If you go back just nine months, you will remember a time when fintech founders were raising capital with ease. Nine-figure funding rounds were the norm, and a new fintech unicorn was minted almost every day at ever higher valuations. Today, the pendulum has swung in the completely opposite direction where any funding round is a surprise with down rounds and layoffs now the norm.
To make sense of all this craziness, we invited Logan Allin, the founder and managing partner at Fin Capital, to the podcast. His recent Navigator deck caught my attention, it is packed full of advice for founders and thoughts on the industry, and he has made it publicly available for everyone.
In this podcast you will learn:
- Logan’s background and the founding story of Fin Capital.
- How he first got into fintech and what attracted him to it
- The gaps in the industry that were not being addressed by traditional VC.
- What he means when he talks about SaaS Plus businesses.
- A breakdown of their three private funds and their different focuses.
- The six sub-sectors of fintech where they invest.
- The quarterly Navigator deck that they share with their founders and now the industry.
- Logan’s specific advice for founders looking to ride out this downturn.
- How founders should think about valuation multiples today.
- When Logan thinks the IPO window for fintech companies will reopen.
- What a normal fintech valuation market looks like and when we will get there.
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FINTECH ONE-ON-ONE PODCAST 378-LOGAN ALLIN
Welcome to the Fintech One-on-One Podcast, Episode No. 378. This is your host, Peter Renton, Chairman and Co-Founder of Fintech Nexus.
Before we get started, I want to tell you about a new event we are hosting in London on October 17th and 18th called Merge, it is focused on the intersection of traditional finance and Web 3. Regardless of the price of crypto tokens, the technology being developed by Web 3 startups has the potential to completely transform the financial system. Our event will be bringing together leaders from Web 3, fintech and traditional finance to discuss how this transformation will take place. Find out more and register at fintechnexus.com
Peter Renton: Today on the show, I am delighted to welcome Logan Allin, he is the Founder and Managing Partner at Fin Capital. Now, Fin Capital is a VC firm, they haven’t been around that long, but they have already amassed a hundred portfolio companies. I wanted to get Logan on the show because I think he has some really interesting things to say about the current environment, we’re going to hear his advice in some depth that he provides for founders, really interesting perspective here.
I think all fintech founders should really listen to this, it’s really how to navigate this unique time period, how to get through it, when he thinks the IPO window might re-open and how that’s going to take place. We talk about why fintech founders should really not be trying to raise money right now, probably not a surprise there, and he gives his perspective on what a new normal is going to look like. It was a fascinating interview, hope you enjoy the show.
Welcome to the podcast, Logan!
Logan Allin: Great to be here, Peter.
Peter: Okay. So, let’s kick it off by giving the listeners a little bit of background about yourself. You’ve been around fintech for a while, you’ve had some interesting roles, why don’t you give the listeners some of the highlights.
Logan: I’ve been a fintech nerd since the start of my career, started in management consulting in the early aughts with Capgemini where I was helping large banks, asset managers, insurers and then ultimately, private equity firms, hedge funds, family offices think about their technology strategy, operations and doing quite a bit of the implementation around that work so focusing on enterprise software to start my career, initially that was helping code, integrate, implement.
Thankfully, third party software started to emerge so it became more about market mapping, diligencing, selecting and then implementing inside of large banks and that really gave me a view inside of this industry, but coming at it from a technology lens. And then ultimately, went in-house, so to speak, at a client, City National Bank, where I helped to run digital strategy with a focus on our asset wealth management businesses and then ultimately, Invesco, where I had a similar job focusing more on our family office wealth management business and really focusing on bringing new technologies to bear.
I was running around Silicon Valley so much, while I grew up in Europe, I spent most of my formative years here in the Valley from a high school perspective, went to Sacred Heart Prep in Atherton, California so all my friends were in tech and venture at that time when I was still running around in a suit and tie and got a bit of an entrepreneurial itch and decided that, you know, fintech was going to be the future. Particularly was interested in what was happening with consumer and neobank applications with obviously PayPal and Lending Club and Prosper emerging around that time and caught up with Mike Cagney and started working with him on SoFi while I was going to Business School at Stanford, worked with Mike, worked with a number of other companies in the fintech world and just became very immersed in that space.
From there, it became more about angel investing, investing professionally, initially in generalist seats and became disinterested and frankly, a little bearish on generalist models and kind of the, I’ll call it 2015/2017 range and just couldn’t be on investment committees where I was bringing fintech deals to the IC and others were bringing things like VR and healthtech and biotech. I was like I don’t know how to vote or underwrite on this, this feels wrong so went back to SoFi in 2017 to really build out corporate develop ventures and at that time look at helping take the company public and got the first two stood up. We did ten minority investments off balance sheet and then acquired two businesses while I was there and obviously the management team turned over and so in 2018, I started Fin.
So, that’s a bit of background on me professionally.
On a personal basis, I’m married, live here in San Francisco in Russian Hill. I’ve found things late a post COVID environment my travel would be a lot more structured and so I’ve a pretty good sense of what my travel schedule is going to be the rest of this year. That travel has been primarily focused on being in New York, Miami, LA and then Europe where we have a London office now so I was in Europe for all of June which was terrific, kicked it off with Amsterdam in Money 20/20 in Europe and then was at super return in Berlin and then spent two weeks in London where I was spending time with our team and our founders there.
Peter: I want to kick it off by just….you described in your LinkedIn profile, you say you lead off with fintech nerd and VC and clearly, you’ve got a lot of passion for fintech, what is it about fintech that attracts you?
Logan: I come at it from an impact perspective, what technologies they’re trying to potentially invest in are going to drive the biggest impact and that can be impact on GDP in various countries, could be impact on consumer and merchant lives, it could be impact on, you know, reducing fraud and cyber risk and so forth. There’s just so many dimensions through which to look at impact and we are ESG managers so we are UNPRI signatories, that takes the form of using ESG metrics the way we evaluate businesses as well as how we measure them ongoing, really capital G for us in many senses because we’re not a prima facie social impact investor seeking out double or triple bottom lines in businesses although we do have some companies that fit that profile.
And so, when I think about me being a fintech nerd, it’s what I’ve been doing my entire career or since getting out of undergrad and as I publicly commented on it, it fell into it a little bit. My first job at Capgemini, I was selected to be in the financial services group simply because I had done an internship at Citigroup my junior summer. (Peter laughs) It involved more cold calling and getting people sandwiches than anything else and so I had very little perspective on the financial markets and financial services outside of, you know, smacking on my studies in undergrad. So, Capgemini looked about one job on my resume and said ah, well, you must know a little something about financial services and of course, when you go into consulting, day one, you’re supposed to be the expert in the room on all those topics so for me, it’s always been a core part of my focus.
I enjoy the types of people that work in this industry, really strong and like you have to be high integrity, you have to be fiduciary in your orientation or you just won’t last long very candidly and so it tends to attract the types of people I want to spend my days with and to me, running Fin does not feel like I should be getting paid, I have fun everyday and so that’s a very good sign and this is my last job. That’s why I call ourselves fintech nerds and then the other part of that is just fundamentally at Fin.
We don’t hire non-former operators. We want to see operating experience predominantly in fintech settings, but also having some perspective in corporate operating settings as I’ve had as well because it gives you a very specific purview because the enterprise software companies were investing and actively selling into that business, whether they be banks, asset managers, insurers or large corporates so understanding what that seat feels like and how those people think is really critical. You have to walk thousands of miles in entrepreneurial boots otherwise you don’t have the empathy to work with those entrepreneurs long term, you don’t have the credibility to really underwrite what they’re building. I mean, you really can’t add long term post investment which is the most critical part of that equation.
Peter: Got it, got it, okay. So then, maybe you can just touch on the founding story of Fin Capital, what was the impetus to get that off the ground?
Logan: Well, I would say a couple of things. One is there wasn’t really a long term home for me at SoFi in a venture seat when the management team got turned over, Anthony Noto came in, rightfully so, he was very focused on shoring up the core business and I thank him and Michelle Gill, the management team that really did an exceptional job. Obviously they’ve had some headwinds on the macro side and the government, also around student loans really large, it’s an extremely well-run business. There just clearly wasn’t a long term home for ventures there and so I decided to spin out on that regard, I could have gone and joined another specialist or a generalist VC at that time, but saw some gaps in the industry that weren’t being addressed by those players.
Number one, nobody seemed to care or be underwriting to B2B fintech, everybody was chasing consumer, everybody was chasing SMB and having come out of that world at SoFi recognized how difficult how those business models were and frankly, having been talking to banks and public market investors as part of the SoFi pre-IPO process, they didn’t really love our business model. (laughs) The idea of having a balance sheet credit risk, significant marketing spend on CAC and transactional revenue base where clarity around LTB and up sell was fairly challenging led them to believe that we should be valued at tangible book whereas our private market investors view this is a technology company where we were getting to traditional tech multiple credit.
That to me was a wake-up call because I said alright, if that’s going to be the case and the M&A space for consumer and SMB has not been that interesting, right, Credit Karma hadn’t happened yet, things were not moving as it relates to the M&A market so it was very small, kind of tactical more aqui-hire type outcomes, Goldman buying out of Adam Dell’s first company, Clarity Money for Marcus, that was it, right. There was not a lot of movement there and the best businesses that were going public and then performing well in public markets really weren’t fintech companies. Lending Club was getting crushed at that point, OnDeck was hurting, Funding Circle was hurting, I was like, if I’m going to invest in these things, I need to generate returns, I need to find a different part of the fintech world to invest in and that became B2B fintech specifically what we call SaaS Plus.
So, in a B2B fintech world there’s two types of models, there’s Take Rate businesses and there’s SaaS Plus Take Rate businesses. We’re investing in a SaaS Plus Take Rate businesses, the pure play Take Rate businesses ala Marqeta in the public markets and now Stripe in the private markets had really struggled in terms of the longevity of those businesses, maintaining gross margins, being able to achieve long term, EBITDA positive type businesses and you know, they have kind of acted a little bit, if you will vis-a-vis public markets scrutiny like these consumer and SMB businesses and so where we’ve just been hyper focused is true enterprise software that also takes advantage of the network effects that they’re creating in their core business. So, that was number one, there doesn’t seem to be anybody focusing on this topic.
Number two, nobody seemed to be bringing, at least publicly and in the entrepreneur’s eye which is getting feedback from a demonstrable operating playbook, where they were adding meaningful value beyond capital. I started to seed capital getting weaponized or commoditized, you know, SoftBank being kind of a first player and that Tiger coming later, those business models can work, but I didn’t really want to be a passive investor then want to look at entrepreneurs in the eye and say, hey, I’m just going to hand you a check and then check in every quarter on how it’s going. We want to be very active value added investors, never has a VC said that, but I wanted to show through an operating playbook and then a tech platform which we built called Lighthouse that they’d actually deliver on that and then hold ourselves accountable.
So, we actually ask our CEOs every quarter, how are we doing through you and we use a version of a net promoter score of zero through ten. Would you recommend us to other entrepreneurs. It’s a very simple question and we’re doing a great job and adding value beyond capital, they’re going probably be a nine to a ten which thankfully consistently across right now a hundred-company portfolio. They’ve been very happy with the value added we’ve been bringing and that’s been tech-enabled, but also hands on through our team. So, that was number two, we didn’t see anybody really demonstrating that.
And number three, I looked around at all the other VCs and a lot of them were former investment bankers, were consultants and they didn’t have fintech operating experience or they came out of corporate banks or credit shops and, you know, went into VC because they felt like they could have an opportunity there. I think former operators make the best VCs, particularly if you just take a long view on the space in terms of having edge in underwriting and then having edge and actually being able to add operating value ongoing and have a very different kind of a relationship with those founders so that’s why I started Fin.
I started as a solo GP for the first 18 months by myself and that was really a lot of sweat equity, it was very hard. I have a lot of empathy for first time GPs and emerging managers and it’s a very tough gig and then I started to add a team as I was able to raise capital and put money to work and did that very carefully because partner risk and team risk is a big part of building a venture firm long term. So, pause there, but that’s kind of the encapsulation of the founding story and why we decided to build Fin.
Peter: Right, right, okay. So, what stage of business, are you Series A, Series B, I mean, what seems to be the check size? Tell us a little bit about your thesis there.
Logan: So, we’re full lifecycle, fulll stack fintech investors, we can write checks from $100,000 to $100 Million, we do that with three private funds, it’s public information and it’s on our website. Regatta which is pre-seed and seed, check sizes there kind of $100K to $2 Million, Flagship which is early stage, seed through B, check sizes there are $3 to 15 and then Horizons growth equity, those are really Series C Plus including pre-IPO, we’re writing checks for $25 to $100 Million. So, that gives us a full lifecycle capability designed primarily to invest in pre-seed and seed initially and then follow on those best performers in the subsequent two funds, but, obviously, we’ve been doing some opportunistic outside investing, so to speak, in both Flagship and Horizons in that new deal.
So, for example, in Horizons 2 we’re on our second fund cycle which we wrapped up last year, we’ve got basically 50/50 follow on investments, new investments, some we recently announced like SumUp, that new investment circle, that new investment prime trust, etc. and that gives us the ability to track on companies build relationships over a long period of time and then potentially find an entry point down the road if we did miss it in the early stage because we just turned four in June. So, a lot of companies that we weren’t around for from an early stage perspective that we think, you know, are really incredible SaaS Plus-type business models that we want to underwrite too and take a position in and still underwrite to the return profile of that specific fund so all three of our funds are absolute return strategies, we want to be able to underwrite to that exact return profile at that stage of the company so that gives us the ability to be full stack.
From a geo perspective, it’s the US, UK, Europe predominantly, four offices in the US, one office in London and we have this year added…..when we add geos, it’s a view that that geo has material maturity in B2B fintech and we’re starting to see emergence there. Actually added LatAm, we’re about to announce our first LatAm deal, actually we’re going to announce two LatAm deals in September and then Israel where you consistently have very strong software development work, we’re starting to see much more fintech in addition to blockchain opportunities emerge out of Israel. So, beyond kind of the US, UK and Europe those are the two others geos that we’ve added that we’re going to be selectively investing in. So, we’re not doing any deals in Southeast Asia, India and Africa and elsewhere, where we just candidly haven’t seen the maturity in B2B fintech and we really don’t have any kind of expertise or underwriting edge in those geos.
Peter: Right, gotcha. I’m on your site right now, I’m looking at your portfolio companies, you’ve got some great names on here, many of the companies have been on my podcast, could you maybe just, I don’t want to go through all hundred of them, but just maybe some of the names that you’ve invested in.
Logan: We invest across six sub-sectors within fintech today. Now, those six sub-sectors as those spaces get more saturated, but that includes embedded finance, the CFO Tech Stack, asset management capital markets, blockchain, Web 3, insurtech and then what we call infrastructure enabling fintechs so those six sub-sectors. So, all of our companies fall within one of those six, we’ve developed very specific theses within those six sub-sectors that we’ve been proactively going out and try the source and that’s been our approach since day one. Those sub-sectors and theses have a fall then we’ll continue to evolve, as I mentioned, as the space matures and we see saturation eventually in specific VCs and there isn’t enough wide space or green fields to operate in.
Some examples, in embedded finance we’re investors in Synctera, they’re in the Banking-as-a-Service space, we really believe fundamentally from a thesis standpoint that banks and partnering with fintechs were really struggling to develop an API framework and an immigration framework and frankly, a revenue framework to work with fintechs. There was going to need to be a middle layer sitting in between that, there is also going to be a middle layer player who provided an app store capabilities for new fintech players that were adding fintech-like capabilities to like the incumbents and then banks who, frankly, needed those capabilities in order to partner with fintechs, things like regulatory tech, fraudtech, so forth. That’s one example in embedded finance space.
In the CFO Tech Stack world, we recently announced Trovata, we actually announced that during the first day of Money 20/20 in Europe as they are entering the European markets. Trovata solves for treasury management for banks and be able to white label for corporate treasurers and those who need to move cash efficiently, understand their chart of accounts, create yield opportunities and so forth and there’s just a lot of complexity in the integration framework and how they exist there.
Third in the asset management capital markets world. Great example of a company we’ve invested in recently is Aiera, I think about them as next generation Bloomberg so using AI now, Nlp capabilities for live event transcription, truly aggregate all market data for specific equities and so the PMs and those who are trading in the hedge fund world or in the asset management world have a center on their desktop both in the Web 3 /blockchain world, they all use Circle again so we did the Series F (garbled) Marshall Wace. Our belief is that Stablecoins can be one of the long term durable, we call it themes and/or structures, in the Web 3/blockchain world that persists. We believe that because we think Stablecoins are going to be used as the future of commerce or consumers purchasing goods in-store or online across the world and nobody’s buying pizza with Bitcoin anymore.
Secondly, we think about it in terms of money movement so consumers, peer-to-peer, moving money from a remittance perspective or in sending money back home to their families, wanting to be able to do that very securely and inexpensively. And then third on that money movement angle is institutional money movement, Ripple had a view that they could replace Swift with XRP. I think we all believe Swift is inefficient and archaic, but that XRP use case did not succeed, my view is that Stablecoin will and institutional money movement will ultimately be done in Stablecoin because of the velocity of that movement and the costs are so much more efficient.
And then lastly, it’s yield, right, so BlackRock is now managing Stablecoin much like it’s operating in US treasuries and so we think the yield opportunity there, particularly in this type of rising interest rates environment, is quite attractive. Insurance, kind of the last ones to the party (Peter laughs), insurtech world, we’re really excited about embedded insurance in particular, Boost Insurance is a great example there, where they are allowing people to embed in any type of insurance capability into an existing fintech offering. Or, if you’re setting up a new insurtech, you don’t want to go out and get a license in all 50 states and build the underwriting stack, build the insurance and carrier and the insurance relationships, Boost can do that where you want on a white label basis.
And then lastly, infrastructure enabling tech, all the picks and shovels, it could be regtech, it could be big data, cloud migration, quantum computing, those types of areas. Great example here is Ocrolus where they are becoming the underlying infrastructure for all lending as it relates to document digitization, fraud detection, data extraction for facilitating those workflows. So, those are six sub-sectors, six company examples amongst the hundred we’re invested in that we’re every excited about and still see opportunities and green fields for net new investments.
Peter: Right, right, okay. So, why don’t you digress a little bit and talk about the deck that you recently produced, it was sent to me by your people and I thought it was really interesting, it was a catalyst to get you on here and goes without saying that we are, living in interesting times when it comes to raising capital, raising equity capital specifically I think it’s gone through an up and down cycle over the last couple of years, but what was the reasoning, what was the drive behind putting this thing together.
Logan: We have a Navigator every quarter and that navigator is a version of a deck that we put together for LPs and for our companies. There’s some shared slides in there in terms of what’s happening in the macro and ground, everybody in the data, but, in particular, in the first half of the year we started seeing presentations and videos in terms of some of our peers and just very candidly, I’m not going to name names, I think everybody knows who they are, there’s just a lot of high level motherhood and apple pie, (laughs) like, you know, hey, high level, like we should be trimming burn and it really felt like those organizations were talking down to the founders and we never talk to our founders. We view our founders as partners and as peers, number one.
Number two, there was no prescription or recommendations, having lived through cycles ourselves, in terms of hey, this is real specific advice for you all to take in and consider and act upon and then here are the three specific resources in terms of vendors, partners and others that you can leverage to trim your burn and take down costs specifically in areas like cloud adoption, your CFO finance function in terms of outsourcing aspects to that. Number two is in potentially fraud or cost reduction issues, payback opportunities, all kinds of ways that you can improve your gross margin picture. And number three is potentially layering in some venture debt so here are our partners on that front that you can work with and consider that your last dollar and then we provide very specific recommendations in terms of metrics.
So, we view runway very specifically as 24 months, you want to be able, and this was in Q1, you want to be able to see runway through the end of next year and not be raising priced capital in this market. If you and your operating plan had, for example, this year as your timeframe for raising a price round, don’t do it. Let’s look at trimming burn, let’s raise a strategic safe note and when we say strategic that means from your customers and other strategic commercial investors. They’re going to be great commercial partners help you increase revenue which is also helpful to the runway and provide for some runway capital aiming for six to 12 months of runway at that revised burn so like it’s giving more installation.
And then, lastly, on that venture debt piece, we’re recommending three to six months of burn in runway in that venture debt allocation looking to get either zero or very low warrants coverage so it will be less dilutive. And then if you are early stage, pre-seed to A, a lot of these companies and CEOs don’t have a finance function so we recommended an outsourced CFO, we work on particular companies that we recommend and just understanding their operating model making sure you’re getting that right. And so, if you do need to make trim on burn, push out hiring decisions, those types of things, you’re doing it with confidence and you’re only doing it once.
So, those were some things that we recommended and then also just providing context and reality around multiple compression so we’ve got added multiple and ED compression happening at a rapid pace, particularly in fintech, rising cost of capital, you have inflationary infrastructures and, you know, global macro concerns happening, geo political risk, uncertainty around regulation and then some issues, particularly in the Web 3 and crypto world with Celsius and BlockFi and others that can be passed on that we’re going to potentially create some knock on that. So, those are some very specific recommendations we made.
Public-based conversion and aggregators are slightly trimmed down, conversion versus what we share with our companies that really want them to feel like they’re getting our most proprietary, most detailed insights as part of the Fin family and then we did a webinar, a webinar which was attended by 300 plus founders. It was clear to us that they were hungry for prescriptive recommendations versus this kind of high level thoughts and opining on the space and that’s been great. What we’ve done for our companies beyond that is we’ll go and provide an updated valuation framework.
So, here is how you should be thinking about your valuation today relative to public comps and private comps that we’re aware of. If you’re pricing a safe note cap, for example, your specific guides around that and we have a team headed by Matthew Mann, who is our Head of Corporate Development who we pulled out of Goldman’s FIG team who helps work with our companies to be a sounding board on that topic and provide a very realistic view into how pricing and valuations are really operating this year versus the last four years where, you know, multiples had been really, really frothy.
Companies have, in many cases, not been able to grow into those multiples at this point and that’s pretty imperialist with essential outcomes forcing that more in the consumer and the SMB world where the amount of capital and the capital and tendency of those businesses is a lot higher as a result, you know, they had to raise that higher valuations. That, by the way, is a very nasty flywheel because not only are they looking to raise more capital at higher valuations, but the funds that are supporting those companies have also been raising larger funds and need to write larger checks, right.
So, that creates this flywheel where they’re saying hey, I need to write a larger check, the founders are like well, I need to take on less dilution and the only way to solve that problem is to increase the valuation. That is a dangerous game as a founder because then you ultimately might not be able to grow into it and if you do get a cycle like this and your burn is constantly a lot higher because you did raise more capital than you felt like you can invest in growth, that creates a potential really dire situation that’s why you’re seeing run-off and consolidation in this market.
Peter: It really is interesting the way you kind of frame the valuation, how founders should be thinking about today. You know, I’ll share a link to the public facing document when we publish this episode, but I want to touch on one slide that was really interesting. You said the IPO window, and we all know it’s pretty much closed now, the IPO window will take ten quarters, roughly ten quarters to reopen so that’s really taking us into 2025 is what you’re saying.
Logan: I would say that we’re looking at probably second half of next year at the earliest, but 2024, 2025 getting back to some multiple stages in terms of volume in the IPO market and the ability for financial investors to really support those exits and there are a couple of things inherent in that statement. One is, right now, we have zero IPO activity, I don’t expect any fintech to go public this year unless it’s through a SPAC, it got Circle going through a de-SPAC process right now publicly.
We have a SPAC in the market, we do expect to announce the deal before expiration and frankly, it’s one of the few games in town and so that’s been an interesting structure to have in this market. Do I think SPACs are here to stay? I’m not sure, I think Gensler and the SEC have made it pretty apparent, they’re not fans, I think there’s going to be a lot of run-off, but it’s going to be in lower quality sponsors, candidly.
And then number two, in terms of the resilience and the snap back in public markets, we would expect those B2B, SaaS Plus businesses followed by B2B Take Rate businesses to be the first snap back so companies like Bill.com, Shopify and Marqeta as examples in that B2B category followed by SMB and Consumer who have been the hardest hit in this market environment. You look at consumer fintech, those are down since call it January of last year to the present, around 90% which sounds insane, but it’s true. SMBs down about 75%, B2B is somewhere in the 20% range, right, so you just have had a lot more insulation as B2B models and financial investors have embraced those higher gross margin ARR software-driven businesses with IP more capital efficient type models.
More so than they have, a balance sheet-heavy credit oriented, heavy cap in consumer spending and they just view those as tangible book value businesses at the end of the day and that’s created a lot of this compression. Unfortunately, private market investors view those as tech multiple businesses and that’s created what we call a “negative arbitrage” between the private markets and the public markets which is not what you want. So, all of that is happening and that’s why we think it’s going to take some time for the recovery and the IPO windows to really reopen in a meaningful way.
As I mentioned, I think they’re going to start to open a little bit up in the second half of next year on the back of what will hopefully be direction by the Fed that they’re going to start pulling back on the interest rate increases hopefully, with inflation under control and that’s going to create obviously an improvement in DCF calculations and people feeling more comfortable that the public markets are going to be supportive of IPOs than the traditional. And so, that’s what we’re telling our companies, that’s why we are really focusing on 24 months of runway and really on the private market side, not raising capital again until Q2 through to Q4 of next year.
Logan: So, you know, if you’re looking to raising a price round this year, don’t do that. Figure out ways to extend runway, however, you need to do it through a combination of burn decrease, strategic saves and venture debt and the other part of this equation is M&A, right. So, there’s approximately $2 Trillion of cash on corporate balance sheets that look at fintech acquisitions, that could be banks, asset managers, insurers and then some of the corporate tech players like Amazon, Facebook, Google, etc., $2 Trillion of conservative number, right.
You look at that and they’re all looking to play offense right now and they’re seeing huge opportunities to come in through companies that might be struggling with their cash position and offer discounts on their last private round and acquire it, really being left with very little choice. And so, that’s absolutely going to continue to happen and thankfully, on the B2B side there’s more M&A activity more likely acquirors than in the SMB and consumer world where that’s a more finite potential buy side set.
Peter: Right, right, okay. I want to close with a question around valuation and it feels like we went through this time period where we had abnormal valuations. Everyone sort of acknowledged we’re a little frothy, shall we say, and then we’ve gone through this downturn, you said 90% valuation drops in some cases, I mean, it feels like we’ve gone completely the other end of the pendulum. What should we think about as a normal fintech valuation market and what’s it going to take to get there?
Logan: What’s happening now is painful as it is healthy for private market valuations because, to your point, public markets have gone now over their skis, Square (Block) was trading it 20X trailing sales in Q1 of last year, today, they’re trading at just under two. Build.com has had multiple compression but not as much and so I think, as I mentioned, the B2B players are going to be the ones that’s snap back, but it’s going to end up somewhere between, right, so Square (Block) is not going to get up to 20X trillion sales anymore in this more SMB and consumer-oriented businesses.
We’ll see kind of valuation trailing sales multiples somewhere between the 4 to 8X range, right, PayPal, you look at PayPal historically, it’s a 7X multiple even in last year’s market. So, kind of that 4 to 8X multiple for consumer and SMB. For B2B Take Rate businesses, they’re not going to get valued that much better, unfortunately, I think those businesses end up kind of in the 8 to 10 at most range from a B2B perspective so that’s the Marqetas of the world and they are all very much trying to layer in more software, right, more recurring revenue, less volatility in their revenue curve so it’s easier for the financial investors to forecast and they can have more confidence in those outcomes.
The other category is the SaaS and the SaaS Plus players and I think those guys get valued at 12 to 15 times trailing sales and they’re going to get more for multiple credit. As they do have ARR, it’s easier for those financial investors to get confidence in those end-of-year or next year numbers. So, that’s how we see valuations playing out in those multiples will largely be applied to the private markets as well, particularly in the late stage and growth stages where they look and feel more like a public business.
Early stage, they’re going to continue to see things pre-revenue, obviously, that will be in the meaningful multiples, but with an eye towards how it’s more repeat founders so we only invest in repeat founders. That’s a key criteria for us and those types of repeat founders who’ve had an interesting exit previously and they’re starting their next company are going to be able to tract higher valuations or safe note caps at the seed level and then more meaningful price rounds in the Series A then it’s going to have to normalize, right, in the Series B, Series C.You have to show fundamentals and metrics that are going to be able to support the valuations you just raised to.
That’s how we’re seeing the environment right now and we had pulled out of the late stage markets in 2018 because of those multiples, now we’re seeing more compression and more attractive entry points in companies like SumUp and Circle who we announced recently where the deal had gotten done last year. We’ll be talking about probably 2 to 3X the valuation a deal got done at minimum in some cases or 5X of that multiple.
So, it’s swung back to being a buyer investor market in terms of entry points and installation and the valuation whereas it was a founders’ market and they were really more dictating terms and creating competition on those rounds and that was good in some cases if they could actually grow into that valuation if they could. Now, they’re really feeling like they’re in trouble and the pendulum swung back to their existing investors who have controlled dynamic perspective that can create a lot of run off and zero outcomes in this marketplace and I think that net is healthy, we need some shakeout and I think things will normalize this year going into next year. So, in short, for investors it’s a great time to have dry powder and be playing some offense.
Peter: We’ll have to leave it there, Logan, really interesting stuff. Thank you very much for coming on the show today.
Logan: My pleasure, Peter, great to be here with you, thank you.
Peter: It really is amazing to me how quickly we went from an incredibly free and flowing environment for raising capital to a really restrictive and basically shut environment for raising capital. As Logan really points out there, you’ve got to try and get through this any way you can, batten down the hatches, focus on cash flow and just try and get through the other side because this is going to be temporary. Fintech is a big industry that is going to be a huge part of financial services for many, many decades to come as we’re going to get through this little blip. We’ve gone from one extreme to the other and as Logan just pointed out, we’re going to get to a new normal and it’s going to be really, really interesting to see who comes out on top.
Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.