What’s hot and what’s not in FinTech?

I just picked up a long and fascinating article on TechCrunch this week. Unfortunately it’s behind a paywall, but they interview seven leading VC investors in FinTech and asked a whole variety of questions:

• Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?
• Do you expect to see more down rounds in 2023? Are you seeing more companies raising extensions or down rounds compared to 2021 and 2022?
• What are you most excited about in the fintech space? What do you feel might be overhyped?
• What criteria do you use when deciding which companies to invest in? Would you say you are conducting more due diligence?
• Have fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?
• What advice are you giving to your portfolio companies?
• How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

A thoroughly enjoyable feature. If you don’t mind paying, you can read it all here: https://techcrunch.com/2023/03/07/7-investors-reveal-whats-hot-in-fintech-in-q1-2023/

Funnily enough it coincided with two people asking me What’s Hot and What’s Not in FinTech? This will also feature in Finovate, where I deliver the keynote next Tuesday afternoon. I'm talking about the metaverse and the financial opportunities in that space. We also have a panel talking about What’s Hot and What’s Not in FinTech. See you there?

Regardless, I thought I would tackle the TechCrunch question: What are you most excited about in the fintech space? What do you feel might be overhyped?

From my own perspective I am super-excited by what FinTechs are doing in the AI space and, in agreement with the folks below, B2B and corporate finance. It’s interesting that the VCs don’t mention AI at all, even though GPT (ChatGPT and Bard etc) are the biggest headline grabbers of 2023. Who would I pick out in FinTech AI activities? There are so many but the ones that come top-of-mind would be Cleo, Kreditech, High Office, LingXi and Skyline AI. You can find out more about them here: https://aithority.com/technology/top-10-ai-companies-that-serve-banking-and-finance-industry/

What is most over-hyped would probably include a lot of the challenger bank stuff. I think they’re all feeling the pinch in 2023 and many realise that their excessive valuations were just that. Excessive. I’m predicting a lot of consolidation and even some failures in that space. By way of example, just look at N26, who claimed that profitability is not one of their metrics, are openly accused by their internal management team as being dysfunctional and run with a culture of fear.

Anyways, here’s what the investors said:

Most exciting areas …

We see tremendous opportunity for innovation in the world of B2B payments. The infrastructure groundwork 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 spark much faster adoption.

Charles Birnbaum, partner, Bessemer Venture Partners

We continue to see a lot of activity in the Office of the CFO sector. There is still so much heavy lifting to be done by accountants, engineers and finance teams to reconcile and close books, understand operational and financial data, and keep up with constantly changing business models and compliance surface area. There are many early-stage fintech companies trying to tackle and compress the workflow between and around disparate data sources and the ERP/General Ledger.

Aunkur Arya, partner, Menlo Ventures

I’m interested to watch the intersection of automation and fintech begin playing out, specifically as it relates to B2B companies and SMBs as enhanced productivity through automation gives smaller teams more leverage.

Ansaf Kareem, venture partner, Lightspeed Venture Partners

We are excited about everything from next-generation B2B payments and verticalized embedded finance platforms to the radical transformation of core legacy infrastructure and associated data analytics across banking, insurance, payments, lending and identity.

Emmalyn Shaw, managing partner, Flourish Ventures

Private markets are undergoing a very exciting market structure evolution from pre- to post-investment that will enable alternative assets to become mainstream. Platforms like iCapital, Republic and Allocate have unlocked access to private-market investment opportunities. We believe the digitization of the post-investment process is critical to enable the next evolution of private markets. From fund closing and fund accounting to more real-time valuation and monitoring, private markets are witnessing innovation that will make them look more like public markets over time.

Michael Sidgmore, partner and co-founder, Broadhaven Ventures

It feels like fintech is experiencing a generational shift. Some cool companies are going to get washed out because their valuations are unjustified, not because their tech is bad or the market isn’t there. That’s a shame. My enthusiasm is not so much sectoral as it is attitudinal: Right now, founders are in wartime mode, which means companies that are founded in or surviving this period are focusing on fundamentals.

Ruth Foxe Blader, partner, Anthemis

Capital-light business models that truly leverage the deflationary power of technology. We are focused on companies building software for the office of the CFO, SMBs and financial infrastructure. That said, we are not completely dismissing consumer-focused businesses and still believe there’s room to innovate in that space.

Miguel Armaza, co-founder and general partner, Gilgamesh Ventures

Most over-hyped

Consumer fintech businesses without long-term, durable customer acquisition advantages are overhyped and will continue to struggle to live up to the lofty expectations set by investors over the past several years. We’re expecting to see significant consolidation across the consumer fintech landscape this year.

Charles Birnbaum, Bessemer Venture Partners

The overhyped areas continue to be the obvious ones that we’ve tried to avoid the last few years: BaaS, consumer/business lending marketplaces, revenue finance platforms and other businesses that lack a real technology moat, are balance-sheet heavy and therefore have enormous sensitivity to the macro environment.

Aunkur Arya, Menlo Ventures

The “CFO stack” has been a constant area of discussion among fintech investors, but it doesn’t seem to have played out in a meaningful way yet.

Ansaf Kareem, Lightspeed Venture Partners (contrasting with the most exciting areas identified by Aunkur above)

Fintech feels underhyped right now. There are quality companies at all stages that are now undervalued.

Michael Sidgmore, Broadhaven Ventures

Emmalyn Shaw of Flourish Ventures, Ruth Foxe Blader of Anthemis and Miguel Armaza of Gilgamesh Ventures did not cite anything as over-hyped