Fintech has been in the doldrums for some time, and with companies like Brex once again cutting staff as they try to control costes It's easy to assume that the market for fintech products is struggling.
That may not actually be the case.
Brex may not be having a good couple of quarters, but there is enough positive news from the fintech world to offset all the negativity around the sector. Bilt Rewards' massive new round is a good example of the other side of the coin: the rewards-focused startup just raised nine figures at a significantly higher unicorn valuation. Elsewhere, BNPL giant Klarna has been busy restructuring its business for more profits and continued growth. So, yes, while there has been a huge lack of publicly traded fintech companies recently, capital is flowing into the sector because venture investors are still cautiously optimistic about it.
So which startups receive the most praise from investors? Today we can answer that question with relative ease thanks to a new consolidation list by the GGV US which highlights 50 fintech startups that venture capitalists find interesting. We also spoke to GGV managing partner Hans Tung about what he sees in the sector today.
We'll delve into the subsectors shortly, but if you want to cut to the chase: Lending, treasury management, and CFO are pieces of the fintech puzzle worth investigating.
The fintech problem (2021)
Before delving into the good news, it is necessary to analyze the situation. Why do fintech seem to be stagnant today? Much of the current anguish probably arises from a growth strong startups that raised too much at very high valuations several years ago. Those massive fundraisings often led to over-employment and stock prices that don't align with current norms.
Brex is a success story. He has managed to build a business that is reportedly closer to $300 million in annual revenue than $200 million, all while remaining private. Is an achievement! However, it is forced to cut staff to expand its future. That is the influx of capital that is part of the fintech equation we often hear about these days. The issue of capital outflows is related, as the inflows were valued according to 2021 standards. Now a valuable company like Brex has a price it cannot defend.
Bottom line: Some fintech winners seem to be struggling today because of what's happened in recent years. But that doesn't mean the future won't be a little better for other fintechs.
GGV makes a good case for fintech. In a presentation, the venture firm argued that with a total gross profit of around $6,5 trillion (2021 data), the financial services market is (still) ripe for disruption. The same chart shows that financial services companies have better gross profits than healthcare ($4,8 trillion) or e-commerce ($1,5 trillion). It is clear from this that financial services companies are making a lot of gross profits, but when it comes to market capitalization, fintech companies are worth a single-digit percentage of the overall financial services sector, it was argued in the presentation.
That data is optimistic, because while it's useful to measure the size of a market based on revenue, doing so can be misleading. What we really care about is how much business those revenues can support, which largely depends on gross margins and therefore gross profits. Tung said looking at gross profits rather than revenue helps normalize corporate profiles, allowing for more useful comparisons, and is a good way to compare fintech's potential with that of other sectors and with different companies within one's own. fintech.
So, with so much existing gross profit to attack and so much market cap to gain, fintechs have a big ceiling above them. So which fintech groups are holding strong today?
The next points to observe
The list of trending categories on the GGV list is as interesting, if not more so, than the names of the shortlisted companies. Some of these companies are pretty obvious candidates, so forgive us if we don't spend too much time discussing the rise of AI in financial services, but some sectors took us by surprise, indicating that there is hope and opportunity for fintechs in this post ZIRP world too.
Two of these categories best reflect the new climate we find ourselves in: loans and treasury/deposits, which refers to “solutions that offer high-interest bank accounts to businesses in a high-interest rate environment, allowing businesses to put to work the idle cash.”
The collapse of Silicon Valley Bank gave companies good reason to think twice about where to keep their cash, but we think higher interest rates are probably giving companies a strong incentive to act sooner rather than later. Some fintechs are stepping forward.
It will be interesting to see if this trend crystallizes in companies focused on this particular space. For example, Zamp Finance (which is not on the Fintech 50 list) makes it easier for companies to invest in U.S. Treasury bills and manage their cash. But such a service could also be a complement to existing offerings, such as banking.
By the way, we are seeing a similar trend at the B2C level, with Robinhood starting to pay quite aggressive returns on uninvested cash. But in B2B, CFOs can put their money to work themselves, so the main benefit to a company may be to make the CFO's office work easier.
This connects to another trend that GGV noted: the rise of the pool of CFOs. GGV seems particularly enamored of this trend and predicts that it is “time for the next generation of SAP, NetSuite and Salesforce of Finance.” The company hopes that AI can be the catalyst that truly brings this trend to life.
That said, companies have made money by empowering CFOs for a long time. Still, the fact is that companies in this particular niche are capital-light businesses that should enjoy the tailwinds of the current environment, much like their counterparts that are building financial infrastructure, another sector that GGV identified as a hot category. .
Geographic centers
Tung noted that 80% of the companies on the list are based in New York or the Bay Area, which surprised us a bit since venture activity in the US has been much more spread across the country in recent years. But Tung explained that the concentration of technical talent and proximity to financial services companies really matter in the fintech sector, which has given rise to two major fintech centers, at least in the United States.
Still, it is expected that, given the reach of finserv, a few more metropolitan areas will emerge as fintech hubs in the coming years. There is certainly enough room for more winners.
