7 investors reveal what is popular in fintech in Q1 2023

The global downturn has affected all sectors, but fintech bore the brunt of it as public market values ​​fell off a cliff last year.

However, it seems that even though VCs are treading more carefully 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 combined investments went to fintech startups.

And while global fintech funding fell 46% to $75.2 billion in 2022 from 2021, it was still up 52% ​​compared to 2020 and accounted for 18% of all funding globally, proving investors still have faith in fintech’s future .

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

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The tougher conditions that have been 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 periods of compression in the ecosystem (eg 2008 and 2000), we’ve not only seen outstanding companies being formed, we’ve also seen great performance for venture companies during these windows,” he said.

“The last two years in the venture ecosystem were an anomaly, but I think we’re returning to a healthy ‘normal.'” Diligence cycles have expanded, better relationships with founders can be formed, investors can enter new areas with more preparation , and a thoughtful approach to early venture capital may emerge,” Kareem added.

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

“Grow in a way that is smart and sustainable for the long term,” advises Michael Sidgmore, a partner at Broadhaven Ventures. “We cannot control the macro environment, and the current geopolitical climate means there can always be the threat of exogenous shocks to the market. But the markets will come back at some point. So just grow in a way that allows you to focus on unit economics and profitability, so you can control your own destiny no matter what market we’re 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’ve interviewed seven active investors over the past couple of weeks.

Spoiler alert: B2B payments and infrastructure continue to burn, and most investors expect to see more flat and down rounds this year. Additionally, they were gracious enough to share some of the advice they provide to their portfolio companies.

We spoke with:

• Charles Birnbaum, Partner, Bessemer Venture Partners
• Aunkur Arya, Partner, Menlo Ventures
• Ansaf Kareem, venture partner, Lightspeed Venture Partners
• Emmalyn Shaw, Managing Partner, Flourish Ventures
• Michael Sidgmore, Partner, Broadhaven Ventures
• Ruth Foxe Blader, Partner, Anthemis
• Miguel Armaza, Co-Founder and General Partner, Gilgamesh Ventures

Charles Birnbaum, Partner, Bessemer Venture Partners

Many call this a downturn. How has your investment mission changed over the past year? Are you still closing deals at the same rate?

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

While our investment tasks 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 declines in 2023? Do you see more companies increasing expansions or downsizing compared to 2021 and 2022?

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

Private market valuations, at any given time, are not only a reflection of a team’s hard work and progress, but are also influenced by the funding environment.

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

We see huge opportunities for innovation in the world of B2B payments. The infrastructure foundation 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 trigger much faster adoption.

We’re excited to see how entrepreneurs leverage these tools to improve our archaic B2B payments ecosystem.

Consumer fintech companies without long-term, durable customer acquisition benefits are overhyped and will continue to struggle to live up to the high expectations set by investors in recent years.

We expect 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 do more due diligence?

We look deeply 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 due diligence as we work to understand the market before making any investments.

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

Have fintechs come close to growing into their 2021 values? How many will fail the task in 2023?

Given the sharp rise in valuations in recent years in the private market and the steep fall in the public market over the past year, it’s hard 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 that they won’t have to answer that question for a long time.

What advice do you give to your portfolio companies?

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

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

How do you prefer to receive pitches? What is the most important thing a founder should know before they have a conversation with you?

From my experience, you often have to find the most exciting companies and make a profit on your investment. We always proactively reach out to entrepreneurs who build in the areas where we have active investment tasks.

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 incoming messages we receive.

Aunkur Arya, Partner, Menlo Ventures

Many call this a downturn. How has your investment mission changed over the past year? Are you still closing deals at the same rate?

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

I would say that our core fintech missions have largely remained the same: we invest in developer infrastructure and embedded finance APIs, vertical banking, end-to-end consumer and business financial services, and the office of the CFO. We also look at thoughtful business 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, ultimately looking less like pure technology companies and more like insurers or lenders. These are the first companies to suffer a downturn because they are strongly indexed to the macro environment.

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