October 2024 newsletter: A look back at the 16th Annual QED CEO Summit

Welcome to Q4: Takeaways from the 2024 QED CEO Summit

“Surefootedness,” “violence inherent in the system” and “the sun is coming out.” These are just a few of the themes that resonated with me most during our 16th annual CEO Summit in Washington, D.C.

We welcomed almost 80 founders from around the world who’ve weathered an incredible storm over the past few years but have emerged on the other side ready to turn to profitable growth with a focus on prudence and intentionality. The past three years have been exhausting. Fintech valuations on a revenue multiple basis have fallen to four-fifths of what they were. The number of fintech startups shutting down increased to 254 in Q1 2024, a 58 percent increase from the same quarter in 2023. Fintech was hit the hardestamong healthcare, consumer and SaaS startup companies with layoffs.

It has been challenging to run businesses through such disruption, but the tide seems to be turning. Global fintech investing is beginning to pick up, the percentage of down rounds is stabilising and public fintech valuations are bouncing back after a difficult period of tumult where all were seemingly tarred with the same brush. Fintechs with sound unit economics and product-market fit are poised to grow nicely.

To quote one of my favourite films, Monty Python and the Holy Grail, we have seen the violence inherent in the system.

Navigating the volatility can be helped by finding the right balance and by bringing the right people with you on your journey. Surefooted growth is about moving forward without slipping or stumbling, especially over uneven or rough terrain. We consider ourselves consiglieres to our founders – business sherpas who can lighten the load, navigate unfamiliar paths and offer the kind of wisdom you can only get from years of pattern recognition and learning from your missteps.

Sigmund Freud once said, "One day, in retrospect, the years of struggle will strike you as the most beautiful." I don’t agree with many of his theories, but this one in particular has always struck a chord with me.

For many of our founders, the toughest experience of the past three years has been husbanding cash and resources very prudently, scaling back and reducing headcount in an attempt to live to fight another day. Founders are motivated by solving big problems. Through cutting costs and reducing science experiments over the past three years, this has become harder. We certainly don’t take joy in telling founders to curb their ambition, but for many of them, it was the only path forward. And, thankfully, only temporary.

Now is the time to focus on unit economics and get the basics right. Once the new foundation is in place, have the courage to do what’s right and to take risks in a careful and thoughtful way. Never stop testing and learning.

Most importantly, I believe you can bend the arc of probabilities of success by having great investors and people around you. As you shift your focus back to surefooted growth, don’t lose sight of the importance of your community and those who can kink the curve on outcomes.

You can read more about my CEO Summit takeaways here and view my opening deck here.

My thanks.

- Nigel Morris, Managing Partner

2024 CEO Summit

2024 startup founder mentality survey

This year, QED launched its first-ever founder survey, which surveyed 400 U.S. startup founders and digs into the startup founder mentality.In today's uncertain global landscape, startup founders face a challenging environment. We set out to uncover what exactly those challenges are and how are founders persevering through them.In the survey, the majority of founders (65%) indicated that they’re more optimistic about their ability to raise capital today than they were 12 months ago and 76% indicated that they’re planning a fundraise in the next 12 months.Of the 76.5% of companies who have investors, 45.3% have been advised by investors that a down round in the next 12 months may be necessary.Over a quarter (29.5%) of founders stated that they last raised a funding round in 2020 or before. This is followed by 7.8% in 2021,16.5% in 2022, the majority in 2023 (32%) and 14.3% in 2024.

“It’s unlikely that founders and VCs will see a year like 2020 anytime soon. It was a record year for VC investments in the U.S., and founders getting back into fundraising mode must internalise that, especially in the fintech space,” shared Nigel Morris, co-founder and Managing Partner of QED Investors. “While the environment is improving in 2024, VCs are keeping the bar high while determining which opportunities are worth pursuing.”

Survey data shows that 55.3% of founders have 12 months or fewer of runway and are in need of venture funding in order to survive.  

Of the 76.5% of companies who have investors, 45.3% have been advised by investors that a down round in the next 12 months may be necessary. Regardless to the advice of investors, below is a breakdown of how much founders are planning to raise in the next 12 months.

"Founders preparing to raise capital should internalize that today's bar and the bar from 2+ years ago aren't the same. Investors expect 2X, 3X and sometimes even 5X the traction for a startup to grow into its valuation if the last money was raised during peak madness," shared Frank Rotman, Co-founder and Chief Investment Officer at QED Investors. "For some startups the answer is an internal bridge round to give them time to grow into their last valuation. But for many startups the answer is a clean down round to reset everyone's expectations and set the company up for future capital raises."

As startup founders prepare to get back into the funding mentality and meet with current and potential investors, there are a few factors keeping them motivated, focused and optimistic but also could potentially set them back.

‍Read the full blog and results on our website.

Up for discussion
What the QED Investors team is talking about

A note from our Head of Growth

‍A large discussion topic with our companies this year has been the balance between growth and profitability. I was fortunate enough to be joined by two of our founders, Yinon (Albert) and Fabio (Solfacil), on stage at our CEO Summit to hear the stories of their journey to profitability and maintaining industry-leading growth in their respective sectors. It was great to hear them give real actionable advice and share frameworks for how to look at re-deploying growth dollars. It was also great to look at our own portfolio to see the trends be very favorable for growth resuming while profitable companies increase in the portfolio.Market data also indicates the preference towards companies that are driving growth while maintaining profitability and punishing those that are having trouble on even one of those dimensions.

- Chuckie Reddy, Partner, Head of Growth

Landing the plane: A necessary choice for many startups

How many founders does it take to land a plane? None, they'll just pivot to a helicopter ride-sharing service.

Joking aside, there’s nothing more fun than being part of an incredibly successful startup. The relentless ambition of passionate teams doing everything they can to ship code and scale is energizing.

And for most startups, their goal is to join the ranks of “real” companies by growing large enough to eventually execute a well-received Initial Public Offering. Having their own ticker symbol etched in the annals of Wall Street drives many founders, and as importantly, IPOs are a critical source of investment returns for the VCs that fuel the startup ecosystem. Without IPOs, VC math doesn’t math!

However, reality is sobering. Only a few percent of all startups backed by Tier 1 VCs achieve the scale required for a successful public offering, and the numbers are much, much worse for the broader startup ecosystem. So, what happens when it’s obvious that a startup isn’t on a trajectory to capture hundreds of millions of dollars of high margin revenue which would allow them to go public?

The unfortunate truth is that once it’s clear that a startup is going to struggle to achieve escape velocity, they need to work with their investors to “Land The Plane.” This is typically very tricky because navigating a safe and controlled descent towards a positive outcome isn’t straightforward nor guaranteed. It often involves finding a strategic buyer that recognizes the value in the startup's financial performance, technology, customer base or talent pool. It often devolves into very heated debates about how to distribute a pool of money or stock that’s less than everyone is happy with. And it often requires a founder to internalize what they’ve built and what their options are with crystal clarity rather than through their normal “eternally optimistic” lens.

And given the “Grand Reset” that’s happening within the startup ecosystem, everyone is embracing the reality that the ZIRP environment funded too many startups that will never achieve escape velocity. The implication is that there are a lot of planes in the air right now that need to be guided to safe landings or they’ll most likely run out of fuel and crash.

Read the full post on X (formerly Twitter).

- Frank Rotman, Co-founder and Chief Investment Officer

How can fintech crack the code for small business lending

Worldwide, micro, small and medium enterprises (MSMEs) are an anchor of the economy. In the U.S., 33.2 million MSMEs contribute 45 percent of GDP. China has over 140 million MSMEs, contributing 60 percent of GDP.

India’s 47 million registered MSMEs, primarily micro enterprises, currently employ 204 million people and contribute approximately 30 percent to GDP and 46 percent to total exports. Clearly, there is a long way to go for India to reach where China and the U.S. are.

Credit is the life force of these small businesses. Every activity of the business needs it. It's used for working capital, machinery and new products. The gap in India’s MSMEs financing is estimated to be $530 billion. Globally, this number is in trillions.

Credit to small businesses in India is at 14 percent compared with 50 percent in the U.S. and 37 percent in China. Small business lending is a compelling opportunity for most growing economies and so it is for India. There have been a lot of efforts to fill this gap, through both traditional and new-age ways. The government introduced TReDs (Trade Receivables electronic Discounting System), credit guarantee schemes and aggregation platforms. India is building the networks to connect lenders, platforms, borrowers and many others. And yet, there have been few large success stories. Why? And what can fintechs and government/regulators do to create more success stories?

Why is lending to small businesses difficult?

MSMEs are not always the most lucrative customers for banks. They take smaller loans and often operate on tight budgets. They have high turnover – as many as 30 percent shut shop within a few years of starting.

MSMEs are not the easiest to find and often function unnoticed. Underwriting is difficult because they don’t have much collateral. Their business cycle depends on collections, not neat monthly inflows.

Finally, banks find it easier to serve corporates, who have deeper pockets, or retail borrowers, who are numerous and have a good record of repayments.

Fintechs have tried technology-first ways to solve MSME challenges, but with limited success. Customer acquisition cost is high because MSMEs are not easy to find digitally. Fraud issues get magnified in digital processes. Technology helps with underwriting and servicing, but gains do not offset other challenges.

Read the full blog on VC Circle.

- Sandeep Patil, Partner, Head of Asia

Traveling around the world!
Where the QED Investors team traveled in Q3

SuperReturn Asia

‍Sandeep Patil and QED's Head of Investor Relations, Katherine Tercek, attended SuperReturn Asia. They had the privilege of networking and collaborating with current and prospective limited partners from around the world in the vibrant setting of Singapore.

Finnosummit

‍LatAm principal Ana Cristina Gadala-Maria led the panel 'From One Family To Another: Leadership and Parenthood in Fintech' at this year's Finnosummit in Mexico City.

São Paulo Tech Week

São Paulo-based principal Camila Vieira Fernandes joined forces with the team at Cooley, Lightrock and Valor Capital Group to host an evening of drinks and conversation with founders and friends in the ecosystem during São Paulo Tech Week.

Global Fintech Fest 2024

‍At the Global Fintech Fest, Sandeep Patil, took the stage and connected with reporters to discuss a number of topics. He dove into insights and strategies for scaling fintech startups, our investment thesis in embedded finance and why he believes India’s consumer story is just beginning to unfold, signaling immense potential for growth.

World Mental Health Day

World Mental Health Day: Things to Consider When Selecting a Therapist

October 10th was World Mental Health Day, a day dedicated to raising awareness of mental health issues around the world and mobilizing efforts in support of mental health. QED's VP of Administration and Talent, Maryalice Viljoen, put together a guide and resource list for things to consider when selecting a therapist or looking for mental health resources.

A great step in supporting mental health is finding a therapist. However, the decision to seek therapy is important and often isn’t decided in a day. In getting to the decision to take action, people may have struggled with stigma, denial, and perhaps a certain amount of fear. In addition, the experience of therapy is very personal and subjective. What works for one person might not work for another. Finding someone who you “click” with can take time and experimentation. Personal comfort, trust, and chemistry between the client and therapist vary from individual to individual, making the selection process nuanced.

There are many therapeutic approaches and specializations, and it can be overwhelming to navigate them. Without prior knowledge of different methods (e.g., CBT vs. EMDR), it may be difficult to know what kind of therapist or approach will work best for you. Some therapists specialize in treating specific issues, while others offer more generalized care. Identifying what you need can be a challenge, especially if you’re unsure what’s driving your symptoms.

The relationship between the therapist and the client, known as the therapeutic alliance, is one of the strongest predictors of successful therapy. A strong connection fosters trust, open communication, and a sense of safety, all of which are essential for personal growth and healing.

Read the full article and find mental health resources here.

- Maryalice Viljoen, VP of Administration and Talent

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QED news

Yusuf Özdalga, Partner, Head of UK & Europe spoke with Sifted about the state of fintech in Turkey. He discussed meeting with the who’s who of Turkish fintech, including the founders of investment app Midas and banking startup Colendi, which raised funds at a $700 million valuation in May.
 

Sandeep Patil sheds light on cracking the code of cross-border fintech investments, regulation and market dynamics in his appearance on The Full Ratchet Podcast. In this podcast, Sandeep discusses investment strategies in Asia and Australia, with a focus on fintech companies, challenges of Starting a Successful tech company in India, market differences and data privacy concerns, fintech trends, embedded finance, digital infrastructure, open banking and more.
 

After the Federal Reserve cut interest rates, Chuckie Reddy spoke with TechCrunch on the impact lower rates are going to have on startups. Chuckie shares, “Counterintuitive as it may seem, lower rates are also good for fintechs that offer loans. Car loan refinancing company Caribou, for instance, falls into this bucket. Caribou offers one- to two-year loans.”
 

Builders & Buyers, which is dedicated to showcasing leading figures in the fintech industry and their contributions, spoke with partner Laura Bock to discuss why, as a firm, QED remains big believers in embedded finance and are excited about new advances in areas like payments infrastructure, wealth management and next-gen bank tech.
 

Frank Rotman joined LinkedIn for VC Wednesdays to discuss his journey from NASA to fintech, why he's bullish on cross-border payments, the rise of embedded fintech and the must-have use case for stablecoins.
 

Nigel Morris spoke with Crunchbase to discuss the landscape for global funding in financial services. During his conversation, Nigel acknowledged that “it has been hard to be optimistic the past three years, as companies missed revenue targets and focused on cost-cutting to get in shape.” However, he sees six to eight fintech companies with the capability to go public should they decide to.
 

Frank Rotman joined the Smart Humans podcast. During the podcast, Frank discussed why single-family real estate is a resilient and inflation-resistant investment, the banking industry undergoing a wave of innovation, new ways of moving, storing, and investing money, and entrepreneurial culture growing globally.
 

Select portfolio company news

Hello Alice

Hello Alice’s Elizabeth Gore has teamed up with Inc.com to publish a six-part founder series sharing her advice, insights and learnings as a founder. Four of the six have already been published. In part one, she shares her advice on how to survive as a CEO when bad things happen. Likely things to happen include: 1) You will have an unhinged employee, 2) You will feel deep isolation, 3) You will get sued, 4) You will have an unruly investor or financier, 5) You or a loved one will get sick.

ApplePie Capital, Codoxo, Kin Insurance, Payabli, Roofstock and Wildfire Systems, Inc.

Congratulations to QED portfolio companies for being named to the Inc. 5000 list, a ranking of the U.S. companies building the future. The businesses are ranked according to percentage revenue growth from 2020 through 2023.

13 portfolio companies named to CNBC's annual list of the world's top fintechs

Wayflyer, ClearScore, Credit Karma, Current, SoFi, Klarna and Remitly all return from the 2023 edition of the list. They're joined by Albert, AvidXchange, Inc., Flywire, Proper AI, Nubank and Zopa Bank.

They span the spectrum of fintech from alternative finance and business process solutions to financial planning, neobanking and payments.

Amount

Portfolio company Amount, which is making banking simpler, safer and more convenient for today’s digital-first customer, announced it raised $30 million in equity funding.

Currently, Amount supports consumer and small business banking needs by streamlining deposit account openings and loan origination processes. Building on its success working with enterprise banks, Amount will use this fresh funding to enhance its artificial intelligence and machine learning capabilities to accelerate its progress within the credit union industry.

ECL

Efficient Capital Labs announced an $11 million Series A fundraise co-led by QED Investors and 645 Ventures to continue providing non-dilutive capital to B2B SaaS companies operating in the South Asia-U.S. corridor.

With the funding, ECL will expand into Singapore and other Southeast Asia markets, building on the successful traction it’s seen in the U.S. and India.

EasyKnock

EasyKnock, the first-to-market home equity solutions platform company in the U.S., won 'Alternative Financing Platform of the Year' from the PropTech Breakthrough Awards. PropTech Breakthrough is part of the Tech Breakthrough organization, the leading independent market intelligence organization that evaluates and recognizes standout real estate technologies around the globe. The award honors excellence and celebrates the creativity, hard work, and success of companies and technologies in the real estate technology space.

Cobre

Real-time payments startup, Cobre, raised a $35 million Series B to to accelerate expansion across its key markets and continue enabling companies to centralize all their money movement and banking partners, accelerating domestic and cross-border payments while accessing all their bank accounts in real-time for unified management of their financial operations.

Finkargo

Latin American-based fintech, Finkargo, announced a $20 million equity financing to expand and focus on strengthening its portfolio of complementary services, such as freight financing, supplier verifications, merchandise inspections and transportation insurance.

Finkargo’s platform offers small and medium-sized importers an automated credit scoring model, access to the capital required, and seamless logistics and financing processes to boost sales and control logistics.

XP Health

In September, XP Health raised $32 million for its digital-first, AI-driven platform that offers employees eye exams and eyewear benefits at significantly lower costs than existing vision insurance plans.

XP Health members who buy eyeglasses virtually can save as much as 69 percent off the retail price.

Plumery

Plumery raised $3.3 million to expand its digital banking experience platform, which focuses on delivering customer-centric banking solutions. Plumery will continue to expand sales and marketing efforts, strengthen global partner management, and enhance product capabilities in the small and medium enterprise and consumer segments.

Airship

Airship came out of stealth and raised a $4 million pre-seed round. Airship was built to simplify the process of selling HVAC systems. As a point-of-sale solution for HVAC, plumbing and electrical companies, Airship plugs into existing field service management systems. The software helps to create lead scores and expected values, incorporates OEM, state, utility and retailer rebates, facilitates data collection within the home, and provides a comprehensive manager dashboard to users.

Aghanim

Aghanim, a pioneering mobile gaming fintech company, announced the public launch of its platform along with a world-class advisory board. Aghanim is the only fully self-managed end-to-end solution in the mobile games industry that offers web-based game hub creation and management, integrated e-commerce, live ops automation, community engagement and a payments platform as a suite of interoperable tools.