VCs and PE bullish on 2021 for distributed finance, B2B tech
E-commerce and digital finance are expanding quickly due to the pandemic, economic downturn and plans for recovery — providing opportunities for VCs that back technology that powers faster, more digital payments.
"A lot of people are buying bitcoin and Ethereum and adopting it for the investment opportunity. But that's only one angle. The technology behind it is here to stay and is like the earlier days of the internet," said Alon Goren, a founder of Draper Goren Holm, a Santa Monica, Calif.-based investment firm specializing in fintech and blockchain.
Distributed finance, or DeFi, refers to an expanding range of use cases tied to blockchain or other distributed ledgers. The goal is to remove intermediaries from transactions to reduce fees or latency.
Much like blockchain itself, DeFi is more of a category than a product, geared toward using cryptocurrency's rails for broader uses independent from government or corporate rails. There's still a need for innovation that can improve scale for mass transactions, according to Nasdaq, which Goren says creates opportunities for firms that can improve connectivity for DeFi.
Draper Goren Holm, for example, recently invested in DeFi Money Market, a lending firm that uses links between cryptocurrency and revenue streams from traditional currency payments to reduce transaction fees and support lending. It's also invested in Return Network, a startup that offers connections to decentralized financial services without requiring engagement with cryptocurrencies.
The pandemic has resulted in a need to rebuild large parts of the financial ecosystem, Goren argues, saying the gravitation to open developer tools and distributed ledgers was inevitable but has accelerated in the past year and will quickly mature over the next year.
"Whether you thought the economy would collapse or not, you could see there will be a major shift," Goren said.
As large fintechs such as Affirm and big technology companies like Airbnb plan IPOs, other payment companies that benefit from the dramatic digital migration are also looking to build financial bulk in the year ahead. Stripe is seeking funding that could push its valuation past $70 billion, signaling momentum for its strategy to reach out to traditional brick and mortar businesses to support e-commerce.
"The virus has shifted the landscape in several areas, such as the acceleration in adoption of B2B payments, accounts receivable and accounts payable automation. There has been a notable transition there," said Trevor Rich, a partner at Lovell Minnick, a Los Angeles-based firm that focuses on technology that underpins supply chains and other financial services technology. Its portfolio includes firms such as Engage, Currency and LSQ.
Among the companies in Lovell Minnick's portfolio that have been made Lovell Minnick-supported investments of their own recently are Fortis Payments, which in 2020 merged with BlueDog. Fortis develops payment processing technology for developers and businesses, and integrates payment software with other business functions. BlueDog provides payment processing and related merchant services, enabling the two companies to provide both scale and breadth to reach businesses and retailers that have digitized customer-facing and back-office operations.
In a separate deal, Lovell Minnick portfolio firm Billhighway acquired Impexium, a software provider in the nonprofit association industry. Nonprofit organizations have also adjusted to remote digital commerce quickly, and moving ahead need to be able to adjust to fund flows that are less reliant on checks and other forms of paper billing. BillHighway addresses a need to streamline invoicing alongside other needs for B2B payments, such as flexible terms and faster payments for supply chains.
The pandemic not only disrupted supply chains, but created a liquidity crunch that continues to impact the financial recovery. Since many of these digital migrations took place under duress in 2020, there will be a new phase in the next year as businesses look to support a permanent mix of brick and mortar and digital for consumer products and work-from-home and in-office staffing for the enterprises.
"There is an increased emphasis on e-commerce fraud and security," Rich said. "That goes with the trend toward buying software that allows all of these transitions to occur in a seamless way."
Overall, the fintech industry has weathered the economic downturn better than most other industries and as such is better prepared to grow in the next 12 to 18 months. Sixty percent of fintech firms have launched new products or restructured existing ones, according to the Cambridge Centre for Alternative Finance. The university found the growth to be uneven, but noted the fintech sector has shown resilience, adding government stimulus would improve its position more. VC flows started to improve in late 2020, according to PitchBook, though that market still favors larger later-stage investments in existing companies. Rich expects that momentum to continue into 2021.
"Given the growth in fintech and payments, there is a lot of interest," Rich said. "These companies have recurring revenue, high margins, scalability and the ability to differentiate through technology."