Last month, QED Investors caused ripples in fintech when it raised short of $1 billion to deploy in the sector, the latest illustration of underlying trends in the industry that remain in place despite the more challenging environment.
The global fintech venture capital firm set up two new funds. An oversubscribed $650 million fund will focus on early-stage companies, while a second $275 million fund will target later-stage startups. While these funds will have a global focus, Latin America will remain a “significant part” of QED’s focus, partner Mike Packer said in an interview with Fintech Nexus.
This news breathes renewed optimism into a startup landscape challenged by limited capital availability. While Latin America experienced a surge in fintech investments in recent years, the tide shifted abruptly last year, hindering the region’s funding prospects.
Now, QED Investors’ latest move offers fintechs a glimmer of hope. Founded in 2007, it has invested in over 200 companies, including 28 unicorns such as Brazilian digital bank Nubank and fintech lender Creditas. It hopes to add up to 45 new fintech companies to the portfolio through its early-stage fund.
To be sure, broader investment flows have yet to pick up. Although adjustments in multiples still have “some way to go,” Packer argues that fintechs that manage to weather the storm will come out with a solid argument to validate before investors: we can manage a crisis.
This conversation has been edited for length and clarity.
What will the fund’s scope be, and how will QED apply that to fintech in Latin America?
We see this as a three-year fund to put the scalpel to work. We are looking to add 35 to 45 new companies to our early-stage fund. This is meant to be a global fund, and we have no specific allocation to Latin America. However, we do have a significant amount of our resources focused on the region as it continues to be a very significant part of QED. While most investments will still be in the U.S., as has been the historical trend, we plan to participate in a big way in Latin America through the entire fund.
What is your view on valuations in the global fintech market, and how has that changed companies?
We are in the middle of a very broad reset, and it’s going to trickle down from later stages to earlier stages. Most companies realized that the valuation environment is changing, especially with what has happened already with public company valuations. It’s a natural course of events for that to filter through, and we haven’t seen as much fundraising activity for that reason. Investors and entrepreneurs are rethinking everything from scratch, so there is still a lot of adjustment to go. But for the most part, the reality has set in, and companies realize that the game is much, much different, and the bar is much higher than it was in recent years.
How would you define the LatAm landscape in particular?
In Latin America, the growth market is all but shut down. Companies that raised significant capital are now focused on finding ways to profitability. There really hasn’t been a market for large rounds. We’re starting to see series A rounds come back a bit, with valuations in the order of 20% to 40% lower. The activity is picking up, but there’s a balance between the capital companies have left, the support from current shareholders, and the pricing expectations of new shareholders.
How would you define this period for LatAm fintech companies?
Latin America, with its lower competition and higher growth rates, has shown more resiliency compared to the U.S. fintech market. Companies are moving away from extremely high growth rates, 200% plus, to very fast growth rates, from 50% to 100%. And then focus on carving out a path to profitability. This period is a test. Surviving companies will have proved to the market, themselves, and their shareholders that they have a real business model.
Many companies in LatAm have put their regional expansions on ice. How should startups approach these opportunities?
It depends on the stage of the company, but the general advice is to make your current market work first. And control your burn and risk. Expanding into a new market introduces new risks, especially in heavily regulated fintech markets. It’s harder to predict how much investment it will take. It is always harder, longer, and more expensive. Even in the good times. And it is extremely distracting. So, if your business model naturally takes you cross-border or you have a big enough home market, absolutely. But what matters right now is making it to the other side. You have to solve a very core part of the business before taking new market risks.
What is the broader trend in fintech in Latin America?
We’re at a pretty exciting time. In Latin America, it is just getting started. The market is only getting bigger and more interesting as companies continue to perform and grow. So while we’re probably in a bit of a stutter step or a bit of a slowdown when it comes to capital, we still see the opportunities being quite large.