MIAMI, Fla. — It was a turbulent capital-raising year. What do experts see in the sale rack, and what are the chances of coming home a happy shopper?
Mike Packer, Partner at QED Investors, spoke with Steve McLaughlin, Founder, and CEO of FT Partners, about mergers, acquisitions, and down rounds this year and beyond on the Fintech Nexus LatAm 2022 Keynote stage.
“We’ll try not to be doom and gloom; I had to do a capital markets panel for our CEO event a few months ago,” Packer said. “But, the rain had cleared out, so hopefully, we can get a good discussion.”
Those that paid attention could see it coming
Before QED, Mike spent 10 years at Capital One developing a skill set in strategy and analytics. He has always been drawn to data-based plans, he said.
He started broad: deals are down, public markets are down, and it’s a challenging environment, he said. Is there any easy way to talk about what the climate is today?
McLaughlin said it was not a huge surprise after a couple of great years.
“I don’t think what’s going on right now is a huge surprise for anyone that’s been in fintech or tech; the market was so good for so long it was only question of when the music was going to stop.”
McLaughlin, formerly a Goldman sacks investment banker, is an entrepreneur and investor specializing in fintech banking payments. He founded FT Partners in 2001 as a premier fintech investment banking firm.
Hopefully, many companies took advantage during the flush times, he said, and raised when the going was good in ’20 and ’21. He said the crash in the capital started to show in some rounds FT helped raise late in ’21.
Hopefully, they raised capital while they could
“A lot of companies raised a lot of capital in 2022,” he said. “In ’21 and early ’22, some of our clients went out to raise 100 million and wound up raising 800 million or 500 million, or 400. The market started cracking in December ’21.”
It’s been over a year since things have gotten dicer and dicier, he said, and it will get worse before it gets better.
“I don’t think any of this means ‘fintech is dead.’ There’s been so much money put into fintech there was bound to be a downturn. Venture capital doesn’t always mean everyone makes 3x 10x,” McLaughlin said. “I’m a massive bull for the next 20 years in fintech; there’s a great opportunity to invest in the space and be an entrepreneur.”
But down rounds will abound, he said. For example, Checkout went from $40 to $11 million in valuation.
Healing and breakouts
QED shares that bullishness Packer said. When the market got challenging, it was about margins and competitive ability, he said, when asked where the healing would come from first and where he saw the potential for breakouts to emerge.
McLaughlin said cutbacks are likely coming, depending on the situation.
“If you’re nervous about getting capital, you have to cut, be austere,” he said. “It’s going to mean slow growth. If I’m a company that raised $500 million last year, I’m not thinking of anything and powering through.”
Many people thought the tough market would be tricky for a couple of months, and now it’s lasted more than a year, McLaughlin said. If you’re still running out of capital, you want to accelerate growth. There is never a more critical time for diligence.
“I think people are doing a lot more due diligence and worrying about writing checks a lot more,” he said. “You’re not going to see ‘fomo’ investing. A lot of the old playbooks are not working. Get ready for conversations with investing, a lot of the boring stuff.”
He said that eight percent is the new 1x in a bear market and if you wait too long to start raising.
“Look at Klarna. They took an 85% down round,” McLaughlin said.
“They tried to reach him for 60 billion,” he said. “Without naming names, they went to a very, very large investment bank and asked, ‘What about 40?’ but then it was ‘What about 31, 20?’ And then wound up with five and a half.”
“Every VC probably regrets a bunch of investments right now. There’s no doubt they can smile a lot and say, prices were high.”
New capital investors in LatAm and M&A
In emerging markets, Packer said it is not the type of market a new investor could enter without experience, so what would McLaughlin impart from his time as an investor?
McLaughlin said Brazil went from nearly “uninvestable” 10 years ago to an embodiment of Silicon Valley. He said to follow the money and build rounds with a small group of curated investors when it’s a new market.
When it comes to M&A, he said big consolidation might be oversold. Nubank will not buy everyone, nor will Paypal or Intuit.
“Putting up a sale sign right now is a sign of defeat,” McLaughlin said. “The dry powder can outwait everyone in this room. There are dialogues in the market involving companies like that, where they probably will pick things up, but I think it’s not going to be everyone’s savior.”
There might be only one deal each of the more prominent players will do in the next couple of years, and that reality is sinking into everyone’s minds, he said. Though many firms think that the next round could be the final sale, no one knows the prices right now, and “the delta is so wide it’s ridiculous.”
From his experience, B2B fintech will hold up well, and consumer-sided firms with multiple cross-selling products have potential, too. But in 20 years of investing, there were not many cases where a big bank snatched up a high-valued zero revenue fintech, and there will not be more on the horizon just because the industry wants it for Christmas.
“In 20 years, there has been maybe 20 where a traditional financial institution like a bank or mortgage organization bought a material fintech with half a billion or more with no earnings and growth, that went out on a limb,” McLaughlin said. “It’s really rare; a big bank buying and taking people out is hard. It’s creeping into people’s minds whether or not to grow in the first place and aim toward exit instead.”