Inside Portage’s fintech portfolio and investment theses with Stephanie Choo

  • Portage is a fintech fund that invests globally, with early stage and later stage strategies.
  • Tearsheet editor Zack Miller interviews Partner Stephanie Choo on the podcast about investing in today's macroeconomic environment.

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Inside Portage’s fintech portfolio and investment theses with Stephanie Choo

Portage is a fintech-focused venture fund that invests globally, with two different strategies: early-stage investing (seed to B) and growth-oriented investing (late stage).

I spoke to Stephanie Choo, general partner at Portage as part of a LinkedIn Live session. She shared the impact that the drop in venture capital funding has had on the sector and fintechs, with fundraising down around 70% year over year and deal volume down 30% to 40%.

But despite the tech recession, the venture capital investor believes that consumer balance sheets are stronger than she expected, opening up new opportunities in the fintech space. Steph also shared that the fall of SVB and First Republic, though disruptive, are catalysts for new firms to step in and serve SMBs and tech companies.

Portage is thematically-driven, investigating and investing along two or three theses at any given time. Steph mentions two interests right now: the intersection between fintech and climate, and artificial general intelligence.

Steph shared several highlights in the Portage portfolio, including Tallied, a modern payment processor, and global investments in investing and insurance.

Here's my conversation with Portage's Steph Choo.

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The following excerpts were edited for clarity.

Steph Choo and Portage

Steph Choo, General Partner at Portage: We are a fintech focused venture fund that invests globally. I'm actually doing this podcast from Rio right now, as a testament to that we do. We've got two different strategies. Our first strategy is where I spend the majority of my time, which is early stage investing -- seed. We write $5 million to $30 million lead checks, primarily.

We've got a second strategy, which we launched last year, which is a growth oriented strategy. So we write $50 million to $100 million checks into the late stage. I can certainly comment on both sides of the spectrum, because there's been some pretty big changes in the fintech arena.

I helped found Portage in 2016. I have been around since the launch of fund one and have been building our platform here ever since. Before that I helped build and launch a retail advice platform that now powers a lot of what a top five Canadian bank does, on that side of the retail investment portfolio.

Before that, I was mainly working for large financial services companies at BCG, and before that, I was at a B2B payments company. So I've been in and around fintech and financial services for the past 15 years or so.

Growth investing as a second strategy

We had the second (late stage investing) strategy in the works. We knew we wanted to do something in late stage investing. Our goal at Portage is really to be one of the best fintech investors for any stage. And so we knew we wanted a vehicle that could invest later than our early stage funds.

Once we saw what the market was doing, we tweaked it a little bit, because we figured there would be really substantial opportunities to invest, especially at the late stage given what's going on in the economy. However, it was definitely opportunistic and the timing of launching it, we moved it up, versus what we might have done to try to catch the market timing.

I spend most of my time on the early stage. But we've we've written one check so far into a company called P97, which is a fuel payments company.

Thematic investing: ESG

We are actually super thematically driven. Every year our theses change, depending on what's going on in the market. I would say we've got two or three at any given time, all of us are working on two or three different theses. One thing that is interesting to us right now is the intersection between fintech and climate. Climate is one of the the areas that has not seen a downturn and it's kind of been counter cyclical in this latest recessionary environment.

I think there are a lot of financial solutions that could actually make sense here, from things like tax credits to other things like ESG frameworks for investing. We invested in a company called Novisto recently. It's an ERP, basically, for ESG reporting and super relevant in heavy regulated environments like Europe. If you're a public company, you need to be thinking about ESG reporting. We even feel it ourselves from our own LPs , who are demanding a different level of granularity on reporting of our portfolio. I think that's certainly going to get more and more prevalent around the world. Even the SEC is now concerned about greenwashing.

That's one trend that we're spending a lot of time on: all the offshoots of potential climate risk around insurance, around weather related changes in fire and flood. There are whole new weather models that are going to need to be implemented.

Thematic investing: ESG

Another area that everybody's talking about, I'm a little more skeptical on but we are spending time on is AGI -- how will this new set of generative AI and tech impact financial services going forward? I think there's no doubt that it's going to change a lot. I think it's a healthy skepticism from having lived through to other AI bubbles before.

Look, it's gonna change the world. It's going to change the way that we work, it's going to change financial services, there's no doubt. I think the question for me is who accrues the value. And value today, I think, is skewed towards the incumbents because they have data. There are lots of new companies that are going to benefit from having much more: they're going to be much lower cost, because now there's just a very different way to build a company.

And not every large incumbent is going to be able to make the transition to using all of this new tech to really scale. Because I think the massive advantage here is that a startup can have many fewer engineers to build the exact same thing because of the productivity gains. However, like throughout history, productivity has always been a very difficult thing to actually measure.

I do believe, like with speed to market, being able to build more with less is an advantage that a startup would have, but otherwise, with a lot of incumbents and a lot of startups, that already exists. Like they're not even startups anymore. Large tech companies that already exist have huge head starts with distribution and data advantages. And ultimately if they can figure out how to use these models, which by the way are mainly going to be open sourced and available to the highest bidder, I think they're going to have major advantage.

I think explainability in AI models is going to be a huge issue in financial services applications for sure. And we've seen how different regulators have different policies on this. But I think transparency and explainability have been core building blocks for most regulators in the world. So if you deny somebody for a loan, or you deny somebody on the grounds of a specific attribute for insurance, that's a pretty serious thing. To be able to explain to regulators why you aren't discriminating.

GPT-4 is amazing. There's definitely still some consumer facing things that you would need to wrap in order to make it usable for anybody. AutoGPT, which is where I think the world is headed, is even more interesting around the actual automation of tasks. It's pretty rough right now and fairly buggy, and over time, it's going to improve. You can see how quickly the technology is moving. But for financial services, you're going to need very specific vertical applications that wrap around the core AI, just because of either a regulatory mandate and or to really make the user experience excellent to connect it to all of your financial accounts, to do the things that you need to do.

I think the AI is not quite good enough to be horizontal and good at all applications yet.

Fintech skillsets

I think fintech is really interesting, because it is first and foremost, tech. So all of the same skill sets that you would need to run a great tech company, I think apply in the fintech space. I think the things that make fintech a little bit different are the time horizon in which you operate needs to be a little bit longer because to stand up a company in fintech in a regulated environment, either in banking, sometimes in lending, insurance, even in payments, just takes longer. The infrastructure is usually quite antiquated, quite frankly. Payment rails in most places are, with the exception of some, like Pix in Brazil

There are a few other countries in the world like Australia that have made inroads in this direction, as well. But being heavily regulated just requires having more funding upfront to actually build. With skill sets, the one thing that is different is obviously an understanding of the specific esoteric financial markets, which actually work quite differently in terms of how the balance sheet flows, how the income statement flows. The specifics of financial services are pretty different, even across financial services. And so having a few subject matter experts in whatever vertical you're trying to build in, to handle the financial side is also important.

Investment trends

I think everybody's seen the numbers year over year. In Q4 and in Q1, fundraising was down around 70%. I would say deal volume is down 30% to 40%, as well, along that same time horizon year over year. We're back to where we were in 2018-2019. Multiples are also down. The private markets follow the public markets -- we went from 2020-2021 multiples of 10 to 20 times forward revenues, and now we're at one to six times forward revenues, depending on which vertical you look at within financial services.

Fintech has actually been hit disproportionately hard. There was a pendulum swing in 2020 and 2021. Fintech had probably some of the highest valued companies out there. And one in every five venture dollars was going into fintech. We've seen a really dramatic pullback in the public markets, but also in the private markets where deal volumes decline in valuations at the late stage have come down at Series B by 50%, at Series C and D up to 70% and 80%. down. I think what we're seeing is a real pullback in the venture environment on the public market side, a real compression of multiples.

That has impacted deals getting done, because I think it's very hard now, even as a VC, to figure out how to price deals, because last rounds were marked where they were marked in 2020 and 2021. Companies have not yet needed to come to market because they raised large rounds at that time at the highs and closing the gap between what is 'fair price' these days, when multiples have collapsed at 70% to 90% and what they were last time -- that number is a big spread. In 2023, we are still seeing a little bit of a stalemate in terms of new funding rounds.

I think the macro environment has created some opportunities. Honestly, consumer balance sheets are actually stronger than I might have thought they would be at this level. Clearly there's a tech recession, but we haven't really seen the general recession yet. I think we've seen a few companies outside of tech start to announce layoffs. But it's been more delayed than I would have thought.

The demise of SVB and First Republic have created opportunities

Nobody would have predicted the the fall of both SVB and First Republic, which I think is creating pretty massive inflows and opportunities for fintechs that can fill the gap, because there are going to be very few institutions that are going to lend to start ups going forward. I think we've just lost two big pillars of the startup environment which a number of different portfolio companies of mine banked with SVB and with FRB.

There's now new opportunities to fill that gap in the SMB banking, in the startup banking space. In the venture debt space, there's a huge hole. There's also a huge hole lending to founders who have had really weird balance sheets where a lot of their capital is actually tied up in in very valuable illiquid stock.

I think it's going to be tough for the next few years. Certainly banking is going to become more expensive if you're starting a company. However, it's clear also that there are a new sets of opportunities in the fintech space that are going to be opened by what's happening in the macro.

Portage's portfolio highlights: Tallied

Why don't I highlight a few companies in our portfolio -- it's like choosing your favorite child. These are representative highlights in the portfolio. I'll start with fund three. I've spent a lot of my personal time in payments. We invested in a company called Tallied, which is a modern payment processor, starting in credit. You can argue that you could rebuild the same companies again and again, especially in the payment space where no one is necessarily incentivized to innovate, and there are huge incumbents. The new incumbents are becoming kind of like the old incumbents pretty quickly.

Every 10 years, you have a new crop of payment processing companies. Tallied is actually starting in the revolving credit space where there are just the current competitors like i2c and Galileo, which have technology stacks that are 20 plus years old. The ability a modern new stack, I think this is pretty representative of something we liked because it's a fundamental piece of infrastructure starting with the hook that hasn't necessarily been developed that we can add value by introducing other companies in our portfolio to that also want to launch products in the credit space.

That component of how we invest is pretty important -- we always ask if we can help. It also lends to good product validation that we're able to introduce our portfolio companies and have a founder validate that product for us.

Portage's portfolio highlights: Wealthsimple

Another thing that we look for is an unfair advantage in building the company. Wealthsimple which is kind of the Robinhood and Coinbase of Canada, is one of the largest private fintech companies in Canada, for sure. It raised one of the largest venture rounds in history in 2021. It's now at about 3 million users -- a tenth of the population in Canada have an account with them. I think they're going to be one of the top financial institutions in the country, competing with the incumbents, starting with a wedge of investing, but then moving to other kinds of crypto, obviously trading, eventually banking. They've launched a card, peer to peer payments, etc. So they're kind of moving to become the financial Super App of Canadians.

Portage's portfolio highlights: Albert, Clark, and

We also have on the B2C side, a company called Albert. They're really a financial banking product as well, another consumer app that I'm very excited about. Again, I think there will be a crop of new consumer companies that change the way that people interact with their finances. I think one of the hooks here is it's a bundle of different services in one. You can get financial advice from a genius via texting -- they have some of the best SLAs for responding. If you think about how often I have been on hold with my bank, I can say that's something that I really value as a consumer. They also offer banking and lending and investing and savings products all in one.

I'll call out a company in Germany, because we do have a very global portfolio, a company called Clark in the insurance space and a company called Alan, which is also in the insurance space in France, where we've done quite a bit of investing across Europe. I would say both are really new examples of going to market and distribution and what you can build in a modern insurance stack.

Clark is a B2C insurance broker, they do all lines. Alan is the first startup insurance company in France in the last several decades to actually get a full license. They are a full stack insurer that does group health. I think that gives you a good intersection of the kinds of investing that we do across B2B, across B2C, across payments, wealth management, asset management, banking and insurance. Those are kind of the four core verticals that we spend time in.

Exit windows

I think one of the only ways that companies are going to exit these days is going to be through acquisition. We've started to see some acquisitions. But the numbers are not very different than what we would have seen in the last few quarters. Everything else has dropped. I think we will see more going forward. Certainly, I think that until the public markets reopen, which might take years at this point, I think we're going to see more acquisitions and just more companies staying private. The best companies, for sure, will still be funded, and acquisitions are definitely to come.

I think there's going to be massive consolidation in the industry. There will be lots of mergers and a lot of startups that are acquiring other startups as well.

Investing for the future

One of our core pillars is wealth management. The area that we're spending a lot of time is alternative investments. I think credit as a part of that has become, in this market and rate environment, super important. I think other things like real estate, tech investing and investing into other kinds of funds, be it PE or VC, is really interesting in an environment where the 60/40 portfolio is probably dead.

In banking, I think that there are lots of opportunities -- in SMB banking to fill the void that SVB and FRB are leaving. In payments, payments is super evergreen. We're spending a lot of time in B2B payments. We're spending a lot of time in B2B SaaS that monetize via payments.

And then insurance. I mentioned climate risk as being one area. Cyber is another area we're spending a lot of time in these days -- capacity has been super restricted in this area. So it's an area where there is a lot of opportunity if you can figure out how to underwrite properly.

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