Thoughts on the Market, from 1Q22

We sent out an update at the end of Q1 2020, when the Covid scare was taking root, predicting that there would be a significant shake-out in the VC world, that we would see valuations start to fall back to earth, and that the proliferation of new, inexperienced seed managers would come to an end.

We felt the tide of easy capital would start heading out.

In hindsight, we were very wrong.

Instead, we saw the exact opposite happen, with a disproportionate amount of new capital and new managers flooding into the fintech space.

We certainly benefited from that, but it also created a challenge for us in BTV I to step up and take on all the competition without getting too caught up in the noise and losing our discipline.

Now, the reckoning comes.

As Covid was disproportionately good to fintech, the end of that era has hit the fintech world disproportionately hard, and we’ve watched some of the top late-stage names in our own portfolios (NRDS, HIPO, and HOOD to name a few) take beatings unlike anything since the Internet bubble burst.

We’ve seen the venture market — from late-stage all the way down to seed — take a pause as everyone adjusts to this new world and takes time to reassess.

So with BTV’s next chapter, we may have a very different set of challenges to face than before, and we still have a lot to prove. 

We believe we are suited for these challenges; we built our first fintech companies out of the rubble of the Financial Crisis, and we built our last fund and made some of our best investments in 2016-2018, when few others cared about fintech.

Our operating model is to always be there when founders need us, in good times and bad. This is the time when the investors who will make their marks will be those who can actually roll up their sleeves rather than just talking about it, and make hard decisions where necessary.

We also believe that our macro-theses still hold: the global fintech opportunity is still massive, and we are uniquely positioned to partner with the best founders in the space.

As long as we stay disciplined and focused on what we do best, we believe we will be able to navigate any market changes and continue to put up strong numbers for our LPs over the long term.

And finally, we fully recognize that we could be wrong yet again.

The war in Ukraine could end, supply chain issues could resolve, inflation could moderate, and the Fed could stop tightening. That wouldn’t likely mean a return to the sorts of valuations we saw these last few years, but it would probably mean a return to “normal” for much of the VC world. 

While this all plays out, here are a few things we’re thinking through to leverage these new funds and adapt to the current landscape:

Staying patient.

When we were raising, we told our LPs that our strategy here was to maximize optionality for whatever the world brings.

Now, we’re *incredibly* fortunate to be in a position to take our time deploying them into this new world. We’ve slowed our pace of deployment a bit as we’re waiting for seed valuations to catch up to what’s going on in the rest of the market.

The opportunity cost of each dollar is much higher now, so we are keeping our bar very high, and we will be greedier on price and ownership targets.

Managing our existing portfolio.

We’re similarly fortunate that our top performers in BTV I raised significant capital recently, some just in the last few months, and have plenty of runway. 

For the rest of our portfolio, we are spending a lot of time coaching them on cutting burn, shoring up capital however possible, and living to fight another day. For some, we will be proactively looking for places to buy up ownership on favorable terms, and for others, we will be helping them think through contingency plans.

Special situations.

We expect that as capital becomes more scarce, special situations will arise where we’ll be able to partner with some of the best founders on terms that wouldn’t have been possible previously. We will try to leverage our networks and access in the space to find these opportunities, even outside of our existing portfolio.

Can we be more aggressive about positioning BTV? Uncertainty and change create opportunity, so we’re thinking through ways to press our advantages and strengthen BTV’s place in the market.

We expect a lot of fintech talent to start thinking about what’s next, and we want to be on top of it. This would mean helping operators find new homes, helping founders start new companies, and adding to our network of EIRs for portfolio support. Our new talent partner, Yoni, is starting at just the right time and has his work cut out for him.  

Investing talent won’t necessarily be spared in this shift, so we also wonder if there could be opportunities to “acquihire” an upstart fintech fund and bring our favorite emerging investors in-house. 

Finally, we’re starting to think again about what a BTV accelerator could look like. We put those plans on the back burner these last few years as we were getting BTV up and running.

In an environment where seed capital becomes much harder to come by, an accelerator has a much greater chance of success. This is a big reason why 500 Fintech performed so well, and we think now might be the right time to revisit.

While it’s a popular refrain these days, we would never say that we’re “excited” for a downturn, because too many people are going to be negatively impacted. We will say that we are cautiously optimistic that we, and our portfolio founders, will be able to weather the storm and emerge stronger on the other side.