June 2023 Newsletter: Fintech ready to thrive

Are the mistral winds of 2022 abating? There are certainly green shoots emerging that suggest fintech has not only survived the buffeting of the storm, but is indeed ready to thrive once again.

QED has several perches from which we draw this continued optimism. There was our recent fundraise – $925 million between our eighth early stage fund and second early growth-stage fund – as well as our keynote presentation at the Fintech Nexus conference in New York City where we shared our co-authoured research report with BCG outlining the vast number of opportunities that remain in fintech globally.

We also hosted jam-packed networking events in New York and Los Angeles, with upcoming meetups in Amsterdam and Singapore already at capacity providing one more anecdotal sign that the fintech community is ready to bounce back. That echoes what we are seeing in the public markets with several of our companies that IPO’d in 2021 – Nubank has seen its stock price double since the start of the year, for example, while Remitly has witnessed an increase of 76 percent over the past five months.

That said, we're not out of the woods just yet, and we're continuing to work hard with our portfolio companies to extend runway and focus on unit economics.

A rising fintech tide lifts all ships and there is a strong sentiment within QED that turbulent economic times afford founders the best chance to build a seminal company. The same can be true of venture capital firms that have a well-defined raison d’etre.

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QED has always benefitted from our partnership with an outstanding group of investors, and we were really pleased to announce the formal close of QED Fund VIII and Growth II in late May. We are now equally pleased to get back to the business of partnering with generational fintech companies through this tumult.

The overwhelming sentiment of this fundraise is one of gratitude; for our world-class LPs who continue to provide support and constructive guidance; for our team – I truly believe the best in fintech – and for many others who not only shepherded us through this fundraise, but who have built and cultivated connections over the past 16 years. And I'm personally grateful to be on this wonderful journey with some many terrifically talented founders who are determined to change our world for the better.

I'm also humbled by the opportunity these new funds will afford our firm; humbled that so many people share our vision of the impact fintech can have, and humbled that QED continues to be a VC fintech fund of preference amidst a noisy macro backdrop.

QED has thoughtfully planned for our next chapter and, in many ways, Fund VIII and Growth II mark the commencement of this journey. As of today, QED has invested in more than 200 companies across 18 different countries worldwide. Twenty-eight of those businesses, many of which we invested at the Series A or earlier, have achieved unicorn status, and I believe that our collective cohort of portfolio companies will positively impact the lives of more than one billion people globally.

The period of fundraising may be behind us, but the work ahead – the next chapter of QED, in many ways – is just beginning. Now it's time to build from the foundation we have so intentionally set in recent years, leverage the unique advantages of QED and be deliberate and disciplined about building generational companies.

- Nigel Morris, Managing Partner

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Market update

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As predicted, the debt limit drama did take almost all month to resolve and resolution did result in a relief rally. The strong jobs report did adjust expectations for the Fed’s next move; an outright pause now looks less likely. But, we also have maintained, that the market is pricing in more and earlier rate cuts than we expect. Prepare for some market repricing as expectations adjust over the summer.

The outperformance of top tech names and AI optimism has been the story of the month. There is still so much sorting out to do on how to forecast impacts. It is much-needed relief to an abyss of positive developments.  

This topic is much more real than the crypto narrative that captivated technology for so long. The public market valuation work is just beginning, but the potential for very broad-reaching impact is clear and has moved to priority No. 1 with most equity investors.

In the private company market, there has been some pickup in deal activity (and not just bridge rounds). There has also been a realization that further optimization of current cash is prudent as the likelihood of a second half 2023 thaw fades away. It has been a little surprising how reluctant founders have been to pursue thoughtful M&A — we continue to advise that difficult market conditions may persist for many more quarters, and those who merge now will have better outcomes.

- Chuckie Reddy, Partner, Head of Growth

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Cautious optimism around generative AI

Like everyone else in the world QED’s conversations have been awash in generative AI discourse. Unlike most of our peers, we’re resisting jumping to conclusions.  

It’s been obvious to us that machine learning and AI would be a massive force in our economy – the use cases were too many, the potential pathways for value were too obvious and our portfolio companies were constantly finding ways to use machine learning widgets to increase value – whether that was matching of business addresses in anti-money laundering (a use case from 2018) to data extraction and small business lending fraud (Ocrolus) or transaction labeling at scale (Ntropy).

Moreover, ChatGPT, Bard and its competitors are breakthroughs for user experience and accessibility. What’s less obvious to us is that this particular moment with generative AI and large language models is a transformative moment for financial services.

Here’s how we’re thinking about navigating this territory:

1.    Generative AI will be a massive accelerant for coding, marketing and other content. We are telling all of our companies to begin experimenting.  

2.    Particularly for customer service, we think that opportunities are enormous but financial services requires accuracy and compliance – something LLMs are demonstrably bad at.

One of our portfolio companies, Coru, has already built and is starting to scale a real-time coaching service that has solved the problem of using Chat GPT, while controlling its output for financial advice, customer service, sales or any other type of assistance the user may need.

3.    We still don’t know how quickly (or if) the generalist AI-industry leaders will be able to conquer domain-specific use cases. In this context, the companies who may benefit most from generative AI may also be those who are most at risk.  

4.    We’re not allocating specific investment dollars to an AI mandate, at the margin we’re skeptical that the new wave of AI-hype companies will be backable. Instead we’re more interested in how companies are using this new tool – to accelerate or to unlock previously hard problems.  

5.    More generally, we are confident that generative AI will upset the value chain, so we’re even more focused on moats that we think will persist – access to scarce resources, network effects, deep integrations and sticky contracts.

As always, our core focus is to keep learning. To that end, we’ve written a very simple survey on the strategic questions for generative AI in fintech. We’d love your input!

- Amias Gerety, Partner; and Adams Conrad, Principal

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QED’s first Fontes Summit

A few weeks ago we hosted our first Fontes Summit in Miami – a one-day event for founders to connect, learn and take a step back from their day-to-day.

With 18 founders in attendance, in addition to guest speakers and QED team members, we shared an intimate environment with open conversations and meaningful connections.

Fontes, our seed-stage fund for Latin America, is unique in that we invest purely in early stage companies, from idea phase to finding product-market fit. More often than not, companies in this stage have shared challenges and grapple with similar questions, which is why we tailored the content of the Summit into practical sessions with tangible takeaways.

With experts across fields, we covered topics ranging from B2B sales and fundraising to product strategy. Invited speakers included Shu Nyatta (Bicycle, ex-Softbank), Hugh Strange (ex-product at Nubank), Jimmy Stephens (B2B sales at Brex), and Jen Terrell (B2B sales at Rain), among others. We also heard QED Managing Partner from Nigel Morris, and Betterfly CEO Eduardo Della Maggiora, who spoke about building an intentional culture and the challenges of leadership in a fireside chat.

A few takeaways from the day:

On fundraising — founders often make the mistake of identifying themselves with their valuation. Remember that you are building a company, that valuation is largely outside of your control and that it does not define you or your team.

On B2B sales — Recognize you will need different profiles of sales leaders as your company grows. The first person you hire will unlikely be the one that scales the business. B2B sales is a science, not an art (although in Mexico, it may very well be an art!)

On product — When building in fintech, remember that “fin” and “tech” have different profiles - getting them to work together well is hard but it is where the magic happens.

On culture — Strive for “perfect effort.” You can’t control the outcome but you can control your effort. Be grateful and stay humble.
Overall, we left the Summit feeling inspired by the quality, energy and commitment of the founders in the room — a good reminder of the reason we launched Fontes to begin with.

We truly believe that the future of LatAm lies in the hands of great entrepreneurs, and we are determined to do what we can to help them succeed. Since launching in 2021, Fontes has now invested in 18 companies. Fontes was created to invest in founders from the earliest part of their journeys, focused on fintech and “fintech+” (companies whose core business may not be fintech now, but can be at some point in the future.)

Current portfolio companies are based in Brazil, Mexico, Colombia and Argentina, although we can invest region-wide. We tend to participate rather than lead rounds, and offer platform-based support that leverages our network to provide founders with the right resources.

Fontes LPs are operators — experienced founders and executives from successful companies in Latin America that also serve as a resource for the next generation. This strategy has allowed us to actively collaborate with other seed funds in the region, create a community of fintech entrepreneurs and set each company up for success in future rounds.

We are extremely excited about the potential of the region, and look forward to continuing to invest through Fontes in the coming years.

Learn more about Fontes here, and check out our portfolio companies here.

- Ana Cristina Gadala-Maria, Head of Fontes

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QED news

• QED Investors announced that it has closed two new funds with combined capital commitments of $925 million.

The new capital commitments comprise Fund VIII, an oversubscribed $650 million early stage fund, and Growth II, a $275 million early growth-stage fund. These funds will allow QED to continue to invest in disruptive fintech companies in the U.S., the U.K. and Europe, Latin America, India and Southeast Asia and Africa.

“We are excited, fortunate and privileged to be a steward of our investors’ capital,” said QED Investors Managing Partner Nigel Morris. “We don’t take that responsibility lightly, especially in this difficult market."

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• In a special five-part series, Managing Partner Nigel Morris moderated a series of discussions about the future of fintech around the world.

Chief Investment Officer Frank Rotman shared why is more bullish about the next 10 years than about the previous 10, and QED's Head of Europe Yusuf Ozdalga explained why embedded finance, back-office automation and international payments are key areas of focus for the London-based team.

Head of LatAm Mike Packer discusses what we can learn from the global benchmark companies coming out of the region like Nubank, while Head of Africa Gbenga Ajayi opines that the similarities between fintech in LatAm and Africa affords countries like Egypt, Nigeria and South Africa a potential blueprint for success.

The mini-series wraps up with Head of Asia Sandeep Patil explaining how Asia's combination of technology talent and financial services talent has set the foundation for transformational fintech growth in the coming years.

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• Chief Investment Officer Frank Rotman told Axios that special things can happen with new S-curves of technology, even when they're vertical agnostic.

In this Q&A, Frank discusses discusses potential growth within embedded fintech, international money movement and treasury management services, and why the next wave of successful fintechs could come from overseas.

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• QED Partner and Head of Asia Sandeep Patil said India's forward-looking regulators will hopefully have a positive long-term impact on the region's fintech ecosystem.

“A lot of VCs, especially in this kind of technology sector, think of regulation as a bad thing," Sandeep told YourStory. "But as former operators, we don't think that way. The moment you are a regulated entity and have RBI’s badge of honour, it means someone has looked at your operations closely and ensured that everything is sound and safe.”

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• QED Partner Amias Gerety said that while generative AI may one day be seen as transformational as the move from desktop to mobile or the shift from server centers to cloud-based systems, it's far too early to definitively declare it a solve-all elixir.

He likened it to drinking a magic potion, the consequences of which were still unknown.

“When I’m looking at a business plan,” he said, “I’m always looking for the startups that can credibly say that ‘because of an insight, experience or expertise I have, what’s hard for others is going to be easy for me.’”

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• QED Vice-President of Administration & Talent Maryalice Viljoen tackled the topic of sleep deprivation and the importance of rest in her monthly Wellness Watch article on LinkedIn.

Maryalice shares tips about dealing with jetlag and breathing exercises as well as the benefits from creating – and sticking to – routines.

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• The executive search firm in our orbit, LF Search, has continued to add value to both QED portfolio companies and non-portcos alike with nearly two dozen successful searches completed so far this year.

Several highlights include placing the chief risk officer at Current, the head of credit at Mudflap, the head of people at Tribal and the chief risk officer at Oatfi. Additionally, LF is actively working on several CFO searches with QED portfolio companies. If you, or a member of your team, is interested in connecting with LF, please feel free to send them an email.

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Select portfolio company news

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Shakepay

In a newsletter sent out to its subscribers last week, Shakepay announced it has officially been registered as a “restricted dealer” in all Canadian provinces, territories and jurisdictions.

Eventually, every crypto platform operating in Canada that is subject to securities legislation will have to register, the newsletter notes. "Customer protection is at the core of this registration for Shakepay as a responsible leader in Canadian crypto," it says. "The regulatory scrutiny is directed at us, not our customers."

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Capchase

On its third anniversary, Capchase announced Capchase Pay, a B2B BNPL solution designed specifically for SaaS businesses who sell—or want to sell—through long-term, annual contracts.

Capchase Pay is a sales-enablement tool that can be used alongside revenue-based financing in a SaaS company’s growth stack.

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FERMÀT

FERMÀT welcomed more than 1,200 people to a live web conference discussing AI in commerce.

Industry experts shared their insights and real-life experiences in customer support, performance creative, analytics, copywriting and image generation. You can watch the full replay on YouTube here.

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EasyKnock

EasyKnock announced its acquisition of Ribbon, a pioneer of powerbuying and cash offer solutions. The transaction is a major milestone for the real estate industry, bringing together homebuying, homeselling and agent solutions into one unified and simplified experience.

On bringing the teams together, EasyKnock is accelerating the development of its marketplace planned to launch later this year.

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Atomic, Kin and Mudflap

Congratulations to a trio of QED portfolio companies for being named to the annual Forbes 'Fintech 50' list for the first time. Forbes' team of reporters and editors evaluated "hundreds of companies, analyzing everything from product originality and customer and revenue growth to leadership team diversity," according to the publication.

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Ntropy

A groundbreaking blog post from Ntropy examines the future of transaction enrichment, looking at how generative AI can help companies understand their customers from their financial data. How does ChatGPT4 stack up against humans? What is the right balance of accuracy versus speed? Check out the post for answers to this and much more.

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