In an exclusive interview to ET, he said that the recent crackdown by the Indian central bank on various segments of the new generation financial services It was a step in the right direction and it did not deter investors with deep operational experience, like his firm, from betting on Indian fintechs.
QED investors’ portfolio companies such as A map And Jupiter were impacted by new regulations in the co-branded credit card segment. In March, Federal Bank And Bank of South India have been banned from issuing new credit cards after the Reserve Bank of India tightened norms for sharing customer data between co-brand partners as some players were found to be in breach.
“We are accustomed to investing in developing markets and the process of regulatory bodies “It’s not unusual to try to encourage a level playing field from time to time. Some of it will be disruptive in the short term, but it won’t have any long-term impact. And given the companies we invest in, with mature management teams focused on real problems and real unit economics, it’s all good,” said Morris, who co-founded U.S. bank Capital One with Richard Fairbank in 2007.
Also read | How RBI is strengthening credit card surveillance
QED Investors’ other Indian investments include an earned wage access provider Refyneopen finance company Upswing, edu-fintech startup Leo1, formerly Financepeer.
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Founded by Morris and Frank Rotman in 2007, QED Investors began as a family office before transforming into a venture capital fund. It raised $925 million last year, including early-stage and growth vehicles, bringing its assets under management to more than $4 billion. Its global portfolio includes Swedish fintech giants Klarna, Brazilian neobank NuBank, SoFi, CreditKarma and Remitly in the United States.
ETtechSandeep Patil, Partner, Head of Asia, QED Investors
Sandeep Patil, head of Asia at QED Investors, which oversees India, said the rise compliance costs This will not stifle innovation among early-stage startups, but will instead help build user confidence. “The cost (of regulations) will go up and is expected to go up. So, anyone who is starting a neobank or a lending startup needs to think about what kind of reporting they will have to provide. If they get an NBFC (non-banking financial company) license, they need to know what that means. That cost would be prohibitive for innovation, but it will be an integral part of innovation,” he said.
Valuation of Fintech
Global fintechs in the payments and lending space have seen their valuations collapse over the past two years. Stripe, the world’s largest online payments startup, saw its valuation fall by 50% last year, reflecting the market’s excitement.
Morris said the growth generated by the Covid-19 pandemic online businesses The combination of these two factors, combined with a zero interest rate regime, prompted investors to bid sky-high valuations for digital assets. However, with rising interest rates and increasing geopolitical concerns, that money started to disappear, he said.
“People were skeptical and backtracked, both in the public and private sectors… but over the last nine months, we’ve seen companies slowing down their growth, those that are consistently hitting their targets and being profitable, come back to valuations that make sense. They’re not as high as they were three years ago,” he said.
But as several companies have opted for convertible deals, they have pushed back their bankruptcy date in many ways, Morris said, adding that public market valuations are now realistic, but there is room for correction in private financing. “There are still a few down cycles to come. But most of these companies have reshaped themselves over the last two and a half years because of austerity and founder expectations coming back to reality,” he said.
Many of QED Investors’ portfolio companies are now beating their first-quarter forecasts. “We’ve seen the IPO market start to open up a little bit. While we’re not out of the woods yet, the trend is positive,” Morris said.
QED Investors expects fintech deals to open up and more companies to tap public markets as they become profitable. The firm evaluates its portfolio companies based on revenue, profitability and management team to prioritize those that are ready for a new era. public offer or fundraising in the next 12 to 24 months, Morris said.
The emergence of “superfintechs”
Looking ahead, Morris said he sees the emergence of “superfintechs,” or large fintech companies with strong unit economics that will expand into new markets or product lines, either through internal development or acquisitions, leading to consolidation in the sector.
“We’ve seen Neubank and SoFi do this very effectively, and we’re just at the beginning. There are a lot of smaller fintechs that have been hurt by the last four years that are going to have a hard time raising money, that don’t have the momentum, but are very strong, and that are going to look to integrate with others,” Morris said.
Traditional banks looking to improve their technology infrastructure can also acquire fintech assets instead of trying to develop them in-house.
QED Investors has added three new companies to its portfolio in the last two years and has made follow-on investments, Patil said. The firm, which has reportedly invested over $150 million in India, is closely following the insurance sector and may consider backing a few startups in the sector, he said.