4 questions with VCs on fintech investments — where they stand, and what’s attractive

In today’s bear market — where fintech funding is drying up as talks of a ‘bubble bursting’ loom — VCs are sitting on dry powder. However, that is not to say that investors don’t have their eyes open for the next big deal. So, what are VCs thinking, and who’s got their attention?

I sat down with Ruth Foxe Blader, partner at Anthemis Group, and Adam Hallquist, principal at FTV Capital, to learn more about where VCs stand in today’s market.

What are investors' attitudes towards the fintech space today?

Blader: While lucid about the implications for startups in the private markets and the repricing of public market fintech companies, most investors remain enthusiastic about finding great fintech deals. There is still a lot of work to do to build 21st century financial services companies and propositions.

Hallquist: Heading into 2022, investors saw a broad macroeconomic trend towards fintech solutions, which is still continuing to this point.

FTV has been investing in fintech for over 24 years — long before the term “fintech” was even coined. We’ve weathered many bumpy cycles and volatility in the market, and have seen that high-quality businesses can thrive even in downturns, especially if they are driving efficiencies and cost reductions for financial institutions.

Fintech is still an attractive area for investors because as broader macroeconomic trends drive its growth, fintech will continue to grow at a greater rate than the overall economy. 

What areas in fintech would you say are top of mind for investors right now?

Blader: Investors are looking for opportunities that are recession-proof and counter-cyclical. I'm seeing a refocus on topics like health, supply chain and logistics, and financial infrastructure. Investors are seeking shelter from D2C, as they refocus on the path to profitability, and doubling down on embedded distribution models and B2B.

Hallquist: Software-focused business models that are creating operational efficiencies in lending, payments, capital markets and other segments in financial services continue to see investment and enthusiasm. At FTV, we’re particularly excited about trends in B2B payments, payment orchestration, lending software and vertical software combined with fintech. Investors are spending less time on areas that have had issues in the past few months, such as cryptocurrency, BNPL and other segments of lending.

There has been additional scrutiny on business models and unit economics, but businesses that are growing and spending money prudently in a way that is sustainable in the long term will continue to do well and be given appropriate credit in their valuations.

What are investors looking for in firms to invest in today's market?

Blader: Investors are looking beyond the veneer of high growth to deeply interrogate unit economics. Underwriting quality and customer acquisition costs suddenly matter. Attractive firms are capital-efficient, attentive to core unit economics, and have a plan to scale efficiently.

Hallquist: The most important factor that investors are looking for is companies that are spending money in a long-term sustainable manner that the unit economics support. At FTV, financial rigor is and always has been extremely important to us. We closely evaluate unit economics, customer retention, sales efficiency and profitability (and conversely, burn). We also carefully pick management teams that we typically know really well and often have known for a long time, giving us a detailed view on the past, present and future trajectory of the company. Profitable and breakeven companies that are growing at 20 percent or more are going to continue to see a lot of enthusiasm from the investor community.

How do you expect 2022 to end in terms of fintech investment?

Blader: In a way, it doesn't matter - venture capital is a long game. A short-term change in funding cycles will likely flush out some noise. But there is still too much work to do, too many social and systemic problems in finance, too much capital committed to venture, and too much recent success for one credit cycle to wipe out the industry. Smart founders raised money last year and are making that capital last. Solid companies find funding regardless of the macro environment. Our job isn't to track short-term funding blips. It's to back category-creating business focused on systemic change.

Hallquist: As we head into the fall, we expect to see an uptick in investment activity, as there is a broader return from the summer holidays and markets have digested rate increases, with inflation starting to decrease into Q4. We continue to be excited by the deep field of promising emerging companies that are transforming industries and taking share from incumbents.