By John Reynolds on Monday 31 January 2022
Rob Moffat, a partner at Balderton Capital, said that as well as higher inflation and interest rates increasing the risk on capital investment, institutional investors were also becoming more risk-averse.
A partner at a VC firm that has backed Revolut, GoCardless and other well-known fintechs says fintech valuations are “going to be lower” and “late-stage fundraising is going to be harder” over the next few months amid market turmoil.
Moffat cites market cap falls at Dutch payment fintech Adyen, which has seen a 28 per cent fall in the share price in the last month and US investment platform Robinhood, whose shares are down 33 per cent in the same period.
Explaining the reasons for declining valuations, Moffat says there are several causes.
“The challenge is that the risk-adjusted cost of capital is increasing: partly due to higher inflation and interest rates, but mostly because institutional investors are becoming more risk-averse," he says.
“Investors are going to be less tolerant of companies that make a loss for many years with the expectation of turning a profit, and they are going to be more focused on ‘how does this go wrong’ than ‘how does this go right’."
Moffat offers some advice for fintech startups and scale-ups amid this environment.
Moffat says at seed stage, fintechs should focus on how quickly they can show strong product-market fit with just "modest amounts of capital". He also says that unit economics "really matter" once fintechs are at Series B and beyond.
Furthermore, Moffat highlights that the productivity of product and engineering teams is also important.
He says: "It is impossible to perfectly quantify the RoI of your product team but the exercise is worthwhile. What should the impact of your product roadmap for 2022 be on the bottom line, and how does this compare to your spending on product and engineering?"
He points out that small teams can be extremely productive.
Moffat also says that underwriting matters, pointing to the case in the insurance industry, where low loss ratios have led to price hardening, which will likely occur across lending too.