Q4 2021 Quarterly VC Update: Frank Rotman on the State of Venture Capital Investing  | Cooley LLP

In conjunction with our Q4 Venture Financing Report, I sat down with Frank Rotman of QED Investors to get his take on the state of venture capital investing.

Key insights from Frank Rotman

On various sub-segments in Web3: “There are commonalities within the sub-segments due to a shared ethos around concepts like decentralization and uncensorability. But the various sub-segments are fundamentally tackling different problems.”

On disrupting traditional industries: “[E]very participant in every creative industry is looking at Web3 and asking the question: ‘What does this mean for me?’”

On Web3 changing the investment landscape: “A fundamental principle that’s been adopted by Web3 builders is that value should accrue to the community that adds value to an ecosystem rather than to a small number of investors and builders in the ecosystem.”

2021 was a record year for venture dollars invested in Web3 and cryptocurrency startups. Do you anticipate this to continue throughout 2022? From your perspective, what factors may propel or shift this trend?

Investment dollars always follow megatrends, and Web3 is undeniably a megatrend that’s in its early innings. And given how much talent is flowing into Web3 startups, it’s difficult to see this space cooling off anytime soon.

Of all the various sub-verticals in Web3 (NFTs, DeFi, DAOs, etc.), which do you find the most interesting from an investment point of view and, if different, from a personal point of view?

Each and every sub-segment within the Web3 ecosystem is chock-full of interesting and incredibly innovative ideas. There are commonalities within the sub-segments due to a shared ethos around concepts like decentralization and uncensorability.

But the various sub-segments are fundamentally tackling different problems. I’m personally spending time digging into programmable money and DeFi dapps, as well as DAOs and NFTs. There are too many interesting things happening in these spaces to distill them into simple “themes.”

Which industries do you think have the greatest potential to be disrupted by Web3 companies? Do you think the traditional financial services industry will follow the trajectory of the newspaper industry?

Without a doubt, every participant in every creative industry is looking at Web3 and asking the question: “What does this mean for me?” The intersection of Web3 technologies and the music/entertainment industries is an obvious place to look if you want to see change unfolding as we speak.

And DeFi is another interesting subsegment of Web3 worth watching, but there’s still a lot of fundamental infrastructure that needs to be built and scaling solutions put in place before DeFi is ready for mass adoption.

How do you foresee Web3 changing the investment landscape for individual private investors and venture capital more broadly? Do you think the shift of value accretion from capital providers to early product adopters will continue?

A fundamental principle that’s been adopted by Web3 builders is that value should accrue to the community that adds value to an ecosystem rather than to a small number of investors and builders in the ecosystem. This doesn’t mean there isn’t a place for investor capital in the business-building process. But it does mean that a significant portion of the longer-term value creation is designed to flow back to the community – instead of being concentrated in the hands of a few early backers and builders.

As you know, QED has had some of its best successes in recent years investing outside the US. Do you think that trend will continue? If so, what geographies are most interesting to you now?

QED Investors is quickly becoming a global fintech VC firm. Our US, UK and Latin America teams have been busy for years seeking out and funding some truly incredible companies. Our Southeast Asia practice is relatively new, but scaling quickly, given the quality of companies and teams we’ve been able to identify and fund. And we just started to turn our attention to Africa and are excited by the innovation we’re already seeing in the region.

Our data shows that the final quarter of 2021 shattered previous records for deal volumes and dollars raised. However, given the recent volatility in the public markets, how do you see this impacting VC investing in the year ahead?

The correction in the public markets will ripple through the VC ecosystem starting with later-stage private companies and slowly working its way to early-stage companies. Every later-stage company that’s still reliant on the capital markets must be rethinking their capital raising strategies given the environment. And I wouldn’t be surprised if many of these companies find ways to reduce burn and extend runway rather than approach investors right now.

About Frank Rotman

Frank Rotman is a founding partner of QED Investors. His investments are focused on financial services and financial technology companies that are credit-oriented or have data analytics foundations at their core. His portfolio of 20+ investments includes many of the emerging next-generation companies in financial services and real estate tech.

Frank was one of the earliest analysts hired into Capital One and spent almost 13 years there helping build many of the company’s business units and operational areas. With two decades in consumer and small business finance, Frank is widely known in the industry as a credit risk and portfolio management expert.

His responsibilities have included turning around underperforming business units, building new businesses from concept to market leadership positions, overseeing the credit performance of Capital One as a whole, and creating a student lending company after leaving Capital One in December 2005. Frank graduated from the University of Virginia with degrees that included Applied Mathematics (B.S.) and Systems Engineering (M.S.).

About QED Investors

QED Investors is a global leading venture capital firm based in Alexandria, Virginia. Founded by Nigel Morris and Frank Rotman in 2007, QED Investors is focused on investing in disruptive financial services companies in the US, the UK, Europe, Latin America, Southeast Asia and Africa.

QED Investors is dedicated to building great businesses and uses a unique, hands-on approach that leverages its partners’ decades of entrepreneurial and operational experience to help companies achieve breakthrough growth.

QED Investors has invested in 175+ companies, including 25 unicorns, and has more than $4 billion under management. In September 2021, QED Investors announced that it had closed a substantially oversubscribed $1.05 billion fund, including $550 million in QED Fund VII for early-stage investments and $500 million in a new growth fund.

QED Investors’ notable investments include AvidXchange, Bitso, Current, Creditas, Credit Karma, Kavak, Klarna, Konfio, Loft, Nubank, QuintoAndar, Remitly and SoFi.

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