VC investor Cathryn Lyall on the year ahead for fintech and startup investment

Tech Wreck, Crypto Winter… the new phrases that were coined in 2022’s difficult year for fintech startups don’t inspire a lot of confidence in the market.

But while valuations have dropped and easy money has dried up, there is a lot to be positive about in 2023.

 

Quality over quantity

The tougher conditions we all face this year will mean those companies that survived last year’s downturn are having to be far more conservative in their approaches to spending and governance. With the exuberance of 2021 over, investors are looking closely at company fundamentals.

This is a great thing for the local ecosystem because it increases the quality of the sector overall.

With less money available, founders and CEOs have to be rigorous in managing costs and cash flow to ensure they free up a lengthy runway, because raising new capital is taking 3-4 times longer than it did.

Investors are even more focused on investing in quality companies – the hunt is on for strong teams, robust technology and sound financial models , not just good ideas.

 

Value

Where new raises are concerned, it remains the case that ‘a flat round is the new up round,’ generally speaking.

While we are still seeing some gentle upward ticks, companies across the board have pulled in on cost and refocused resources.

This has created a new paradigm – where investors were previously putting money in on the basis that companies would grow via new capital, now the lens being applied is far more akin to that which is applied to listed entities – the need to get to profitability as quickly as possible.

That’s a much more difficult task for a new company, particularly in Australia where there is very little Government support.

We are seeing new companies offshoring at a more rapid rate in this tougher environment – Singapore and the UK are the winners when founders are looking for easier environments to grow their new businesses.

International investors are keenly aware of this, and we’re seeing more of them coming here to find promising Australian ideas to take back home.

The Government needs to act quickly to avoid a prolonged period of pain for startup founders here on our shores.

On the flip side, for VCs it means that it’s a great time to find new investments.

While there are less deals out there, the opportunities that are still coming through are definitely more considered than they were 18 months ago. We’re not seeing millions being raised off the back of a pitch deck any more, and that’s healthy.

As we know, the best performing funds are the ones that do most of their investment during a downturn, and then exit when the cycle swings up again – which it will. Now is a good time to be investing – there’s still innovation happening and there are still great companies being founded. 

 

Better together

We’ve always specialised in working very closely and hands-on with our portfolio companies, and through this more difficult period we see founders keen to extract non-monetary value from investors in terms of mentoring, advisory and directorships.

We have supported our Founders through quite a number of challenges over the past year, one of which is now on a trajectory for a good exit.

One of our blockchain investments has gone through a major restructure and recapitalisation and is coming back with new management.

At another, we appointed a new CEO and members of our team came onto the board and at another we provided on the ground advisory and management support when a founder became unwell. 

Like Seed Space, it’s likely that other VCs will start doing more to support their investee companies.

As the focus has shifted from growth to profitability, startup founders are going to need the guidance of experienced business heads who can help with management and governance – two areas where we often see startups under-resourced.  

 

Where to from here?

The worst is largely over in terms of write-downs, and  valuations have stabilised however there is still consolidation to take place in a number of areas.

Valuations will hover at neutral to slightly down until markets are more bullish again.

The exuberance we saw through 2020-21 is over for the foreseeable future, but as the quality that is being created today matures, the fintech market will definitely strengthen. The nice thing about investing at seed stage is that as companies move from start up to scale up and begin hitting revenue and growth targets, valuations increase really quickly.

From a digital asset perspective, we are very confident in the future of that market. There was a lot of low quality, low value products and those companies, products and services  have been washed out of the system  now.

Where the real use cases still exist – in places like self-sovereign identity, supply chain, immutable records,  currencies, highly secure networks – those technologies are still going full steam ahead.

Our view has always been that digital asset technologies are best suited to that ‘pipes and plumbing’ type of infrastructure, rather than day trading or as retail investments.

The defi/tradfi dichotomy is becoming less acute and that is accelerating quickly. Now the ‘froth’ of the crypto bull market is out of the way, it’s easier to talk about the role digital assets will play in our financial landscape. All the traditional financial entities are well down the path of developing their future models – from platforms, to a diverse range of digitised assets, to defi services – the big institutions are already well advanced in carving out their niche.

This decentralisation is a once in a generation social opportunity to address some of the inequalities that are baked into the traditional finance system and we’re really excited about that. 

In terms of our fund performance, of course 2022 saw some significant write downs, but we also saw that quality companies were able to raise on solid upward valuations.  So overall, we are really pleased that we have still been able to meet our performance targets, even in the downturn.

2023 will be a really interesting year in terms of performance. 

We have several companies raising at the moment and there is solid investor support.  Likewise, we have a good pipeline of deals being reviewed by our investment committee that will probably accept investments at half the valuation they would have expected in early 2022. 

These gems will be the ones to really shine as the market picks up in the next cycle.

* Cathryn Lyall is a director of Seed Space Venture Capital