Early Stage Fintech Deals? So Hot Right Now
Hi all, Julie here.
Before we jump in, wanted to highlight our live Q&A tomorrow, Monday August 24th, at 7PM ET/4PM PT. I’ll be chatting with QED’s Frank Rotman and Slow Ventures’ Jill Carlson and Will Quist about the effect of inflation on the economy over the next few months. We only have 20 spots left—if you want to sign up, fill out the form here!
Usually the end of summer is one of my favorite times of the year. Fall is right around the corner, it’s fairly quiet since people are taking last minute vacations, and it’s prime time for my little rooftop garden in Brooklyn. I’m not gonna lie though, 2020 had other plans. It’s pretty hard to enjoy much of anything these days. I was doing well with COVID for the first couple of months (I’m an introvert and homebody so not going out and traveling a ton is more than fine by me), but the last few months have been challenging.
My relationship has taken a hit. My mental health has taken a hit. I’ve been the sole income for my household since this all started. And like many of you, I could keep venting for a while on the gripes I have with 2020. Every day I’m going through the motions, praying for this all to be over. Another groundhog day as some people have put it lately.
I hate admitting all of this, but unfortunately I think several of us are in the same boat. Which is actually a bit of a relief, isn’t it? At least if I have to go through all of this, I have friends and family going through it as well and we can all be here for each other.
Anyways, I’ll circle back to one of the things I mentioned above. VC friends, especially on the early stage side, I’m pretty certain you don’t feel like it’s slowing down much at the tail end of summer this year, right? There are some crazy rounds going on right now! Not only closing in record time, but a bunch of Series As and Bs getting preempted as well. I’ll use this tweet as a bouncing off point:
https://twitter.com/fintechjunkie/status/1296146495436201984?s=21
Naturally after seeing this, a bunch of us were trying to figure out which company Frank was talking about. We figured that with a few facts like: Series A to Series B, May to August, and 3x valuation…we’d be able to figure it out. Crazy thing is, it’s actually essentially impossible to come up with just one name since you’ll get a couple of different answers that fit the description depending on who you ask.
Now, we’ve had FOMO around in venture investing for a few years now and it’s more noticeable at certain times than others. But this seems to be picking up steam while we all thought funding would dry up. Back in March when things started shutting down, I remember asking folks what they thought would happen. Everyone was telling me that companies that had just raised were super lucky since they might not be able to raise again for a few months. That they weren’t sure they’d be able to pull the trigger on investing without meeting the founder and team face to face. That portfolio companies should be extra strategic about spending so funds didn’t dry up before the venture spigot opened up again. Well guess what? That spigot is WIDE open my friends.
There are a few obvious questions that come out of this. The first is how long does this last. This will vary by sector and which themes the companies can bucket themselves into, but as long as founders can convince series a and b stage investors that growth is going to continue and execution is going to be near perfect, I don’t see this ending anytime soon. Certain VCs will continue to give credit for what hasn’t happened yet as long as other ones are too. Otherwise, in their minds, they risk missing out (back to FOMO). It’s a nice little domino effect, where you have no idea when the final domino drops or what that might trigger.
The second question is what longer term impacts this might have. Will valuations just consistently be months or even a year or two ahead of themselves? Or do valuations go flat or at least level out in future rounds, as they end up being more grounded in reality? (Honestly what even is reality anymore though.) I think this is something that will impact the Series A and B investors most, since seed stage investors are still getting in at fairly reasonable prices (though even that is arguable in some cases). Although, even if the Series A and B investors are paying quite the premium in many cases, venture capital is also about finding those one or two bets that are going to see massive returns. So in that sense, getting in at a $20M valuation vs $8M shouldn’t matter much to you in the long term since you’re betting the valuation is going to be above $1B some day.
https://twitter.com/bdickins/status/1296149318320128000?s=20
While basically losing out on 12-24 months of a return would be a bummer for someone looking to hold on to shares of Apple or Target for a couple of years, it doesn’t matter much at all for VCs since they’re going to be holding onto it for upwards of 10 years in many cases. The longer time horizon allows for more valuation flexibility at the early stage, in theory. For instance, do you think Index Ventures loses sleep over the valuation they agreed to for leading Robinhood’s Series A?
Who’s going to get hurt the most? Perhaps employees. If the valuation is outpacing reality, it’s going to make it that much harder for even early stage employees to make much on their shares.
To close off, I wanted to get Ian’s thoughts on this topic. He noted, “what interests me the most is that the spike in valuation is in companies that are just getting started. The venture space seems increasingly interested in the potential of fintech and the pipes and plumbing that can enable change. It’s such a stark difference from a few years ago, when no one wanted to back infrastructure fintech companies.”