TechCrunch recently asked a number of venture capitalists who invest in fintech to share their thoughts about the state of the industry; they pulled us into the present moment, drawing from their portfolio companies, deal flow and inboxes.
Today, we asked them to look into the future.
Although it looks like the COVID-19 pandemic has clipped the tails of many unicorns, this era won’t last forever. Investors expect the domestic and global economy to recover, perhaps starting in late 2020 or early 2021, though those timelines could be aggressive.
TechCrunch wanted to find out what improving macro conditions in the future might mean for fintech startups, a cohort that has attracted huge checks and even larger expectations from its backers and founders. To better understand what is coming, we reached out to a group of VCs we selected based on their experience and their firm’s investing history to predict what’s beyond the horizon.
Here’s our group for today:
- Matt Harris, Bain Capital Ventures
- Charles Birnbaum, Bessemer Venture Partners
- Jackson Gates, Manresa Ventures
- Rob Moffat, Balderton Capital
- Brendan Dickinson, Canaan
- Yann Ranchere, Anthemis
- Cherry Miao, Accel
As always, we will distill and discuss key trends before sharing their responses in full, lightly edited for length and clarity.
Consolidation, the power of cash, who is doomed and far-off IPOs
Our first theme is that consolidation is generally expected and could come broadly in the diverse fintech space. Digging through the answers, most said they believed the maturation of the fintech industry is upon us. Horizontal mergers might happen at a faster pace than before as companies struggle and acquisitions become cheaper.
Investors largely noted that startups in the lending space will not come out of this crisis unscathed, so expect forced combinations in that sector, as well as companies that target SMB customers.
The second trend we noted deals with who lives and who dies. The answer, contrary to our guess, doesn’t deal with stage but, instead, runway. Preparing this particular survey we had a hunch that later-stage fintech startups would have a better shot at staying alive, given their history of huge capital raises. That was nearly correct, it turned out.
However, instead of stage, our investor group generally agrees that runway matters more; older startups raised more, but they also may have far worse burn rates. In this vein, one investor noted that super early-stage fintech startups that just raised should do fine, as they’ll just build straight through the downturn.
Our third trend deals with which cohort of fintech startups will fare the worst. We had the investors rank a number of types of companies and some categories fared poorly. Consumer lending fintech shops do not inspire investor confidence, nor did consumer-oriented payments companies. Business lending was probably around third from the bottom.
There will naturally be some startups in those categories that do fine, but that’s almost more a comment on the total number of fintech startups than it is a commentary on the viability of any particular sector.
Trend number four: fintech IPOs are on hold for quarters, if not years. If you were hoping for a quick return to fintech liquidity, prepare to be let down. The investors we questioned said that we might see one in Q4, but that public debuts for fintech players are probably more of a 2021 affair.
We also asked if the Bill.com IPO — which went well — had any impact on fintech exits. Not really, was the answer, aside from one note that it might have helped drive some later, pre-COVID-19 M&A activity.
Our final trend: expect doom and gloom for interchange revenue.
The investors we chatted with said they largely think we’ll see a sharp drop in revenue from interchange fees, a slice of the pie that many card issuers take per transaction. This means that the startups that bet on IC revenue to fund their nifty why-not consumer debit cards will see a drop in their ability to issue. And that hurdle could mean startups struggle to make their credit card bets stay a reality, which brings us back to the first theme we talked about: further consolidation.
All this said, but one investor disagreed. You’ll have to read the piece to find out which one and why.
Matt Harris, Bain Capital Ventures
Looking ahead there may be consolidation inside the fintech space. Which areas are the ripest for combinations?
Companies that target SMB customers have been and continue to be ripe for consolidation given the preferences of their user base. With limited resources, SMBs often prefer full-suite solutions over fragmented point solutions, so we’ve already seen consolidation in areas such as human capital management, payroll and benefits. The recent market environment will exacerbate this trend as SMBs try to do more with less, so I suspect we’ll see more consolidation among across platforms with similar end-user roles such as HCM platforms and 401(k) providers or CFO-suite solutions. We are also going to see some major changes in alternative lending. None of those companies will come out of this current economic crisis unscathed; many will go out of business and others will find themselves forced into various forms of combination.
Which stage of fintech startup is best positioned to survive and thrive during the rest of 2020?
The survival of fintech startups through 2020 is less about stage and more about the two dimensions I mentioned earlier — vulnerability in terms of cash balance, burn, and durability of revenue, and direct impact of COVID-19 on their topline. Regardless of stage, startups will face both operational and fundraising challenges. Many of the companies that survive will do so out of sheer luck of their business model or fundraising timing, while others will have to actively change the way they operate in today’s world. In general, we’ve seen the most strength in B2B focused companies with recurring revenue models, particularly those focused on helping businesses automate and move analog processes online.
Ranked in order, which type of fintech startup is best positioned to thrive in the next few years?
- Software companies with embedded financial services models
- Back-end infrastructure for enabling embedded financial services (B2B or B2C)
- Compliance
- Payments (B2B)
- Personal finance (banking, investing, loan refinancing)
- Payments (consumer)
- Lending (B2B)
- Lending (consumer)
How long until the next fintech IPO? Did Bill.com’s IPO have any impact on fintech exits?
In light of today’s market conditions, I think we are at least a couple quarters away from the next big fintech IPO. Bill.com’s IPO was a sign to companies that profitability isn’t a prerequisite for IPO, but the recent market volatility might have companies second-guessing that strategy. Similar to 2008, we will likely see a drop in IPO activity in 2020 with a gradual ramp up in 2021 and beyond. Companies should focus on maintaining strong economics and market positions during this time in order to put themselves in a favorable exit position in years to come. Investors will look back on 2020 with a sympathetic eye, but it certainly won’t be a “get out of jail free” card for poor performance.
Will interchange revenue retain its popularity among fintech startups over the next 3 years?
The change we see in the industry is less focused on the interchange fees charged by banks themselves, but more on total transaction fees paid by merchants, of which interchange is one part. While the percentage fee may not change drastically, who gets a slice of the pie continues to evolve. Incumbents will continue to share payment economics with fintech startups, but they’ll also increasingly share those economics with non-traditional fintech companies such as vertical software platforms. Companies like Finix, which is an infrastructure platform that helps software companies take on payment processing capabilities, are making it easier than ever to participate in payment economics, so we’ll continue to see more players do so over the next three years.
Finally, what’s a fintech company that isn’t on our radar yet that should be?
A space that is often overlooked by the market is loan servicing, and EarnUp is a company that’s delivering strong value to lenders, servicers and borrowers. EarnUp is a loan-optimization platform that powers the interface between servicers and borrowers. They’re bringing data transparency and insights to the loan industry and make paying a loan as easy as tapping your phone screen. Similarly to the payments industry, loan servicing is rich with customer transactional data and servicers enjoy deep relationships with end customers. Today, this wealth of customer data is largely untapped, so I’m excited to see how EarnUp helps transform servicing from a cost center to a profit center.
Plus any other thoughts you want to share with TechCrunch readers.
Today, we refer to “fintech” startups as a vertical of its own, but I’m excited to see the shift from fintech as a sector to fintech as a platform (more of my thoughts here). We’ve started to see evidence that financial functionality is becoming a native component of a company’s business and tech stack rather than a primary business model. For example, merchant payments are increasingly embedded in vertical software companies like Mindbody, a business software platform in the wellness industry that also accepts and monetizes payments through its platform. Along that vein is a portfolio company of ours I mentioned earlier called Finix, an infrastructure platform that allows software companies to take on these payment processing capabilities. We’re still in the early innings of this shift, but I suspect many years from now, even the term “fintech investing” will be redundant. Rather, fintech will be a platform for all companies just as the internet, mobile, and cloud are today.
Charles Birnbaum, Bessemer Venture Partners
Looking ahead, there may be consolidation inside the fintech space. Which areas are ripest for combinations?
While we have seen some major activity in the infrastructure space lately with Plaid, Galileo and others, I do expect more consolidation on the consumer fintech and insurtech segments. I- the fundraising environment becomes more challenging for an extended period of time, joining forces with well-capitalized incumbents will be more compelling to many fast-growing, but high burn direct to consumer players as opposed to navigating difficult financings.
Which stage of fintech startup is best positioned to survive and thrive during the rest of 2020?
As many industries (mortgage, core banking, both personal and commercial lines of insurance) are realizing that they have been too slow to adopt digitization and the shift to the cloud over the past decade, the startups at any stage and leading companies that allow these incumbents to catch up will see strong demand in the coming months. Customers still need to open new accounts, close on mortgages, borrow and buy insurance products without live interactions with agents or customer service reps and there are many great software vendors ready to enable this.
Ranked in order, which type of fintech startup is best positioned to thrive in the next few years?
- Back-end infra (B2B or B2C)
- Payments (B2B)
- Compliance
- Personal finance (banking, investing, loan refinancing)
- Payments (consumer)
- Lending (consumer)
- Lending (B2B)
How long until the next fintech IPO?
If I could predict the performance of the short-term equity markets, I wouldn’t be in venture capital!
Did Bill.com’s IPO have any impact on fintech exits?
No real point of view here.
Will interchange revenue retain its popularity amongst fintech startups over the next 3 years?
It is a strategy that requires massive scale, but one that will remain effective as long as leading fintech players can raise additional capital. If they are forced to be more efficient they will need to search for additional, true margin-generating revenue streams in short order.
Finally, what’s a fintech company that isn’t on our radar yet that should be?
Jackson Gates, Manresa Ventures
Looking ahead there may be consolidation inside the fintech space. Which areas are the ripest for combinations?
I think most of the consolidation will be horizontal mergers — many stock-for-stock private transactions. For example:
- Card issuing e.g., Marqeta and Stripe.
- Fraud tools for ecommerce, e.g., Riskified, Forter, Signified etc.
- Third-party purchase data, e.g., SecondMeasure, Similar Web, Slice, Edison Mail, Quandl, 1010Web, Superfly (likely acquirers Visa, MC)
- Consumer challenger-banks to become “big enough to matter” and find a sustainable business model, e.g., Dave+Chime+Varo etc.
- Crypto wallets and crypto exchanges
- Robo-advisors + trading apps, e.g., Robinhood + Wealthfront + Betterment, etc.
- Small business loan origination, e.g., BlueVine + Kabbage + FundingCircle + OnDeck
- Large payment processing and merchant acquiring. Major acquires being Stripe, Adyen, PayPal and possibly Chase — possibly we see 1-3 huge mergers here.
- HR and payroll software, e.g., Wealthfront + Rippling + Gusto + Carta
Which stage of fintech startup is best positioned to survive and thrive during the rest of 2020?
- Seed-stage companies that recently raised and are building product but won’t ramp for 12-18 months.
- Late stage, unassailable industry leaders that have been preparing themselves for acquisitions, e.g., Stripe, Square, Shopify, Gusto
Ranked in order, which type of fintech startup is best positioned to thrive in the next few years?
- Compliance
- Payments (consumer)
- Payments (B2B)
- Back-end infra (B2B or B2C)
- Personal finance (banking, investing, loan refinancing)
- Lending (consumer)
- Lending (B2B)
How long until the next fintech IPO? Did Bill.com’s IPO have any impact on fintech exits?
Next fintech IPO should be: Stripe, Gusto, Marqeta or Blend. Bill.com may have catalyzed the Plaid and Credit Karma acquisitions.
Will interchange revenue retain its popularity among fintech startups over the next three years?
Yes — for companies that can pull in money via ACH and disburse via corp card rails. But IC revenue will not be enough to sustain consumer debit card or credit card issuing.
Finally, what’s a fintech company that isn’t on our radar yet that should be?
- Papaya — simple mobile payments for medical bills.
- Flowhub — best-in-class solution for inventory management, compliance and payments for cannabis retailers.
- Routable — secure and scalable invoice and bill payment platform to help companies accelerate and improve B2B payments.
- Very Good Security — helps companies protect and exchange sensitive data for better compliance and security.
- Clyde — provides extended warranties and purchase protection to consumers at point-of-sale through its merchant partners.
- Gentem — revenue lifecycle management, claims processing and payments to SMB healthcare providers.
- Hugo — flexible and affordable liability auto insurance to consumers without down payments or annual contracts.
- Ladder — affordable payment product to increase access to employment certification, job training and continuing education. Currently providing an educational platform to help Americans navigate the unemployment and healthcare challenges created by COVID-19 pandemic.
- Peach Finance — modern loan management, compliance and servicing platform for fintech lenders.
- Gorgias — simple customer service tool directly integrated with Shopify.
Treasury Prime — banking as a service to automate back office ops and improve customer experience on new and existing services. We need a competitor to SynapseFi and need to reduce third-party risk for fintech startups.
Rob Moffat, Balderton Capital
Looking ahead there may be consolidation inside the fintech space. Which areas are the ripest for combinations?
Lending, especially business lending, is going to be a tough sector, expect some consolidation there. I think the banks and insurers will be in lockdown for the rest of the year so don’t see much activity from them. Recently payments companies such as Visa, Paypal and MAstercard have been the big acquirers.
Ranked in order, which type of fintech startup is best positioned to thrive in the next few years?
- Personal finance (banking, investing, loan refinancing)
- Compliance
- Payments (consumer)
- Payments (B2B)
- Back-end infra (B2B or B2C)
- Lending (consumer)
- Lending (B2B)
How long until the next fintech IPO?
IPO markets will be shut until Q4 at least. Then maybe Transferwise?
Will interchange revenue retain its popularity amongst fintech startups over the next 3 years?
Interchange revenue will trend to zero
Finally, what’s a fintech company that isn’t on our radar yet that should be?
Wagestream
Brendan Dickinson, Canaan
Looking ahead there may be consolidation inside the fintech space. Which areas are the ripest for combinations?
Over the past five years many fintech companies raised a lot of money but are simply financial products — either new or existing financial products with little moat or differentiation. Historically speaking, there has been little appetite to acquire these companies at meaningful multiples — despite where private markets have valued them — and the public players have traded poorly. Many of these companies now face *significant* headwinds and private markets are going to struggle to support the existing valuations.
Which stage of fintech startup is best positioned to survive and thrive during the rest of 2020?
It’s not so much stage, as it is runway. There are going to be months of dislocations in the broader fintech market, as partners (lending, insurance, regulatory, etc) all re-evaluate and try to understand the new world. People need to figure out if their compasses still point north and right now, we don’t know. To the extent you have runway and aren’t dependent on partners (particularly risk-bearing ones) you are in better shape than many.
Ranked in order, which type of fintech startup is best positioned to thrive in the next few years?
*** = areas I am excited about
- Payments (consumer)***
2. Payments (B2B)***
3. Back-end infra (B2B or B2C)***
4. Lending (B2B)***
How long until the next fintech IPO?
I’ll take the over versus the consensus.
Did Bill.com’s IPO have any impact on fintech exits?
No.
Will interchange revenue retain its popularity amongst fintech startups over the next three years?
With startups, no. They are really limited in terms of sources of revenue compared to incumbents. The bigger question is to what extent VCs and growth investors will continue to value interchange revenue similar to SaaS revenue.
Yann Ranchere, Anthemis
Looking ahead there may be consolidation inside the fintech space. Which areas of fintech are the ripest for combinations?
In our view, two main drivers will be strongly behind consolidation in the fintech space:
- Vertical consolidation/adding more products/revenue lines to an existing user base to augment monetization;
- Horizontal consolidation: aggregating similar players to build large champions potentially internationally.
Which stage of fintech startup is best positioned to survive and thrive during the rest of 2020?
Companies at all stages with sufficient funding to weather a tumultuous 2021 will be in position to do well in the second half of 2020, with existential risk less a looming factor for those. Additionally, early-stage companies born out of the new market conditions will have the necessary reset in approach to be given the chance to succeed.
Ranked in order, which type of fintech startup is best positioned to thrive in the next few years?
- Back-end infra (B2B or B2C)
- Lending (B2B)
- Personal finance (banking, investing, loan refinancing)
Finally, what’s a fintech company that isn’t on our radar yet that should be?
As part of our investment focus on embedded finance, we believe the current environment will accelerate the move toward more efficient, cheaper infrastructure in payments, financial data aggregation, embedded insurance distribution just to give examples. Additionally, services that are helping customers better save and manage their personal finance in their day-to-day lives will also have a significant role to play.
Cherry Miao, Accel
Looking ahead there may be consolidation inside the fintech space. Which areas are the ripest for combinations?
We believe that the SoFi-Galileo deal is a sign of things to come and that there is much more consolidation in the future. Relative to venture dollars raised, the fintech sector has had very few public offerings to-date (versus say, SaaS or security), in large part because few businesses have had financials that would stand up to public scrutiny.
For SoFi-Galileo, the combined company has diversified revenue across consumer and B2B payments, an incredible team and a clear path to over a billion of revenue in the short term. We think that this will resonate well with the public markets.
Which stage of fintech startup is best positioned to survive and thrive during the rest of 2020?
Businesses with scale, cash flow and/or large balance sheets.
Ranked in order, which type of fintech startup is best positioned to thrive in the next few years?
We continue to be incredibly excited by opportunities across fintech, building on our expertise in investing in infrastructure (Galileo and Braintree), consumer finance and insurance (Ethos, Luko, Monzo, The Zebra, and Trade Republic), B2B financial services (Invoice2Go and Soldo), compliance (Middesk, Checkr, and Privitar), and payments (Venmo and WorldRemit).
How long until the next fintech IPO? Did Bill.com’s IPO have any impact on fintech exits?
We’ll see. There may be a number of companies ready to go in 2021/2022 but we expect there to be more M&A than IPOs in the short term.
Will interchange revenue retain its popularity amongst fintech startups over the next 3 years?
Yes.
Finally, what’s a fintech company that isn’t on our radar yet that should be?
As the early Venmo backers, we’ve been looking for companies that take a Venmo-like approach to B2B payments. B2B payments are still almost entirely done via cash and check, leading to massive inefficiencies for businesses of all sizes. The Melio team out of Israel and New York has the best product in this area — it’s mobile and fast with a great UI/UX. We expect big things from them in 2020 and beyond.