back in the game.

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 receiving pitches via email or Zoom. No matter what happens, I want the founders I work with to know that they can be open and honest with me. If we end up working together, I want to be the first person they call, whether it’s to share the good, bad, great or ugly.

Hans Tung, managing partner, GGV Capital

As the CEO of IBM recently predicted, “every company will become an AI company — not because they can, but because they must.” AI is deeply connected with next-generation fintech companies, and it will enable software to add more value to businesses.

Fintech is also evolving. The first wave of fintech focused on the intersection of fintech and e-commerce, with new models for buy now, pay later (Affirm) and providing credit to underserved consumers (Stori). The second wave focused on B2B: Fintechs that enable business such as neobanks or address gaps in financial infrastructure (i.e., spend management, such as Clara).

The third wave, areas where we are seeing a big thumbs-up, is workflow automation within financial infrastructure and data enrichment, where AI is used to parse and categorize data quickly. For example, use cases for AI in underwriting where unstructured data, such as employer recommendations, can be added to structured data such as FICO scores or repayment history.

Over the years, we have seen many startups — especially neobanks — focusing on very niche segments of the population. What are your thoughts on such specific offerings? Is it a good strategy to be so specific and what do you need to do to be successful if so?

There are many underserved populations for financial services across vertical markets, such as small business, and especially in emerging markets. Our view is that these services should be more democratized so that everyone has an opportunity to participate in the digital economy. Neobanks are popular because of their customer-centric, self-service products, but even with a niche focus, they are often not used as a customer’s primary bank. What sets this new generation of fintech companies apart is their ability to leverage real-time transaction data to make better decisions on lending and other services.

Funding recently reached a six-year low. How has your investment thesis changed over the last year? How much slower is your investment cadence?

Our investment has slowed by almost half over the last year due to market conditions, but our investment thesis around fintech remains strong. Overall, fintech has a $14 trillion market cap, so we are still in the early innings of this sector.

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?

Down rounds will continue in 2023, and more companies are raising extensions compared to 2021 and 2022. Down rounds are part of a down market, where value gets dragged out very quickly with a higher discount rate — that’s just simple math. Yet, companies are still growing well despite market uncertainty.

We advise companies to manage cash efficiently, but remain focused on growth drivers so that they will be able to accelerate as the market recovers.

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

AI and AI. AI is enabling exciting efficiencies in data infrastructure, and accounting and ledgers is a sector that has seen little innovation in decades. And who wouldn’t love a more humanlike chatbot with solutions that are not pre-programmed or based on a decision tree?

AI is also overhyped. It is central to the core business in some companies, and in others, it is simply a supporting character. We value domain knowledge and information on how to best apply technical solutions to solve customer pain points, be it consumers or enterprises.

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

We invest in sectors that we know well, such as fintech; then we dig into the market, people and business model.

What advice are you giving to your portfolio companies?

A down market is a great time to start a company, but it’s the most difficult time to operate one, too. We advise founders to manage cash and operate with efficiency, focus on growth drivers, and engage with their teams, as they are the key to winning in the long-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 admire vision and mission, and I really value hustle, resilience, passion and execution. Running a startup is hard. I did that twice before, so I can appreciate how difficult and lonely that process can be. I prefer seeing brief pitches over email before taking a first meeting and checking out founders’ LinkedIn profiles to give me an initial feel for how they would solve problems. But nothing replaces live, in-person discussions when you want to dive into the details.

Lizzie Guynn, partner, TTV Capital

Everyone is talking about artificial intelligence. If a company isn’t already using it, they’re looking for ways to incorporate it into their operations. What are your thoughts on this?

AI has become table stakes already. We’ve seen many of our portfolio companies adopt AI to increase efficiency, improve automation and enable faster communication with their customers. There are so many use cases for AI in fintech, and it has been fascinating to see the industry evolve.

What is getting the thumbs-up and what’s not in the theme of the moment?

We are always giving a thumbs-up to high-growth, low-burn companies with true product differentiation. We are looking for startups that have demonstrated strong, early signals of product-market fit and innovation, combined with scalable and relatively low-cost customer acquisition.

Vertical software has received some attention over the past few years, but we continue to see interesting companies in the manufacturing and supply chain spaces. These businesses continue to face challenges around simple operational bottlenecks that software should be able to solve. Everything from quoting and pricing to order placement and connectivity between buyers and suppliers are areas that need technological improvement. In addition, the opportunity to verticalize payments provides an even bigger opportunity for growth in these companies, which makes us excited.

We give a thumbs-down to companies that have high-burn, crowded sales channel acquisition, and high customer acquisition costs. Based on this criteria, consumer-facing brands are less likely to be successful, but we continue to look for opportunities that have strong potential and can demonstrate an efficient go-to-market strategy.

We have seen firsthand the value that can come from tailoring banking services to serve a niche audience. That said, we don’t invest without first looking at the data. We want to know if there is a significant, untapped market whose needs are not being met by traditional banks, and if there is a path to profitability.

We see the biggest opportunity in neobanks that provide community, support and features that cater to a specific demographic, and foster a sense of trust that differentiates the business from other banking providers.

Funding recently reached a six-year low. How has your investment thesis changed over the last year? How much slower is your investment cadence?

Even though venture capital investments have slowed this past year, our investment thesis hasn’t changed. We are maintaining discipline in our investments and have set a high bar for capital deployment. When it comes to founders, we continue to look for hardworking, visionary leaders who are creating new categories that solve unmet market needs.

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 are not seeing many down rounds at companies that have a strong business model, low burn rate, and a path to profitability.

However, the fundraising environment is definitely more challenging than in previous years, and sales cycles are taking longer to close. This combination makes valuation a key consideration for new rounds. We are advising our companies to raise enough for 24 months of runway to allow time to build without having to restart the fundraising process.

We are seeing capital come in through seed extension rounds to help buy companies time to hit milestones before they raise a larger Series A round.

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

We’re currently excited about early-stage opportunities in insurtech. As fintech investors, we have seen firsthand how innovations in automation and technology have impacted banking and payments, and we see parallels in the insurance industry. We think this space has been broadly overlooked because of the slow pace of innovation, but change will happen in the coming years.

While I strongly believe that AI has already become table stakes, and that companies that don’t integrate it into their offerings will be left behind, I also think that some valuations for fintechs using AI are overhyped. Much like what we saw with crypto, investors are eager to give companies with AI implementations a much higher valuation, even though it remains to be seen which use cases will emerge as winners.

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

We evaluate all of the standard elements of a business: product, go-to-market strategy, early customer and partner adoption, and other financial metrics and data points. However, since our firm is focused on early-stage fintech, we know products will likely change over time and that business metrics will need time to improve.

That’s why the company’s founding team is one of the biggest deciding factors for us. We’ve seen the most success when we back strong, thoughtful, team-oriented founders. Investing in leaders who have the ability to hire a strong team to execute on their vision is what gets us excited.

What advice are you giving to your portfolio companies?

As always, we’re reminding our portfolio companies to focus on optimizing operational effectiveness and building sustainable businesses. Companies should plan ahead for their next round of funding so they aren’t in a difficult position when more capital is needed. In this economic climate, founders should have a clear understanding of the benchmarks that downstream investors want to see, and work toward proving those data points. We also advise our companies to be able to articulate any pivots and changes, and back up their decisions with data.

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?

Although I love meeting founders in person, I prefer to take initial pitch meetings as video calls. It’s easier for me to take more notes so that I can capture everything we need to know about the business.

Before I talk to a founder on a call, they should be able to clearly articulate the problem they are solving. The ability to distill this down into a digestible and understandable statement is very helpful. I appreciate when founders can walk through the customer workflow end-to-end and prove the customer benefit. This helps us build conviction in a customer’s willingness to pay for a new tool or software.

Ed Yip, partner, Norwest Venture Partners

It’s exciting, because the value proposition and the use cases are clear, which wasn’t necessarily the case in the last hype cycle with crypto and web3.

However, it’s still very early. At the application layer, it’s been hard to invest in vertical AI solutions, because there are pretty much zero technical moats due to the fact that most of these apps are using the same data models (which are often open source). The real moats will have to be either a deeply embedded workflow or user experience, or proprietary data layered in over time. Unfortunately, at the early investment stages, it’s been challenging to see real product differentiation.

There have been lots of high-profile vertical AI bets recently, as some of the growth has been incredibly impressive. But over time, we’ve seen low-intent users churn out of these platforms after the initial hype dies down.

This is all driven by companies looking for ways to drive marketing leverage and stronger unit economics, and ultimately, prove a path to profitability. If these communities have naturally strong word-of-mouth referral channels, they can be highly lucrative growth channels.

I think it’s a solid growth strategy if the market is big enough, and there’s a robust product roadmap that finds ways to further monetize the user (and drive ARPU [average revenue per user]).

Funding recently reached a six-year low. How has your investment thesis changed over the last year? How much slower is your investment cadence?

Most deal flow is still concentrated in the seed and Series A stages. I’ve come across very few compelling Series B and later deals out there. We’re starting to see more interesting Series As with adjusted goalposts.

While in the boom days companies could raise a strong Series A after hitting $1 million in ARR, we’re now seeing expectations of $3 million to $5 million in ARR with strong growth and retention metrics.

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. We’re only starting to see the down rounds/recaps come in. I think we’ll see an increasing number in earnest starting in Q1 next year and continuing throughout 2024 and 2025.

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

Fintech infrastructure on the B2B side: Large financial institutions (banks, insurance carriers, etc.) are finally recognizing that they need to upgrade their software stacks and infrastructure. On the consumer side, I don’t think we are out of the woods in terms of recessionary risk. I think inflation will stay high, unemployment will rise, and the Fed won’t cut rates as quickly as the market is expecting. This may result in a drop in consumer spending, debt defaults, etc.

I’m interested in new consumer structured credit and lending solutions that are geared toward the mass-market and underbanked populations.

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

In the early stages, I focus most on strong product differentiation (or potential for it) and strong founders who are driven to realize their vision. I also place a lot of importance on promising signs of product-market fit (great engagement, retention) and take into account growth — but the latter can be misleading (see point about AI hype).

I am conducting deeper diligence, but the hot deals are still moving very fast, as there’s a lot of cash on the sidelines and investors are getting more antsy by the month.

What advice are you giving to your portfolio companies?

Build a defensible product, and build for sustainable growth. Don’t step on the gas and spend until there is a good sense of the ROI [return on investment] on every dollar spent.

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 always appreciate an introduction from a mutual connection or a thoughtful, personalized email. Once we’re connected, I prefer an in-person meeting or a Zoom meeting. If our initial meeting is on Zoom, I prefer to meet in-person afterward.

Lauren Kolodny, co-founder and partner, Acrew Capital

In the long-term, we are very excited about the potential of AI, particularly in fintech, where I spend most of my time. AI has the potential to bridge the information gap between financial institutions and their customers, provide insightful financial data, and reduce risk.

If financial products can relay important pieces of financial literacy, or contextualize best financial practices at the right moment, they could provide a great deal of utility to consumer and business users. That would democratize access to a level of service previously reserved for only the highest-value clients.

We’re also excited about AI as a tool for fraud detection. Because fraud detection is all about nuanced pattern recognition, AI software may be the best first filter for detection. When you consider that AI will increasingly be used by malicious actors on the other side of the equation, it’s all the more important for AI to be incorporated into fraud-detection strategies.

That said, in financial services, accuracy is paramount and reportability is mandated in many areas. So, while we are actively looking for opportunities in this area, we are also mindful of which opportunities may be viable in the short-term versus which will necessitate more advanced technology to deliver on.

In my experience, the biggest opportunities in fintech are those that serve large unmet financial pains and, occasionally, financial aspirations. While affinity groups certainly have unique sets of needs, the largest opportunities (and, in many cases, the greatest needs) are felt universally among large swaths of the population. Chime, for example, supports the 70% of Americans who live paycheck-to-paycheck.

I certainly see a place for some affinity-based digital banks, but most won’t be venture-scale opportunities. Those can certainly be great businesses, as evidenced by many community banks, which I see as an analog. Though, as with anything, there will likely be an exception or two that find very large affinity populations to serve, where the financial needs are shared across the population while remaining distinctive from the rest of the population.

I just don’t yet know what that will be.

Funding recently reached a six-year low. How has your investment thesis changed over the last year? How much slower is your investment cadence?

We are still actively meeting companies and making investments. We’ve appreciated the opportunity to be more thesis-driven again, as the time to make investment decisions has returned to a more normal pace.

We’ve spent a lot of time in the past year talking to founders at the beginning of their journeys who have their eyes wide open about the macroeconomic environment and are building from Day 1 with full awareness of the implications on the next generation of fintech. Volatility in the macroeconomy means consumers and businesses face new financial pain points, so there’s an advantage to companies created to solve those pains.

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 are definitely seeing opportunities to invest in companies that are open to reprice. In some rare cases, companies have already done so proactively before talking to new investors. There are a lot of interesting companies out there making operational progress whose founders now recognize the need to reset their goalposts and are ready to have these conversations.

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

My contrarian perspective is that the next generational consumer fintech company is being built now, or will be in the next 12 to 24 months.

Many of the great Web 2.0 consumer fintechs were born in the aftermath of the global financial crisis. The recession and its impact on consumer psyche, millennials coming of age, and the then-emergent mobile platform all created an opportunity for B2C and B2B2C fintechs to take hold.

We’re seeing a repeat of that now: Gen Z, with their distinctive characteristics and preferences, are coming of age; the current macroeconomic upheaval creates an opening for new financial solutions; and AI is driving a fundamental technological shift. The ingredients are in the water for the next great consumer fintech.

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

We are fundamentally using the same criteria that we have always used when evaluating teams. Because we’ve returned to an environment where there is more time to make decisions, we’re happy to revert to the level of diligence that has always been our standard. Most importantly, that means taking the time to really get to know founders and their teams.

We look at the alignment between founding teams and their understanding of the market opportunity, their knowledge of the space, and their drive to solve a particular problem. As always, but especially now in this environment, we are looking for founders who are exceptionally fluent with their own data. These founders understand capital efficiency and what milestones-based levers to pull in order to achieve business goals.

What advice are you giving to your portfolio companies?

Focus on proving what matters most to your business, and deprioritize the rest. With a really high level of focus, you can answer the most critical questions and be capital efficient while doing so.

The capital needed to expand and scale will come from depth of proof points, not breadth.

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 most compelling pitches are the ones where founders make it really apparent in the first few minutes why they are doing what they are doing, and why they are uniquely suited to solve this. Good pitches bring a solution to life by showing a product demo or walking through customer journey examples.

Founders should always think about what a VC’s biggest doubts about their business could be, and what the three critical questions they could be trying to get comfortable with in order to take the next meeting. Instead of avoiding those topics, own them, hit them head-on with a lot of candor and self-awareness. That will make us want to take the next meeting.