We’ve heard for months about the VC dry powder, yet every so often, the news tells a tale of a successful funding round. Last week, on August 22, Ramp served the industry with one of these stories.
The company announced that it had raised $300 million despite a 28% drop in its valuation. The amount was on par with the series C round Ramp underwent in 2021, but the environment was a stark contrast. Two years ago, the industry was in the middle of a boom, and almost everyone was getting funded. VC investment doubled between 2020 and 2021, reaching a total of $130 billion in the fintech sector alone.
Halfway through 2023, the numbers paint a different picture. S&P Global reported fintech funding worldwide had plummeted by 49% in the first half of this year. The second quarter was particularly disheartening, dropping to its lowest level since 2017. Funding rounds of over $100 were also at a six-year low, making Ramp’s funding even more anomalous.
Ramp is in the minority, but not alone. Successful rounds are slowly eking through despite the endless tales of dry powder.
“You’ll talk to one person, and you’ll get doomsday, and you’ll talk to another person; it’s very rosy. And I don’t know if either side is really right,” said Marcos Fernandez, Managing Partner of Fiat Ventures. “There’s still capital out there to be deployed into founders with really unique propositions and in interesting categories.”
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Funding is down, but it could create an opportunity.
For Fernandez, the environment is a good one, requiring founders to double down on the fundamentals of the business.
“For founders who are looking to start right now, although it’s tough to come upon capital, it might be the best time to do so,” he said. “Expectations are back where they should be. You’re focusing on core businesses, and there’s still a massive opportunity for improvement.”
“In 2021, some companies and founders are raising capital every six to eight months, which is helpful and really well capitalizing a business, but you’re not able to build out the foundations and structures for what should be a long-term viable business.”
At the height of the fintech funding boom, a “growth at all costs” mentality had taken hold, leading VC funding to be driven more by a fear of missing out. Fernandez explained that while, for the most part, the foundations of creating a viable business were considered, founders now have the time to focus properly on their business models.
“We have always taken this approach of really understanding businesses and spaces before deploying capital..That model has gotten a lot stronger, especially in this market,” he said.
“It’s really backing teams and founders, especially at the early stages, that have really good founder market fit…today, when capital is less available, you want a team that both has the grit and understanding of really solving that core first problem before they’re thinking about what to expand to over time.”
Ongoing Differentiation through the saturation
The doubling down on fundamentals may also be increasingly important as markets become saturated. Already, fintechs like Stripe, Klarna, and Paypal have established themselves as financial giants in their own right, leaving little space for newcomers without a unique proposition.
“On the direct-to-consumer side, it’s definitely saturated. It’s easier to get in. And then it’s just really competitive to try to go after individuals,” said Fernandez, explaining the competition is heightened in a market like that which fintechs face today. “In a broader market correction, especially when there’s a little bit of less certainty with some of the middle market banks and fintechs. Individuals like you and I will often take our capital to what will feel like more long-term financial institutions.”
“It’s a case of more competition and saturation, more expensive to get users, and users who are less likely to convert, which makes it really difficult on the consumer side, but not impossible.” He explained that even through the difficult climate, startups had surfaced with differentiators facing the consumer market that had generated interest. However, now the outlook for funding has gone beyond the initial proposition, turning instead to their ability to navigate through the competitive landscape.
“When you start to see a lot of that saturation, it’s tough to have conviction….Everyone across a particular category will inevitably end up competing over time…It’s about having a very clear plan around what is the problem you’re solving today but also having a vision for where you can end up tomorrow.
“Whatever the pitch deck is for the first time you raise capital is often very different to the product that really ends up scaling and becoming very successful. So what you’re looking for is founders who have a clear thesis and guidelines around what they want to do, but also are able to accept feedback and can pivot companies and do so really successfully as well.”
Due to this focus, he expected that the startups receiving funding over the next few years, despite being funded at a lower rate, would likely create even better businesses.
