The economic winds are changing.
For the past 13 years, the U.S. economy has been on the rise. Stocks growing year-over-year. And as the financial markets surged upwards, the dynamic market created a powerful startup environment, particularly in the Fintech ecosystem. Returns were strong and venture investment was further propelled by valuations marked at market comparables known as “comps” instead of multiples of revenue growth.
But the bull market appears to be waning.
The Dow Jones Industrial Average is experiencing an 8-week losing streak, propelled by rising food and energy costs globally further spurred by Central Banks raising interest rates to tame record high inflation. The venture community is sending up warning signs as well. Y Combinator, in a note to their portfolio companies, said to “plan for the worst” and Andreesen Horowitz put out a detailed article about the impacts to fundraising for founders. Both provide insights to how public markets are impacting private valuations all the way down to the earliest Seed stages.
These warning signs aren’t theoretical, either. Tiger Global, a massive player in late-stage investment, has lost $17 billion this year. And Softbank’s stock price is down $140 billion from its February 2021 high. While both firms typically invest in later stages, known as “growth” financing, their historic losses reflect the broader markets receding valuation multiples.
There’s no sugar-coating the situation. The early signs of a broader market correction are upon us. And while recessions are normal, consumer confidence is lower now than it was when the COVID-19 pandemic began.
So what does all of this mean for Fiat Ventures?
For the rest of the article, we’ll outline why Fiat Ventures isn’t just prepared for the broader market correction, but also well-positioned to take advantage when compared to other emerging VC funds. We’ve built the fund to not only survive an economic downturn, but to take advantage of the opportunities that arise in a bear market.
Let’s dive in.
1. Our Investment Strategy
From Day 1, our investment strategy has been grounded in the realities of startup growth. We look for teams with past operating experience. And, importantly, markets that aren’t just large today, but also poised to grow over the next 10-20 years. In addition, we have always placed a lot of emphasis on growth statistics that provide meaningful ways for companies to scale. Some refer to this as “product-market-fit” but we know them more tactically as customer acquisition costs (CAC), referral rates, unit economics (ARPU), and revenue margins.
A unique advantage of Fiat Ventures is our partnership with Fiat Growth, our market leading growth-focused consultancy.
Through Fiat Growth, we have direct sight into companies before we invest in them. We consider this the strongest type of due diligence. And with every Fiat Growth client, we pre-negotiate rights to invest. From strategy and tactics to financials and technology, we can see their current position and future potential.
The Fiat Growth team works alongside these early-stage companies, helping them prepare for their next stage of growth. In two-thirds of our investments, Fiat Ventures was involved after our Growth team had worked alongside founding teams.
Having a relationship, knowledge, and vision already established through Fiat Growth enables us to make the best possible decisions with the most accurate and up-to-date information.
This extended due diligence isn’t just important for our initial investment. As companies grow from their initial Seed funding, we’re positioned to better allocate reserve capital behind the teams and products that are seeing outsized growth. In a space that’s governed by the power law, this provides us with the ability to place as much capital behind the companies that show signs of outperforming the rest of our investment portfolio.
Much has been said about the investment strategies of high-profile funds. Rising valuations. Reduced or outsourced due diligence. Prioritizing speed above all else. And “extremely aggressive deal making.”
We’re not here to criticize the work of others. But we are here to say: that’s not how Fiat Ventures invests.
At Fiat Ventures, we believe the fundamentals of investing and growth are what drive success. And that fundamentals prove themselves out when the market shifts.
Our strategy is built for both a bull market and a bear one.
2. Early-Stage Companies
Not all investments are equal.
And not all stages of startup growth present the same risks and challenges. Predictably, the funds that have been hit the hardest so far are those focused on late-stage Growth investments. Funds built on the need for explosive growth and massive investment.
As an early-stage fund, Fiat Ventures is positioned to see valuations that have yet to be as greatly impacted by inflated valuations as some later-stage funds. Our initial investments are deployed into Pre-Seed or Seed stage investments, providing the ability to gain larger ownership percentages with lower total capital being deployed.
This is not to say there won’t be downstream impacts in early stages, but they tend to be less susceptible to over-inflated valuations at later stage financing rounds. We work closely with founding teams and reserve additional capital for follow-on rounds. This approach gives us the ability to invest in multiple early-stage fundraising rounds.
Early-stage companies, however, aren’t immune to broader market corrections. Founders need to be cautious of their spend when it comes to building teams, shifting their focus from “growth at all costs” to sustainable growth strategies. This will continue to challenge companies who are faced with the conflicting pressures of needing to conserve cash and extend their runway, while also needing to hit ambitious growth targets for future capital raises.
3. How We’re Addressing the Changing Market
The last note is this: we’re actively monitoring the situation.
Our team has been in this industry for over 50 years combined, and we know how quickly things can change. The terms “bull” and “bear” market are broad-strokes categories. But in-between the terms, there’s a whole world of details.
We pay attention to those details and are actively implementing the following investment strategies to make sure we continue to deploy capital behind the right types of investments.
First, we’re paying closer attention to entry valuations, especially for the earliest stages without a product in market. While we will still make investments behind certain teams with prior founding experience, we won’t lean into an investment until we’re able to see traction. This becomes increasingly important as more consumer Fintech products enter the market.
Second, we’re focusing our attention on businesses that can drive high revenue margins at scale. We’ve often shared that “all roads in Fintech lead to lending” because of the high margins and sticky relationship with customers. Vice versa, we’re not looking at Fintech sub-verticals that have seen oversaturation in the past few years further driving down pricing, product differentiation, and profit margins. At the end of the day, adoption is only as good as the revenues that are generated.
Lastly, our focus will remain in investing an initial check to earn 1-2% of a business, while reserving 2-3x our capital for follow-on investing. By having a heavy reserve strategy, we can see how companies weather the upcoming market correction before allocating capital.
At Fiat Ventures, we love this industry and appreciate the opportunity to invest, through the highs and the lows. Our team has weathered storms in the past. And we’ll weather this one with diligence, experience, and an eye to the future.
We also know that down markets can unlock amazing opportunities. Some of the best companies in the startup ecosystem came from companies that were started in the last great recession of 2008. Presently, valuations are lower, but teams are focused on building.
Startups look for a trusted partner, not just a check. And we believe, through Fiat Growth and Fiat Ventures, we’re perfectly positioned to step in.
Thank you for trusting us. We’re excited to share this journey with you all.
– Fiat Ventures team