Demand for products that digitize payments hasn’t let up, despite uncertainty following the Silicon Valley Bank collapse and a capital fundraising crunch, according to a venture capitalist who formerly worked at the fintech Stripe.
Mark Fiorentino, a partner at San Francisco-based VC firm Index Ventures, co-leads the firm’s fintech team. Index Ventures is currently investing from three funds that total $3.2 billion, and he said it’s the right environment “to craft interesting deals.”
Indeed, other investors and industry CEOs have said funding challenges won’t slow competition in payments, with strong interest in business-to-business and infrastructure concepts.
At digital payments company Stripe from 2015 to 2019, Fiorentino worked in finance and sales strategy before shifting to the corporate development and investor relations area of the company. He’s also worked in late-stage private equity as well as investment banking at Goldman Sachs.
Fiorentino declined to comment on Index Ventures’ ties or its portfolio companies’ ties to Silicon Valley Bank. He also shied away from commenting on Stripe’s current challenges – the company recently posted a lower $50 billion valuation – but did note its openness about that valuation decline may let other fintechs follow suit.
“If one of the fintech darlings is OK doing it, maybe everyone else will be,” he said.
Editor’s note: This interview has been edited for clarity and brevity.
PAYMENTS DIVE: What’s the payments and fintech fundraising outlook from your vantage point?
MARK FIORENTINO: Even prior to the Silicon Valley Bank crisis, there were already questions over, will fintech recover? Is it doomed forever? As an investor, I'm probably more excited for this timeframe, because there’s more opportunity from a pricing standpoint to craft interesting deals, and companies are still performing quite well in sectors that need a revamp.
Yes, you could acknowledge the fintech sector probably had the worst performance from a value creation standpoint over the past 12 months or so, but on the other hand, the total addressable market hasn’t changed whatsoever.
Financial services are still the lifeblood of the economy, payments are still the lifeblood of the economy, and there’s still a ton of demand for more products that digitize these two things. Whether it’s verticalized (business-to-business) payments or capital markets infrastructure, there’s a lot of interesting things to look toward. The couple areas that have suffered the most are companies with large balance sheet exposure and lenders. If you have heavy lending exposure, it is a tough time for you.
Stripe, I think, has seen more of a refocusing on their core value proposition of late. They do marketplace payments extremely well, they do small- to medium-sized business, high-growth startup, e-commerce payments very well, and you're going to see more of that.
The biggest threat of competition on the Stripe side is the second- and third-degree products that maybe ended up being a bit of a stretch, or right idea, wrong timing for Stripe to build. You're going to see more fintech infrastructure players potentially chip away at some of the long tail there. That could be treasury management or interesting issuing businesses – areas like that are where we see a lot of interesting opportunities still.
What types of payments companies are struggling with fundraising and pursuing profitability?
With capital intensive businesses, I fundraise, fundraise, fundraise and then eventually hit some sort of escape velocity. The last, maybe five years, was an OK time to do that. An environment like this is, unfortunately, a tough one to build upon. Those companies are going to have to rethink a certain strategy. With rising interest rates and no end in sight for the time being, balance sheet heavy businesses with heavy, heavy lending exposure, long timeframes and heavy loss risk, those are going to be the hard types of fintechs to raise for.
Businesses built on top of an interchange-driven business model are hit or miss these days. It’s fine to monetize off interchange, but you probably need something more – so an interchange plus (software as a service) model is far more attractive than a pure interchange only model. Those adding some sort of payments take rate, like a Stripe or an Adyen, plus some sort of software fee, are kind of the most resilient type of fintech company in any economy.
Have companies in Index Ventures’ portfolio had to reset valuations?
The majority of the companies in our portfolio raised pretty big war chests in 2021, first half of 2022, so most of them have the luxury of riding out the wave for at least a little bit longer. What we’re advising is, stick to the fundamentals. If you plan goals appropriately, if you understand what (customer acquisition cost) payback looks like, what sales efficiency looks like, are you on target – that's the best way to justify the valuation you have. Maybe it takes an extra year or two to grow into whatever your prior round was. But if you have the runway to grow into it and you're hitting targets, that's the most important part.
Could Stripe’s situation of having faced less demand from investors lead other founders to be more accepting of lower valuations?
That will be an anchor point for some people to feel more comfortable, that you can build a large company and face a down round. Ensuring you have capital to build a business for the next three years is better than optimizing for valuation and having a company that doesn’t exist a year from now. It’s just a matter of getting people comfortable with that.