What is hot for fintech investors in 2023?

The investment landscape will be a challenging one in 2023, according to Mukaya (Tai) Panich, CEO and chief venture and investment officer of SCB 10X, who clarifies: “But the opportunity is that there will be less noise and it will be a great time for builders and founders to build their startups without much distraction.”

Embedded finance…

“We are seeing a convergence where financial services are increasingly embedded into ecommerce and other software platforms and we expect demand to grow,” says Jaidev Shergill, president and founding managing partner of Capital One Ventures.

Capital One Ventures has already made a number of investments in ecommerce platforms, in line with this thesis. In November 2022, Capital One Ventures provided $96m in follow-on funding for travel recommendation app Hopper, which “is emerging as a centrepiece of the resurgent travel ecosystem”, according to Shergill.

Capital One Ventures also led a $3m June 2022 round for FanRally, which provides digital subscriptions for sports teams and the entertainment industry as well as reservations for games and concerts. The unit was also part of commercial mortgage marketplace Lev’s $170m round the month before.

…and the tools that enable embedded finance

At the same time, as financial services become increasingly digitised, there is a growing market for the tools and infrastructure that make it all work, said Shergill.

“With that in mind, a new investment for us [in 2022] was Observe, which is tackling a challenge that site reliability engineers face organising and visualising data from distributed sources to detect and resolve system stability issues,” he says.

“We also invested in Harness, a software delivery platform created by the founder of AppDynamics. Accessibility is equally critical in a digital context, so we see the value in companies like Evinced, which provides accessibility testing tools.”

Blockchain-based banks

Thailand‘s Siam Commercial Bank has an ambition to build a blockchain-based bank, and so for SCB 10X, its investment arm, blockchain technologies remain firmly in focus.

“Currently, my corporate VC team and I are in the process of doing proof of concept on cross-border payment and remittance using USD Coin (USDC) — a digital stablecoin pegged to the United States dollar — on Solana and Stella blockchains,” says Mukaya (Tai) Panich, CEO and chief venture and investment officer of SCB 10X. The team is working with a payment aggregator partner and Fireblocks, the crypto custody provider.

Her team is working on instant settlement flow, using blockchain and stablecoin technology, to solve the problem of pre-funding in traditional cross-border payment and remittance.

”However, due to the regulations in Thailand,” Panich continues, ”an entity of the bank such as SCB 10X cannot hold digital assets or stablecoins unless we take a capital deduction from the bank’s capital reserve, so we are going to enter into Bank of Thailand’s sandbox to do this.”

One of last year’s highlights for Panich was the investment SCB 10X made in crypto trading platform Talos. The company provides trading infrastructure technology targeting institutions to manage the entire trade life cycle, from price discovery to execution through to clearing and settlement — including liquidity sourcing, direct market access, price discovery, algorithmic trade execution, transaction cost analysis, reporting, clearing and settlement.

“Talos is bridging the gap between traditional finance and crypto,” says Panich. “It supports full trading life cycle for crypto spot, crypto futures, perpetual swaps, as well as FX spot. It is also a play on the trend of electrification of trade lifecycle in crypto that will unfold over time, just as what was seen in traditional asset classes such as equity and bond.”

This year, SCB 10X is also looking to build on the investments it made last year in crypto custody companies Fireblocks and Anchorage.

“Since our bank has the ambition to build a blockchain-based bank, we got to bring in Fireblocks and Anchorage, to be the providers of crypto custody for our bank’s crypto exchange,” she says.

Financial inclusion

With a tough economic climate and price inflation hitting populations across the world, Shergill’s team at Capital One Ventures also has its eye on financial inclusion.

“We backed Canary, which introduces emergency relief funds as an employer benefit to support employees facing sudden financial hardship,” he says.

SCB 10X, meanwhile, is looking at microloans. “We invested in Thailand-based AI-powered digital lending startup SCB Abacus. Their advanced digital lending platform uses both traditional and non-traditional credit indicators to provide credit to people who lack access to formal finance. We invested in SCB Abacus since the seed stage. The company is currently in series B and we are an investor along with Openspace and Vertex.”

IPOs and exits unlikely in 2023

One of the big features of 2023 for fintech investors, as for the rest of the market, is funding rounds and exits drying up.

“We are coming out of 10 years of close to 0% interest rates, which created ample liquidity in the system and made investing in risk assets attractive. Now, with rates going up to close to 5% this year, has of course created a big shock among investors. And they will have to take time to reassess their investment strategy,” says Panich.

She believes that the window for initial public offerings (IPOs) and exits will remain closed for the rest of 2023. ”Due to the rising interest rate regime, growth tech stocks are out of favour, especially the growth tech stocks that are still cash flow negative,” she says.

Instead, with IPOs out of reach and growth-stage funding rounds becoming more scarce, we’re likely to see a lot of secondary deals, with valuations at a big discount.

More early-stage funding this year

Much of fintech investors’ attention is shifting to early-stage funding rounds.

“The valuations of these early-stage startups haven’t really come down much in this current private market winter,” says Panich. “In addition, we see a lot of growth-stage funds now are investing in the earlier-stage rounds like seed or series A, when in the past they tended to invest in series B or higher — like Tiger Global, Bain Capital.” However, Panich adds that early-stage investors are more selective with their investments.

With investors no longer chasing startups as aggressively with term sheets, this a great time for entrepreneurs to focus on building their startups without much distraction.

“Because we also do incubation programmes, due to winter in startups, we can source talents easier into our programme. We spend a lot of time to incubate projects from the ground up — build something from the problem statement that we see and nobody is building,” says Panich.