This month, in a conversation I led with strategic investors, Jade Mandel at Goldman Sachs and Ant Barker at Aviva Ventures, we kept returning to the word “exuberant,” and for good reason. It was a fitting description for the past few years in fintech venture and growth investing. However, we now find ourselves exiting this period of exuberance, and the past eighteen months have prompted a recalibration, driven by interest rates spiking and valuations resetting. It feels like private (and public) market investing has worked its way to a much needed denouement. While here, we can gain perspective on what lies ahead in Q4 and beyond, gradually returning to a state of “business as usual.”
Getting back to basics
In Q4 of 2023, our new normal feels pretty familiar. In many ways, we’re revisiting the fundamentals of venture and growth investing. We can see how most firms are reprioritizing, aiming for strong business model fundamentals over revenue growth at all costs. And today’s market seems to be (mostly) dissuading the VC community from FOMO (fear of missing out) investing. Parsing signal from noise, some venture firms are recalibrating their pipeline management against this new backdrop. It’s clear that VCs today will only really fund startups with product-market fit and a clear path to profitability.
At Anthemis, the most challenging investing environment for us was actually the post-Covid zero interest rate, bull market starting in 2020, lasting through to the start of 2022. While we largely avoided FOMO deals, owing to our thesis-driven investment strategy, we certainly had to adapt to the prevailing market realities. What we found most alarming wasn’t the amount of capital available, or even eye-watering valuations; rather, it was the speed at which deals were completed during that period. For those of us deploying at the earliest stages, we saw how quickly firms sped through diligence, often discounting the importance of founder-investor relationship building. In 2023 and in the year ahead, we’ll continue to see early-stage investors and founders place more importance on pre-close relationship building. At the seed stage, we can again prioritize building these professional relationships as a key component of our investment process. Relationships that are key to making and supporting great investment outcomes and that are destined to evolve, deepen, and when a startup is successful, span many years.
Anchoring valuations in our new reality
We anticipate investors and company founders to continue to slowly adjust to a new valuation paradigm and to increasingly discover new “clearing prices” as “bid/ask spreads” continue to close in the next few quarters, as startups will continue to need to raise capital and get deals done. However, we don’t expect prices to shift too much (in either direction) from where they are now, and we expect pricing to become more heterogeneous and company-specific. I also believe that given the current macro and geo-political landscape, including the U.S. elections in late 2024, there is unlikely to be a substantive IPO renaissance in the near term.
2023 and 2024 may not offer much to the public markets, but they will give us an opportunity to learn from past valuation missteps. Closing out the year, venture leaders will try to understand where we went wrong with pricing and solidify new heuristics for this new capital markets environment. Most of us can agree that pricing blew past the “right levels” where shareholders, employees, and founders would have been happiest — and yet, there is still much work to settle on a new market consensus for the coming quarters. The end of year accounting closes will probably be a catalyst for setting a new baseline. At Anthemis, we’re excited about the opportunities to take a much more quantitative approach to modeling private markets asset pricing and valuations as one lasting benefit of the benign market environment of the past cycle was the creation of hundreds of publicly traded fintech companies. Although public fintechs may be more dense in some financial services sub-categories compared with others, we are steadily approaching the point where it is possible to collect sufficient data to deploy traditional multiples-based equity valuation methodologies as a key input to determining appropriate private company valuations. And over the coming years, as more fintechs enter the public realm and private secondary markets continue to develop depth and breadth, venture capital valuation methodologies will become “more science, and less art.” For fintech founders, this will also give them the tools to better optimise their business models and growth strategies to align with market signals, even from the earliest stages.
Embracing a market transition
While some narratives frame the last eighteen months as an unmitigated disaster, we recognize that alongside the obvious challenges arising, there are equally clear opportunities arising from this market dislocation. A more normalized and discerning market actually suits our investment approach at Anthemis: it makes it easier to find signal from noise and it facilitates being deliberate in our process for sourcing and analyzing the companies that match our thesis, while also leaving more space for serendipity to operate in our pipeline. It allows the time for more thoughtful discussions with founders and reflections on both risks and opportunities that are part of the natural DNA of venture markets. While the exuberance of the “up and to the right” bull market might have been advantageous for some, especially in the short term, given the illiquidity and long time horizons innate to successful venture investing, it is very difficult to be successful as a “momentum” investor in this asset class. This is where our experience investing and navigating through multiple previous market cycles and asset classes has been valuable in keeping us grounded through this bull and bear market cycle. Given that our (sector and thesis driven) investment style is more “hunting” than “gathering”, while not immune to broad market trends (no one is), it allows us to navigate different and changing market environments more resiliently. And we constantly remind ourselves that our job is to invest in great companies — not to invest in all the great companies.
When we established Anthemis over a decade ago, venture was considered a ‘craft’ business. In the greater pantheon of global capital markets, it was a small, idiosyncratic backwater. However, the two decade long secular bull market in technology-led economic change that began the 21st century, supercharged by the incredible amount of central bank liquidity created post-financial crisis and post-Covid created an enormous impetus and tail wind to transform the market for private capital generally, and venture capital in particular into an established and important component of global institutional capital markets. Today, venture and growth investing can now truly be considered a distinct asset class alongside private equity, public equities, private credit, debt, and other financial instruments. It is now an unavoidable component in the toolkit of institutional deployment of investment capital. As venture and growth capital moves into this new “adulthood” over the next decade, this will create extraordinary opportunities for investors with the experience, skills and mindset to adapt to this new normal.
To listen to the Navigating the Changing Tides: Fintech Venture and Growth Investing webinar, register here. We hope you can join us for our future webinars.