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December 19, 2022

QED Investors' 2023 fintech predictions

As 2022 draws to a close, we asked our investment team to look ahead to the next 12 months to predict the most meaningful fintech trends and exciting verticals.

Here are some things we'll be watching closely in 2023.


Too many businesses were built on sand because they simply don’t have a real purpose. They didn’t ask themselves three fundamental questions: Are they solving a real problem? How do they know it’s a real problem? Who will pay to have this problem solved? They were technologies in search of a business problem and they were being fueled by excess money in the system – too much money chasing too few ideas.

On the VC side, we’re going to find substantial consolidation where asset allocators will put money with entities that can speak to having a comparative advantage or scale. Imagine a 2x2 matrix that has ‘specialist’ and ‘generalist’ on the X axis and ‘big’ and ‘small’ on the Y axis. If you’re a small generalist, you may struggle. If you’re a small specialist you’re also going to find it difficult, just a bit less. You’ve got to get to threshold scale so you can see all the deals you need to while giving you the economics to build your non-investment platform functions and create a brand that drives positive selection. Scale allows you to expand ideas across geographies, stages and verticals.

Businesses that help customers and companies save money – like QED portfolio company Caribou that saves car owners $100 a month –  will be successful in 2023 as the cost of living crisis and recessionary environment continues into the New Year. Earned-wage access companies that help workers get their money earlier, B2B payments companies and CFO suite software will all continue to do well, whereas B2C fintechs, particularly in developed markets like the U.S., may struggle in comparison.

2023 will be a tough year. There will be more meltdowns and there will be an increase in regulation, especially in the wake of FTX. It will take time for crypto to earn back its trust – some may say irreparable harm has already been done – but the advances in Web3, particularly in the use cases for blockchain as its full potential emerges – will go a long way to alleviating a vertical that is currently tarred by the same brush.

All I know is that fintech is a force for good and that we are still in Chapter 2, not Chapter 8, of fintech’s incredible story.

- Nigel Morris, Managing Partner

The market will continue to be bad through all of 2023. There will be some green shoots, but this won’t be a v-shaped recovery. It will take well into 2024 before the markets really start to recover. This will be particularly true in the crypto world.

But, the best companies will be able to raise. Downturns provide great opportunities for innovation and growth, so there will be breakout companies. But many, many others will fail.

Emerging markets fintech will have a funding brownout. But that will mask massive underlying opportunities for large scale impact and growth.  Bringing fintech around the world will be a huge trend in the next 5-10 years.

- Bill Cilluffo, Partner, Head of early stage investments

It’s highly likely that we’ll see the end to rate increases by mid-2023. It’s highly likely that the drivers of inflation will flatten and/or start to improve by mid-2023. It’s highly likely that housing prices will settle into a new norm by mid-2023.

Right now consumers’ perceptions of inflation exceed the rate of inflation itself and businesses don’t know how to respond. But once the new rules of the game are understood, businesses can adjust their models and consumers can re-optimize their lives accordingly.

Great businesses need to be built on top of foundationally good businesses. Going directly from “zero” to “great” is a fantasy standard that 2023 is going to stomp out of the belief system of Founders and Investors. Discipline will be rewarded in this new world.

Regulation is the imposition of rules and penalties that are intended to modify the behavior of individuals and firms in the private sector. If people can’t protect themselves then Regulators will. And with the recent meltdowns in crypto, it’s an obvious place for them to start.

One shouldn’t underestimate the power and momentum good regulation can unlock. Unfortunately the opposite is also true. One shouldn’t underestimate the friction that bad regulation can impose. Prediction: Incremental Regulation in 2023 will be net positive.

“Team and TAM” investing will retreat to the pre-seed stage. Positive progress will govern the availability of downstream capital. Darwin has returned from vacation and he only likes the good things in life. And if Darwin doesn’t like you, extinction might be around the corner.

The startup ecosystem has years of catch-up work to do flushing out marginal business models and teams that were propped up by undisciplined Investors. 2023 will without a doubt be the year that capital dries up for these businesses and natural selection starts working again.

2023 is going to be a tough year for startups that can’t attract capital if they’re burning cash. Sales processes will rarely result in a great outcome. Most will end up being fire sales, acqui-hires or no-bids. It’s a tall order for tech and team to justify owning a liability.

For most startups the downstream impact of layoffs will be positive. They’ll be leaner, move faster and make better choices. Money will last longer. The learnings per dollar deployed will be greater. The companies being built will just be better.

Layoffs typically come from the “experienced middle ranks” because “doers” are necessary and Executives rarely fire themselves. This could kick start a new cycle of innovation because many in the “experienced middle ranks” will use this opportunity to become Founders themselves.

Valuation multiples will collapse to reasonable levels. Blitzscaling will be replaced by smart scaling. Round sizes will shrink as startups re-learn the power of capital efficiency. Startups will have to materially de-risk between rounds to attract capital.

Fundraises will no longer feel like shotgun weddings and instead will return to mutual dating exercises. LPs will have less capital to allocate to the VC asset class which will hurt new managers and underperforming established funds.

Liquidity for employees and early investors will be hard to come by until a startup is fully de-risked and on a glide path to profitability. Controls, governance and reporting will once again become important to Investors and in many cases will be non-negotiable.

Until recently, most VC backed startups were HQ’d in specific cities that were known “talenthubs.” And until recently, most Investors preferred investing in startups they could touch regularly which meant they also HQ’d themselves around these “talent hubs”.

The combination meant that a handful of cities in a few countries dominated the rest of the world. But the past few years untethered the sourcing and management of talent from geographical imitations. Borderless Ideas + Borderless Talent = Global Opportunities.

- Frank Rotman, Chief Investment Officer

Click here to read Frank's full Twitter thread of predictions.

Crypto winter will remain. Trust takes time to build and even more time to rebuild after it's been lost. The extent of immoral and illegal activities in the space has left scorched earth. This earth is fertile for new products but that will take time.

U.S. consumer fintech will remain in the doldrums, impacting infrastructure businesses which serve and enable these businesses, like Google, Plaid etc.

Emerging market fintech will surge as regulators see the upside in PIX-style programs. This upside is defined by growth in taxation revenues and increase the velocity of money movement.

Interest rates will impact home prices. The most notable impact will be on number of home sales rather than any mass contagion event we saw in '08. Proptech businesses that weather the storm will come out of this stronger than ever.

The U.S. Dollar will remain strong, driving demand for products that unlock access to the U.S. Dollar and U.S.-denominated investments (StableCoins, property, stocks, bonds etc.).
- Adams Conrad, Principal

Fintech will continue to produce innovative business that are pushed by at least one of these key drivers:

  1. New technologies (eg. AI/ML, API, blockchain, etc): from digitizing paper based industries to applying sophisticated tech, fintechs will gain better data capabilities. Better data means better risk management, better underwriting, and better risk adjusted financial products. New technologies also mean a reconfiguration of how work is done. When I see new technologies like OpenAI ChatGPT, I wonder what will happen to a number of jobs out there. Will inside sales continue to exist? How about content marketing? How will resource allocation evolve?
  2. New consumer and business behaviors: GenZ have completely different relationship to money than previous generations, global workers are moving across regions at faster pace, companies are going global earlier --- how we store, save and move money will continue to shift and new fintechs will emerge to adapt to these new needs.
  3. New regulation: regulation can be a powerful driver of innovation as it unlocks new market and business possibilities. Some examples include real time payments like PIX in Brazil, open payment data, the new climate budget and decarbonization of real estate, among others.

Both business and people will be in a cost cutting mentality so companies that helps reduce costs will gain quick product market fit. It helps me to think about people and companies P&L. For instance, housing, transportation, food and taxes are the top expenses of a person's P&L so any company that helps them reduce these costs will gain quick traction in today's environment.

More homeowners will tap into their home equity to invest in their own homes instead of moving to a new place to upgrade. With embedded home equity at all time high, HEI, HELOCs and alternative forms of liquidity providers will emerge, especially as recessionary pressures begin to weigh heavier on the consumer.

Even though a number of companies raised internal rounds to extend their runway, they will need to come back for air next year's Q2 and Q3. While there is available dry powder, "dry powder per quarter" will be scarcer as VC firms extend their capital deployment period. As a result, we will observe an enormous backlog of companies fundraising next year, yet not all of them will be able to secure funding.

Next year will continue to be tough and we will see a couple of name brand fintechs struggle to survive. With a slow growth and a high cost structure, these late-stage companies will be forced to execute additional rounds of cost reduction effort.

On average, investors will prefer to lean into companies that have capital efficient models or have a clear path to profitability. We will also observe more syndicated deals and a higher reserve pool per new deal.

Regulators will tighten their scrutiny on fintech and crypto as the ripple effects and market contagion from name brand players in trouble intensifies.

- Camila Key Saruhashi, Principal

M&A will pick up as companies that have great features but can’t scale to IPO have less funding available and seek marriages to larger fintechs, banks and insurance carriers.

CEOs will push for the companies to come back and consolidate to offices and face resistance doing so.

Crypto prices do not rebound in 2023 due to a lack of new crypto adopters who stay in the sidelines waiting for the sector to stabilize and stronger use cases to develop.

Contrarian VCs thrive by figuring out where to get bold as others get skittish. Many of the growth funds fade as their portfolios booked in 2020-21 are re-evaluated.

- Matt Risley, Partner

We will see the regulators stepping up their regulation in two areas in particular: Crypto as well as e-money regulation. Some of this will be positive, as it will make the rules more clear (in the case of crypto), and some of it will make it harder for fintechs to obtain e-money licenses.

Banks will see profits increase in the face of higher rates, and banks will come out stronger from this recession compared to how they fared in 2008.

We will see more and more M&A in the sector, and fintechs will capitalize on this in two ways: either by preparing themselves to be acquired if they have no more cards to turn over, or by building an M&A muscle so they can become the acquirer. Banks valuations are still depressed, but as their p/b and p/e ratios improve, they will increasingly start to be more acquisitive.

House prices will come down, but the downturn in nominal prices will not be as bad as many expect. The decrease in real house prices will be greater, the delta obviously being driven by inflation in the 10% range. In other words, the delta between real vs. nominal will become more apparent than it ever has been in recent memory.

Platforms that can manufacture high-quality loans at reasonable costs will see a positive impact on their valuation multiples as income generating assets will be sought after more actively by investors.

Dollar strength has been a big story in 2022, this may reverse as the Fed starts to slow down rate increases in the later part of 2023.

We will see more sovereign nations launching digital currencies.

- Yusuf Özdlga, Partner, Head of UK and Europe

2023 is going to be the most uncertain year of my career.  Sitting at the beginning of 2009, I felt I had more clarity that the government’s efforts to step in would result in a recovery from all-time lows.  Everyone knew that something had to be done to help stimulate the capital markets. But this time, the Fed doesn’t have a game plan. They are trying to balance multiple competing outcomes from their policy actions.  I think they move to a wait-and-see approach as most investors have already done so in their own investing cycles. Add to that that credit markets are a lot more impaired then people think and market participants tend to be glass quarter-full type of people.  

On the equity front, the hope of accumulated mountains of “dry powder” in the industry will not translate into a massive acceleration in deal activity. The companies that clean up their capital structure early will be at a major advantage to those who choose to kick-the-can. On the bright side, we will see high-quality IPOs return to the market and a lot of M&A. It’s a time for people to accept reasonable prices and to find ways to realize cost cutting through synergies.

Great news for B2B companies that are cost-cutting solutions or create opportunities for additional monetization of the ultimate consumer. It’s been many years since companies had to focus on OpEx and organic revenue enhancement.

Thank you in advance to Amazon for reversing course on over-paying for everything. Paying well above market for warehouses to parking lots to labor is something that we could use without when inflation seems to be in all corners.  

While a mild recession is likely inevitable, I think we can avoid something deep and painful.  2023 – the reality check, get back to basics!

- Chuckie Reddy, Partner, Head of Growth

Businesses will continue to go global and we need more fintech tooling to solution the continuation in globalization. From a global commerce perspective, merchants are being hit with increasing challenges in customer acquisition cost because of ongoing application tracking restrictions and have to consider going global earlier in their lifecycles in order to find more customer audience channels.

For most software businesses, globalization is a continuation from pandemic time periods, from both a customer / revenue standpoint, as well as a staffing / resource perspective. We believe fintech is essential in supporting this continuing trend, such as FX hedging, more seamless and programatic cross border money transfer, global merchant of record solutions, international destination tax / compliance, etc.

The rising cost of capital will force companies into thinking more about capital flow timing lags and renew business models. When talking about increasing interest rates, the first companies to be impacted are often lending / balance sheet heavy businesses.

However, there are many other businesses that are implicitly impacted by the drastically higher capital cost (both positively and negatively). Holding on to customer funds for a longer period? Time to think about how to effectively manage risk but capitalize on the much higher rates. Fronting money for customer purchases or having working capital in flight for longer time periods? Start to consider how to reduce working capital days or increase pricing to make up for capital costs.

Elsewhere, regulators will apply more scrutiny around funds separation hygiene, and more fintech infrastructure vendors will benefit from it: From some of the 2022 debacles, companies are increasingly aware of the importance of separating different purposed funds, especially in the case of holding onto customer funds.

Surprisingly, a lot of companies do not have sufficient visibility and infrastructure to dynamically track and categorize funds flow. We believe the fintech infrastructure to help set up sub FBO accounts, track funds in flight, keeping good audit trail, will become ever more important in the coming year.

- Victoria Zuo, Principal