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Fintech Roundup: Will financial technology startups dodge the venture slowdown?

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Welcome to my weekly fintech-focused column. I’ll be publishing this every Sunday, so in between posts, be sure to listen to the Equity podcast and hear Alex WilhelmNatasha Mascarenhas and me riff on all things startups! And if you want to have this hit your inbox directly once it officially turns into a newsletter on May 1, sign up here.

On March 25, PitchBook released its 2021 Annual Fintech Report, which found that the fintech industry raised $121.6 billion last year — up 153% year-over-year in terms of global VC deal value. Alex and I will be doing a deep dive on that report next week, but it’s a nice lead-in to what I’m examining today.

There has been much talk as of late of a slowdown in venture funding. But if this past week’s mega-rounds in fintech are any indication, the sector is proving it has the potential to be quite the outlier – at least for now.

In what was not a surprise but is still noteworthy, corporate spend and expense management startup Ramp confirmed that it raised $200 million in equity, secured $550 million in debt and doubled its valuation to $8.1 billion. Not bad for a company that only publicly launched just over two years ago.

I also exclusively covered Jeeves’ $180 million Series C, which quadrupled that company’s valuation to $2.1 billion in half a year’s time. I’ve been writing about Jeeves since it came out of stealth last June with $31 million in equity and it’s been wild watching it grow. It also operates in the corporate spend and expense management space, with more of a global footprint and infrastructure component. In fact, it describes itself as the first “cross country, cross currency” expense management platform. Jeeves has a presence in, and is seeking to expand in, Latin America, Canada and Europe. It’s also eyeing Southeast Asia and potentially Saudi Arabia and Africa.

Another thing that both Ramp and Jeeves have in common — besides skyrocketing valuations — is that both companies are experiencing hyper-growth. Unfortunately, as with most private companies, neither startup will share hard revenue figures. But they do at least provide some metrics. Ramp says its revenue grew “early 10x” in 2021 compared to 2020 while its cardholder base grew 7x and its user base grew 15x. CEO Eric Glyman also tells us that Ramp is powering over $5 billion in annualized payments volume. Considering it makes money off of each transaction, it’s safe to say that Ramp is well, ramping up into impressive revenue territory. Meanwhile, Jeeves says it has seen its revenue grow by 900% since its September raise and even more impressively, that in the first two months of 2022, it brought in more revenue than all of 2021. Meanwhile, the startup has doubled its client base to more than 3,000 companies and reached about $1.3 billion in annualized gross transaction volume (GTV).

Is this market big enough for so many global players? That remains to be seen. But it will be fun watching how the race in the space plays out. As Alex, my friend and Equity podcast co-host, pointed out this week — it seems these companies can’t stop adding features and new products fast enough. For example, Brex announced last week that it provided $10 million in growth capital via venture debt to Zesty.ai, a leading provider of predictive data analytics in the climate risk space. Brex launched a venture debt program last August as part of its effort to be many financial-related things to startups and maturing companies alike. (It had also filed for a bank charter last year but ended up withdrawing its application). Meanwhile, newer players are also entering the scene. I recently wrote about a new company called Glean AI, started by former OnDeck and Better.com CFO Howard Katzenberg, which aims to help businesses save money by using machine learning to analyze things like deal terms, line-item data, redundant offerings and negotiation opportunities. Startups like these are keeping the incumbents (relatively speaking) on their toes.

It’s safe to say that as long as these startups keep adding on to what they can offer to other companies, the rapid pace of funding to support those initiatives will likely also continue — but there’s a caveat — IF they’re showing fast growth as described above.

It’s too early to tell truly if fintech is truly an outlier when it comes to a pullback in global venture funding, or if we’re just seeing deals that were initiated late last year starting to close. The second quarter will give us more insight as to whether fintech is in fact experiencing, or dodging, a slowdown. 

On that note, our amazing fintech/crypto reporter Anita Ramaswamy talked to Lightspeed Venture Partners’ Justin Overdorff on the topic and at least in his view, fintech is not immune to the global slowdown. For context, Overdorff joined Lightspeed in 2021 to help lead the team’s fintech practice. He told Anita:

Image Credits: Self-proclaimed “fintech junkie” Justin Overdorff / Lightspeed Venture Partners website

We’re seeing pretty big market changes. Maybe valuations aren’t coming down yet, but what is changing is that we are certainly seeing round sizes are shrinking. And the number of term sheets that are being offered are shrinking. So when you see, you know, a deal, and a [founder] who normally was going to go out for a $20 million Series A, they’re being told by the market to raise 12 to 15 million, because that’s where the appetite is. And instead of eight term sheets, you’re going to get two. And that’s been happening pretty clearly….Now, with that said, I think that there’s still a lot of appetite [for fintech] across the board.

On the venture side, Overdorff told Anita that from what he’s hearing, VCs “are trying to make their funds last longer” and as a result, “there’s an unknown of where it goes.”

So if Overdorff’s observations are any indications, both startup founders and investors alike are working harder to make their dollars last longer.

Robinhood expands into consumer finance while Apple steps up its fintech game

In other notable news, Robinhood this week announced it was launching a new debit card that allows for spare-change investing. As my very talented colleague Sarah Perez and I discussed, the move was significant in that it shows that Robinhood is taking concrete steps to expand beyond trading and into more consumer finance areas. Sarah’s exact words were: “It puts it in more direct competition with other fintechs such as Chime and even P2P payment companies such as CashApp and PayPal/Venmo, which tie online customer accounts to physical payments cards. The roundup feature can also help to increase customers’ investments passively — like Acorns [with its savings app] and like Venmo is doing with crypto.”

Another example of fintechs trying to do all the things.

Meanwhile, as our friends at Protocol reported, Apple is reportedly buying U.K. open-banking startup Credit Kudos for around $150 million. This follows its early February introduction of a new Tap to Pay feature for iPhone that turns the device into a contactless payment terminal. The tech behemoth is clearly encroaching into fintech territory.

Fundings

As usual, there was no shortage of fundings around the world, although I do have to admit, this list feels shorter than in weeks past. Here’s a sample of just a few:

In other news

Mastercard announced the launch of a new suite of open banking-driven smart payment decisioning tools aimed at eliminating friction and improving success rates in the payments ecosystem. The credit card giant called the move “one of the first significant technology developments to come out of its acquisition of Finicity.”

This article by our own Alex Wilhelm ties into the “is fintech an outlier” narrative from above: Forge’s public debut will pose fresh test to SPAC-led exits. Forge operates a market for private shares — equity in unicorn startups, basically. It went public via a SPAC this week and, gasp, actually had an impressive debut.

Ola said on March 24 that it has reached an agreement to acquire Avail Finance, a financial services startup that serves the blue-collar workforce, as the ride-hailing giant looks to expand its financial services offerings. Manish Singh gives us all the details in this piece.

Sightline, which just a few months ago became Nevada’s first unicorn, announced last week that J.P. Morgan Payments will become the primary processor for its Play+ transactions spanning online casino, mobile sports betting, cashless payments at casinos “and more.” The company told me: “The gaming industry has a notoriously clunky payments ecosystem bogged down by regulations and casinos’ reliance on cash. But recently there have been huge technological advancements, like Sightline helping launch the world’s first casino with a fully cashless infrastructure.”

Stori reports that it expects to reach 1 million active customers this month. Says CEO and co-founder Bin Chen: “We are super excited about reaching this milestone, particularly because most of our customers were rejected by traditional banks in the past. With a Stori card, they are building credit history and gaining financial upward mobility.” I wrote about the startup’s $32.5 million Series B in February of 2021.

BMO Financial Group and 1871 last week issued a national call for applications for their leading fintech industry program for women-led startups, WMNfintech. Applications for the 2022 program will be accepted through April 22, 2022.

In this Q&A with FinLedger, Morty co-founder Nora Apsel discusses the online mortgage marketplace’s journey, overarching goals and plans moving forward. I talked with Nora myself earlier this year and the former engineer is very impressive. Her company raised a $25 million Series B in July 2021 at a $150 million valuation. In February, she told me that the startup’s revenue has grown nearly 14x since 2019 and doubled in the last year alone.

Image Credits: Nora Apsel / Morty

Funds

Speaking of women in fintech, Mila Ferrell, a founding member of Zoom’s product team, last week joined Cervin, becoming the first female partner at the early-stage venture capital firm. In her new role, according to the firm, Ferrell will “define the future of work and shape fintech infrastructure in the next decade and beyond.” 

Image Credits: Mila Ferrell / Cervin

Tishman Speyer, one of the world’s largest real estate developers, announced it secured $100 million in commitments, anchored by the National Pension Service of Korea and Investment Management Corporation of Ontario, for its first proptech venture capital fund. The venture says it seeks to raise up to $150 million in total equity to fund investments “in technology-driven opportunities related to all sectors of real estate.”

Well, that’s it for this week! My newsletter was set to launch today but for logistical reasons, that date has officially been moved to May 1. Thanks for hanging in there and reading this column in the meantime. Have a great Sunday, and week ahead!

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Will There Be War Over Taiwan – The Next Spy Thriller

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I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.

Thrillers

Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.

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Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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Crypto Minsky Moment Now Happening

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During the second half of the twentieth century, economist Hyman Minsky provided a set of guidelines to identify what makes financial markets fragile and economies unstable. It is the midpoint of 2022, and a crypto Minsky moment is underway.

Investment professional Paul McCulley coined the term “Minsky moment.” He did so when describing the dynamics of an earlier financial crisis, the Asian Debt Crisis of 1997.

Minsky actually died in 1995, and so was not alive either to witness for the 1997 Asian currency crisis, or to see his name used in a catchphrase for economic instability. Nevertheless, the term “Minsky moment” has stuck.

Here are three facets of the crypto Minsky moment that is ongoing.

1. At the beginning of 2022, Bitcoin BTC was trading at $47,743, and closed on June 30 at $19,986, down 58%. The market value of Bitcoin comprises the lion’s share of the entire crypto-market; therefore, as the value of Bitcoin goes, so goes the value of the entire crypto asset class.

2. Hedge funds are shorting shares of Tether USDT , a stablecoin that is not so stable and beginning to wobble. Notably, Tether is the major “coin of the realm” for the inter-crypto market, the exchange of one crypto-asset for another. Another stablecoin, TerraUSD, did worse than wobble: it collapsed in May.

3. The crypto-lender Celsius is now fighting for its life.

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In February 2022, Bitcoin was trading in the neighborhood of $44,000. At that time, I warned that crypto-investors needed to pay attention to how the issues Minsky studied applied to cryptocurrency markets. Now that these markets are experiencing a Minsky moment, let me just recapitulate in hindsight what I warned about in foresight.

Minsky’s framework features about a dozen major components. Below are six that just leap out.

1. Fringe finance: This was the term Minsky applied to what Paul McCulley — and now the rest of us — call “shadow banking.” Shadow banks are financial institutions that operate outside the central banking system, and do not have the central bank as their lender of last resort. Crypto-markets are a perfect example of fringe finance, as they operate at the fringe of the global financial system.

2. Speculative and Ponzi finance: Minsky warned about debt finance in which the source of the funds for making interest payments and repaying principal is price appreciation rather than cash. Prudent debt finance, Minsky was very clear to say, is based on hedge finance, where cash generation, not price appreciation, provides the funds for borrowers to fulfill their obligations to lenders.

Minksy warned, very loudly, that when market participants are gripped by euphoria, they shift from hedge finance to speculative and Ponzi finance. The stability issues associated with Tether and TerraUSD UST stem from the riskiness of the portfolios which back the stablecoins they offer, or in the case of TerraUSD offered. The concern is that these portfolios are weighted towards speculative and Ponzi finance. In 2021, a group of entities including Tether reached an $18.5 million settlement with the office of New York States attorney general. The office had accused these market entities of making several public misrepresentations regarding the dollar reserves which back them, especially the Tether stablecoin.

3. Asset pricing bubbles associated with financial innovation: Those wondering what an asset pricing bubble looks like need only look at Bitcoin’s history. Those wondering what financial innovation looks like, need only look at how DeFi has evolved to produce assets like Tether and lending institutions like Celsius.

4. Excessive leverage: Celsius has an assets-to-equity ratio of 19-to-1, much higher than 9-to-1 for the average North American bank in the S&P 1500 Composite index. Assets-to-equity is a standard ratio measuring leverage: the higher the ratio, the higher the leverage.

5. Bank runs, beginning with the commercial paper market: Tether is concerned about a run on its stablecoin, as investors rush to sell their Tether coins en masse. There are rumors that the assets backing Tether include highly risk commercial paper issued by Chinese entities. Tether denies the rumors, but that has not stopped hedge funds who are shorting the Tether to express their concerns that this is the case.

6. Too big to fail: Minsky asserted that during a financial crisis, governments would engage in what he called “contingency socialism” and rescue firms that are too big to fail. At this stage, there appear to be no firms large enough to qualify as too big to fail. TerraUSD certainly did not so qualify.

I am not saying that cryptocurrencies have no fundamental value, and in fact I believe that they do. Economists call the concept “value in use,” which they contrast with “value in exchange.” The problem is that there has been a large gap between crypto value in use and “crypto over-value in exchange.”

Crypto investors might believe that they are making bets on crypto-fundamentals; and indeed they might be doing so, to a small extent. The thing is to a large extent, most of what they are betting on is sentiment. Minksy warned that euphoria will surge during economic expansion, at least until the Fed raises interest rates to address inflation. Then investors’ sense of euphoria collapses, and with it asset prices.

As Yogi Berra once said, and might have said again in connection with Minsky’s perspective and crypto markets: It’s deja vu all over again.

Crypto euphoria is in a state of collapse, which is why crypto markets are experiencing a Minsky moment. Down the line, a crypto phoenix will rise out of the ashes, with less euphoria, similar to the way that the dot-com sector emerged from the dot-com bubble. Until then, investors of all stripes would do well to pay attention to what Minsky taught.

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Stock Market Investors: Don’t Fear Inflation – Embrace It

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The inflationary trend is now self-perpetuating, but that doesn’t mean investors cannot earn excellent returns.

Start with today’s inflation:

The three underlying causes are:

  1. Too much money
  2. Too low interest rates
  3. Inflationary actions/reactions being taken by businesses, other organizations, employees, consumers, investors and Wall Street

Number 3 is the reason an inflationary trend is so hard to stop. It’s a chain effect of “sellers” pushing prices up at least in line with cost increases and “buyers” attempting to hold back the inevitable.

Therefore, don’t expect this Fed to subdue inflation with a “soft” landing. Inflation well above the Fed’s 2% target likely is here to stay and even increase until the Federal Reserve and political leaders accept the need to take drastic, unsavory actions.

Okay, that sounds dire and distressing. So, where does the happy investor part come in?

How investors can win from the inflationary growth periods

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Remember, inflation is rising prices. On the surface, that means company revenues and earnings get an inflationary boost, producing stock price gains for investors.

However, industries and companies get affected differently. Therefore, succeeding in the coming inflationary bull market means adjusting strategies and expectations for the altered environment.

How to adjust strategies and expectations

The conditions to understand and accept are:

Inflation – Expect a rising cycle of higher highs and higher lows as organizations and consumers get into the swing of it

Interest rates – Realize they are still well below the level capital markets would set without Federal Reserve interference. So, consider this a bonus inflationary period where the Fed says it is tightening, but it actually is only reducing the loosening already in place. In other words, there is a long way to go before conditions truly get tight.

Economic growth – Until there is a recession, “real” (inflation-adjusted) GDP growth will remain positive. That means “nominal” (not inflation-adjusted) growth will be increasing at a higher clip as prices rise.

Company growth – Here is where things get interesting. An inflationary environment creates winners and laggards. Therefore, do not expect yesterday’s winners to be tomorrow’s in this new environment. Most likely, a significant shift will occur. And that brings us to…

Company stocks – As the financial, economy and business conditions transform, so, too, will Wall Street. Expect to see new strategies, selections and valuations based on inflation-based rationale. And that means the biggest change ahead is probably…

The shift to actively-managed funds from index funds

The inflationary growth period will push “outperformance” to the top of investors’ wish lists. No longer will matching the whole market’s middle-of-the-road results be satisfactory. As active managers charge ahead, investors will begin jumping aboard.

Skeptical? Don’t be. The combination of new, different and outperformance will be like meat to today’s malnourished investors. It’s a bull market cycle driven by extraordinary conditions that will replace the worry refrain of inflation-interest-and-recession (Oh, my!)

Note: Like many stock market periods, the reasons and results come from a combination of conditions and actions – not one simple explanation. Therefore, be sure to read my previous article, “Exceptionally Good Conditions For Stock Bull Market Launch In July.” In it I list four actively managed funds in which I have invested.

MORE FROM FORBESExceptionally Good Conditions For Stock Bull Market Launch In July

The bottom line: Multiple conditions build inflation trends, so ignore simplistic commentaries

Many (most?) media reports link simple explanations to results. Ignore them. They are written by reporters on a deadline with no time for analysis. Just think back to the gyrating explanations for each daily (or intraday) stock market move. The reason cited is normally a coincidental occurrence. For example, “8.6% inflation!” Or, “Consumer sentiment at a new low!” Or, when a simple reason is lacking, something like this from The Wall Street Journal (June 27) – (Underlining is mine)

“U.S. stocks slumped Tuesday, giving up early gains and falling for a second consecutive day as investors parsed fresh economic figures for clues about the pace of monetary-policy tightening.”

No, the market didn’t fall because investors were parsing for clues about anything. In fact, most short-term market moves are noise, often reversed a day or two later. A better short-term period to watch is a week, because the weekend market closure has day traders sitting on their cash.

Instead, follow economic, business and financial developments without trying to tie each to a stock market move. A beneficial approach for linking everything together is quarterly analysis. Why wait three months? Because each quarter contains all the earnings reports (and management outlooks), followed by the quarter-end reporting and analysis from active managers. Moreover, examining a trend quarter-by-quarter does away with all the in-between gyrations that can produce more uncertainty than understanding.

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