Q&A: Commerce Ventures’ founder sees fintech as a long-term growth trend

At Money20/20 USA, Insider Intelligence met Dan Rosenfounder and general partner of the VC fund with a focus on the financial services sector Commerce Ventures. Rosen was one of the organizers and judges of America’s Got Access startup pitch competitionwhich focused on financial inclusion. Rosen gave his insight on fintech funding cycles (he still thinks it’s in a long-term growth trend), what the coming consolidation among fintechs might look like, and what he learned from this year’s pitch competitions.

The following has been edited for clarity and brevity.

Insider Intelligence (II): How do you think the America’s Got Access startup pitch competition went?

Dan Rosen (DR): The competitors were impressive. I thought each and every one of them carried with them that mission of financial inclusion and access. And then they connected it to their personal stories in a way that just made it touching, very real — and frankly, very hard to figure out who to dislike.

II: How did you decide on the theme of inclusion for this competition?

DR: We’ve been much more intentional in the last two and a half years about doing more around financial inclusion and access. We created a fund, CV Access, whose sole mission is to invest in startups with that focus. Many of them have entrepreneurs from underrepresented backgrounds. We knew we could bring like-minded companies on stage to present. That’s why we thought of holding a pitch competition at Money20/20.

II: What was the driving force behind your joint efforts towards financial inclusion?

DR: I think for most of us with hearts, in the middle of 2020, we all woke up a little bit. At least that’s what happened to me. But my very first fintech investment back in 2008 was a company called PerkStreet Financial, which was trying to bring a Digital Difference Analyzer (DDA), essentially a rewards debit card, to the mass market. The idea was to help people earn more and save more. We’ve also been investors in a bunch of companies like MX Technologies, which focuses on personal financial management, and other companies that have similar missions.

II: When you look at startups, has your criteria for investment changed compared to two or three years ago?

DR: I don’t think it’s significantly different. But we’ve started to be more intentional about tracking deal flow with different founders and trying to improve it.

II: Let’s zoom out to the dismal state of fintech funding right now. What are your thoughts on that?

DR: I think the story is less about how far the market is down and more about whether we get back to the right size for the funding opportunity that really should exist.

The most interesting thing is how finance expanded so much faster than it probably should have in the natural course because capital was so cheap and free flowing. It was difficult for venture capitalists and the companies they invested in not to take capital when it was offered. And then you invest it pretty quickly because more capital will keep coming to you. You invest more and you invest it faster. It creates a feedback loop that shortens funding commitment cycles.

The market is still trying to find its way to what the normalized rate of investment will look like. I can’t imagine we have much more to drop because there is so much institutional demand for venture. There is still a very rich and robust set of startups to invest in. Many talented entrepreneurs have worked for other businesses that have raised money and scaled, and in many cases made successful exits.

II: Do you think we’re going to look back at 2021 and the first part of 2022 as an anomaly in terms of how much investment was put into fintech? Or do you see it eventually going back up to previous levels?

DR: My guess is that it looks like the dot-com bubble, when venture also expanded and there was a ridiculous acceleration. That is, if you chart the 10-year period from maybe 2013, you’ll see a steady upward trajectory, and then a really big spike that was unnatural. It then falls back to the longer line with a positive trend. I think we are in a long-term growth trend.

II: Do you see signs of consolidation in fintech, such as companies dropping out because it is becoming more difficult to secure funding?

DR: We are still early in that process. Nine or six months ago, a friend in venture who is a fintech investor said, “We just did the math and realized we haven’t had a write-off in five years.” I realized we hadn’t either. It’s actually not healthy. That’s not how venture is supposed to work, no matter how good you are. It is a natural part of the process that some companies do not get it done.

In the last three to six months, most companies that have been able to pivot have done so. Those who needed a little more capital and had good partners raised a little more money. Some managed to raise a lot of money right before things fell. Unit is a classic example of that.

And some of our largest companies that are very well capitalized and that have become more mature, I would say each one of them is reassessing their level of spending, becoming more efficient and making sure that their money is funding them to a place of break-even, rather than a place to raise more money. And there is a clear change in the market. Maybe they should have always thought that way. Our younger companies are starting to think that way too.

Many companies are reasonably well funded, but you will start to see some run out of money. They won’t be able to raise a round that funds them long enough to reach a major milestone, or at a price that’s above the last round they raised. These companies will be looking for housing, if they are not already. Agreements are in the works or under discussion. We’ll hear more about that over the next three to six months, as well as about companies that just didn’t make it.

Some high profile private companies are going to face a day of reckoning. Or they have to raise capital that looks dramatically different than what they were valued at before. I have a lot of respect for Klarna, because they said, “Let’s do the smart thing now, while we still can.” Other companies have avoided this and tried to use creative structures to raise debt. Some will do anything to avoid the significant decline that will occur in their next raise.

II: Are there bright spots in fintech financing that still produce good results?

DR: We are excited about a recent investment we have made in the Treasury, CNote. And we watch wider credit infrastructure, such as collection and servicing. We do a deep dive into the service area. And we continue to be excited about players who have differentiated offerings in the next generation credit card space. There’s just a ton of opportunity for innovation there. And structurally, even banks can buy these businesses. The card issuing space is a valuable place for banks to be on the lookout. We hear of many large banks thinking about mergers and acquisitions and wondering if they should buy things.

I think we all face the reality that neobank models are going to be more challenging to finance. And there are many questions about which banking as a service (BaaS) models will be sustainable and achieve enough scale.

II: What signs should we look for that this decline in funding has leveled off?

DR: You definitely need to see more news about companies going bankrupt or being acquired. I suspect that once we get a ceiling on where interest rates are going, that will be a good indication that we know how much capital can be extracted from venture assets as well as the broader ecosystem.

We heard an economist speak yesterday and it sounded like he said we should peak in early to mid 2024 and start seeing some rate cuts by then. If he is right, over the next six to 12 months, people will be more confident to see rate hikes slow and inflation fall. Many companies were listed on the stock exchange when the shares were down as much as 50-plus percent. Investors in these companies are sitting on their holdings. If interest rates start to come down and, certainly, if inflation starts to come under control, I think you’ll see valuation multiples go up. If they do, more liquidity comes out of businesses and goes back to investors. And that starts the cycle again.