QED Investors says pace of investing from new funds will be ‘extremely disciplined’

Welcome to The Interchange! If you received this in your inbox, thank you for signing up and your vote of confidence. If you’re reading this as a post on our site, sign up here so you can receive it directly in the future. Every week, we’ll take a look at the hottest fintech news of the previous week. This will include everything from funding rounds to trends to an analysis of a particular space to hot takes on a particular company or phenomenon. There’s a lot of fintech news out there and it’s our job to stay on top of it — and make sense of it — so you can stay in the know. — Mary Ann and Christine

Hi, hi. It was an unusually active week in the world of fintech fundraising, as evidenced by the sheer number of startup raises we covered (more on that below). Last week, QED Investors also announced that it had raised $925 million across two new funds to back fintech startups globally — a $650 million early-stage fund and a $275 million growth-stage fund. The venture firm has been around for well over a decade, exclusively investing in companies building financial technology. To dig a little deeper, I caught up with QED managing partner and co-founder Nigel Morris after news of the fund closures came out. Here’s that Q&A (edited for brevity and clarity).

Q&A with Nigel Morris

What do you mean by investing in the “early growth stage”?

A large part of the Growth Fund, approximately two-thirds to three-quarters is earmarked for continuation capital. As a result, this capital comes in when the early-stage fund drops off, typically after the Series A round.

Growth Fund I and Growth Fund II are predominantly intended for Series B and Series C investments to allow us to continue to back our breakthrough companies, while giving us the optionality to invest opportunistically in companies we may have missed the first time around.

What are some recent exits?

QED had five portfolio companies IPO in 2021 — Remitly, AvidXchange, Sofi, Nubank and Flywire. JPMorgan acquired OpenInvest in 2021, too. We did not have any exits in 2022 or so far in 2023, but hopefully there will be more in 2024 as the later-stage thaw continues.

We are spending a lot of time with our later-stage portfolio companies making sure they are ready for a sale or an IPO, and we are supporting our entrepreneurs with opportunistic fundraising for their next round of capital where it makes sense.

What areas of fintech are you particularly bullish on, and why?

Considering our deep Capital One heritage, we have extensive experience as a team in core financial services like credit and payments. We remain particularly bullish on the theme of embedded finance, also businesses that are counter cyclical, which are more important than ever today considering the current macroeconomic environment. Looking farther ahead, we are excited to explore specific use cases around both blockchain technologies and infrastructure and its corresponding rails, and we are also excited by the promise of the next iteration of insurtech and proptech. With our strong heritage in data science, we also believe a lot of the major trends that people are talking about in AI/ML frameworks today are already underfoot in many financial technology companies.

What geographies are you particularly bullish on, and why?

QED is now a global VC and we are particularly excited by the opportunities in emerging markets like LatAm, Africa, and India and Southeast Asia. The potential to build seminal companies in these geographies is incredibly exciting for us because we can democratize access to financial inclusion on a truly massive scale.

While North America and Europe will continue to embrace fintech and digital adoption, the biggest growth in terms of multiples will come from emerging APAC, MENA and LatAm where large numbers of people remain unbanked and underbanked. The potential to build world-class transformational companies in geos such as Singapore, Indonesia, Egypt, Nigeria, Brazil and Mexico and make a noticeable difference in people’s lives is terrific. In these developing markets, QED believes we are in the earliest chapters of fintech’s evolution.

Fintech has taken a big hit in the past year or so. What are your thoughts on that? Was there too much hype? 

There was a lot of froth in the market after 15 years of up-and-to-the-right progress. Valuations became unsustainable and peaked at inflated 20x revenue multiples in Q2 2021. As valuations soared and inexpensive capital flowed freely, it became difficult to accurately determine what a company was truly worth, and as a result, the industry overpaid for companies that likely didn’t have the business model or traction to command such a price.

My colleague and co-founder Frank Rotman has likened it to Darwin taking a two-year vacation but now finally returning. Some companies will struggle to raise their next round and some companies will falter. QED remains intensely focused on building lasting, durable businesses that have strong fundamental unit economics and that solve real problems.

How many companies do you plan to invest in out of these new funds, and what is the average check size?

Pacing will be extremely disciplined, but we will be opportunistic where it makes sense. Generally speaking, we anticipate fund deployment to be quite measured across the ecosystem, particularly in comparison to recent years.

We anticipate making approximately 35 to 45 investments out of Fund VIII with average investments of $15 million. We’ll likely make around 20 investments out of Growth II with an average investment size of $15 million. While we prefer to play at the early growth stage, we are…positioned to also create co-investment opportunities for our LPs and to capitalize when the IPO window starts to unfreeze and the M&A activity picks back up. — Mary Ann

Your move, Step

Just when you think you’re the “king of the castle,” someone comes along and challenges you to the throne. Last week, I wrote about Step, the digital banking service geared toward teens and young adults, which announced a 5% rate for its savings accounts.

At the time, I also mentioned that neobanks and other financial organizations are giving traditional banks a run for their money (pun intended), with some being inspired by Apple launching its savings account rate of 4.15% earlier this month.

In talking about Step’s high rate, CJ MacDonald, co-founder and CEO, told me that the company’s goal was always to offer the highest percentage rate among competitors.

Well, the challenger emerging this week is M1, a finance app offering automated investing, borrowing and banking products, which is matching Step with a new M1 High-Yield Savings Account that has a 5% annual percentage yield.

M1 also seems to have similar thinking to Step in working to always have a high savings account rate. In November, it was 4.5%. Like Step and others, you don’t automatically get the 5%; there are some things you have to do, such as have an active M1 Plus membership. M1 said it is offering three months free, a $30 value, so there’s some incentive to try it out.  — Christine

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