Menlo Ventures’ Aunkur Arya: FinTech ‘Growth at All Costs’ Pales Next to Capital Efficiency

For FinTechs, and for the venture capital firms that fund them, the mantra “growth at all costs” is so 2021.

Aunkur Arya, venture partner at Menlo Ventures, told PYMNTS’ Karen Webster in an interview that only six months into 2022, entrepreneurs are learning that the mindset has changed a bit — and, increasingly, there’s more focus on becoming profitable in a reasonable timeframe.

It seems long ago and far away, but VC firms were strong in their commitment to backing top-line growth, and valuations became heated.

But in an environment of 8% inflation, with rising rates, and geopolitical and supply chain risks, the pressure is on.

Many entrepreneurs, Arya said, are learning just what it takes to run a capital-efficient business. And they’re learning through real-world experience, as it’s become a struggle to have 24 to 30 months of cash on hand to steer the FinTech through choppy economic waters.

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The boom cycles and the inevitable cooling off of investment activity are good for FinTech, Arya said. And though the markets may seem a bit shaky now, he said, “there is still a lot of activity and there is still a lot of optimism.”

Arya’s comments came just weeks after starting his present role with Menlo.

At a high level, what he’s doing now is a continuation of what he’d done earlier in his career at PayPal — meeting with early-stage tech teams at various FinTechs that are working on a range of interesting projects. That work also entails helping those FinTech teams think through fundraising or go-to-market strategies.

“And then I write checks when I am compelled by the team and its products and services,” he said.

Easing Frictions

Regardless of offering or niche, these FinTechs display some common themes, Arya said. They’re looking to solve particular frictions that lie inside bigger platforms, or they’re looking to re-architect fundamental infrastructure tied to specific areas of payments.

Some of the impetus for those executives, Arya noted, stems from personal experience.

“There’s a ‘hair on fire’ problem, as I like to call it,” he said.

Among the most urgent frictions to be addressed and pain points to be managed are tied to digitizing treasury operations, which in turn has led Arya to invest in firms like Modern Treasury and MidDesk. Building new plumbing helps eliminate a broad range of back-office tasks and manual activities.

There’s really no need to boil the ocean, said Arya. The startups that are proving the most successful, are the ones like MidDesk, which found a finite problem and then “went deep” to solve it — in this case, validating and verifying businesses.

In doing so, Arya said, focused FinTechs can find profitable endeavors in offering the infrastructure and integrations that help clients overcome inertia and noise that has bedeviled payments, especially consumer payments. A casual observer looking at FinTech initial public offerings (IPOs) might wash their hands of the whole space, thinking that, no matter where you look, things are headed south.

Indeed, at this writing, the FinTech IPO Tracker shows that a group of more than 40 companies has seen its share prices decline by more than 30% year to date.

“But good investors are not writing off whole categories,” Arya said. Despite the vagaries of the economy, some themes remain intact. Big banks will continue to be big banks. And even some large FinTechs are having some issues maintaining compliance. The smaller, tech-nimble firms that help automate those functions and offer the application programming interfaces (APIs) that make it all seamless are the ones that will find new opportunities, see top-line torque and make a profit. What is new and cutting edge eventually becomes sustainable. After all, in the wake of the 2008 financial crisis, a number of payment firms moved from concept to game-changing juggernauts, the PayPals of the world among them.

Even crypto, Arya said, will see that kind of cycle.

The Future of Data

Looking ahead at some of the most immediate and even longer-term opportunities, Arya said: “I’m fascinated by and have a bias toward API-first businesses. Within FinTechs, I tend to gravitate toward core banking and infrastructure.”

And though digital wallets and payments have been gaining a wide embrace among consumers, there isn’t yet a “digital store” that allows for the collection and storage of individuals’ documents and data.

“Every time I establish a relationship with a financial adviser or a mortgage company, it’s very manual,” he said. “Secure, self-custody of that data is something I am looking at, too.” Time and technology will help alleviate customers’ anxiety about storing those records digitally and on devices.

No matter the model and the focus, he said, “the capital-efficient companies will be the ones that built to separate themselves from all the rest. Capital efficiency never goes out of style.”

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