8 top fintech VCs discuss COVID-19 trends, signals and opportunities

In recent years, fintech’s revolution has felt like a rising tide.

Behemoths like Stripe and Square edged out banks while newbies like Brex nonchalantly raised nine-figure rounds. Today, however, the state of the financial technology industry feels more wobbly — some healthy startups in the genre are faring better than ever, while others are feeling the strain as consumers tighten their wallets and change their spending patterns.

It’s clear that we’re going to see some fintech startups struggle in the near future, but venture capitalists claim not to think in a short-term manner. We ran our last fintech VC survey in November 2019, so we wanted to get their take on where fintech is today. We turned to eight top VCs to better understand the state of the industry, which market signals they’re tracking and where opportunities still exist within the already-crowded pool of financial services:

• Matt Harris, Bain Capital Ventures
• Charles Birnbaum, Bessemer Venture Partners 
• Jackson Gates, Manresa Ventures
• Rob Moffat, Balderton Capital
• Hope Cochran, Madrona Ventures
• Brendan Dickinson, Canaan
• Yann Ranchere, Anthemis
• Cherry Miao, Accel

Next week, we’ll publish the other findings we received from these investors, focusing on fintech’s future in a post-COVID-19 world.

What follows is a collection of themes we noted from the investors, followed by their at-length responses.

Investing pace, flight to quality, varied impacts and uncertainty

Our first theme deals with investing pace. More investors than we expected were willing to note that their investing pace into fintech companies was slowing for one reason or another. While it’s become a cliché for private investors to state that they are open for business as a market signal, that doesn’t appear to mean that investments into fintech won’t slow.

The reasons why investors are slowing their pace of deals is varied, with some noting issues on their end (difficulty to reach conviction while operating remotely, etc.), and some detailing that some fintech companies are more internally focused today than reaching out to raise new capital. Investors also noted an expectation for fundraising to take longer and lower valuations. While that’s not great for founders, it’s also not the worst news; there is still money out there to be raised, and many investors claim they are writing checks of the same size as before.

The second theme deals with an expected flight to quality, with investors stressing that startups in the space should curtail spend that isn’t core to survival (marketing spend around branding was raised, for example), focus on key business metrics (unit economics, aggregate profitability), and monitor leading business indicators more closely. This is not a surprising set of advice, per se, but it is one that matters. If founders will listen remains to be seen, but investor are clearly signaling a return to more sober business operations.

Our third theme deals with how varied the impact of COVID-19 has been on fintech companies. As TechCrunch has reported, fintech companies have seen a distributed set of results since the pandemic closed much of the U.S. economy. However, when reading through investor responses, the true scale of this divergence became clear. The new reality is not merely that some fintech companies are doing a bit better or a bit worse. Instead, it’s that some are sharply down, some are flat, and some are soaring. This is perhaps a good argument for tightening what fintech means, or perhaps dealing with the category on a more tailored basis; fintech may have become too broad a bucket to treat as a group.

And finally, our fourth theme is uncertainty. Our investor group this morning isn’t expecting the economy to snap right back. But when it will return, and in what form, are far from clear. 2020 could be a lost year, said Brendan Dickinson from Canaan. The market recovery will not be swift, said Matt Harris of Bain Capital Ventures. And Charles Birnbaum from Bessemer Venture Partners said that “economic shocks” all “play out quite differently from one another.”

With that collection of notes, let’s begin. Responses have been edited for length and clarity.

Matt Harris, Bain Capital Ventures

What portion of your fintech portfolio companies is thriving? What portion is struggling?

Recently, we’ve started to look at our portfolio along two dimensions. The first dimension is the vulnerability of the company in general, considering things like cash balance and level of burn, fundraising needs and durability of revenue. The second dimension is the impact of COVID-19 on that company. Fortunately, a good portion of our portfolio fell into the positive end of both dimensions, and we were quick to focus our attention on companies with either high vulnerability or high COVID-19 impact.

Businesses that relied more on transactional revenue and exhibited urgent need for capital that couldn’t be solved by cost-cutting measures are the most vulnerable, while businesses centered on consumer investing and spending, or those companies serving highly affected sectors like restaurants and travel tend to be most impacted.

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