How Sapphire Will Spend That $1B

There are some contradicting reports forecasting the strength of FinTech investment this year. The latest report from KPMG’s Pulse of Fintech, released quarterly, found a substantial decline in FinTech investments by venture capitalists in Q2 2016, causing some concern that the space has lost its luster.

But the reality, other analysts say, is that Q2 represents just a temporary blip in a stellar year for FinTech startups. Last May, KPMG International and CB Insights concluded that 2016 will set a record for FinTech investment, surpassing 2015’s investment totals by 36 percent.

Sapphire Ventures is one venture capital firm with a heavy hand in this space. And it’s about to get heavier.

On Wednesday (Sept. 14), the company revealed a new $1 billion venture capital fund. Being born out of enterprise SaaS conglomerate SAP, Sapphire is positioned to place later-stage funding in B2B FinTech firms and help 2016 on its record-setting investment path.

While Sapphire doesn’t focus solely on FinTech startups, it is a hot area for the firm, according to Dave Hartwig, managing director at Sapphire Ventures.

“We want to make sure that the ‘Fin’ part of ‘FinTech’ is incorporated into a world-class team,” Hartwig told PYMNTS in a recent interview, describing what the company looks for when placing investments in FinTech firms. While Sapphire investors “get excited” about technology innovation overall, when it comes to FinTech startups, they won’t back just anybody.

“Financial services requires significant domain experience,” he said, “whether about capital requirements, regulation (particularly for global players, which is where Sapphire has a natural inclination) or other elements.”

Sapphire’s new $1 billion fund is significant, and with FinTech startups nabbing significant attention from investors, the fund may lead to some high-value investment rounds in the space. According to KPMG, $4.9 billion was placed in FinTech startups in the first quarter of this year alone, nearly double the volume of funding placed during the same period in 2015.

“FinTech had a very strong start to the year, and with the recent multibillion-dollar investment in Ant Financial in April, we are starting to see FinTech move into the mega-deal space,” said KPMG International Global Co-Leader of FinTech Warren Mead in the firm’s Pulse of Fintech report.

Of course, Sapphire won’t reveal whether it will lead any mega-deals with its new fund. But Hartwig did provide some more insight about what FinTech startups need to know if they’re looking to secure some venture capital.

“It’s important that startups research potential investors and know what to expect when seeking funding,” the executive explained. He pointed to Sapphire’s target of “high-growth companies” in enterprise IT.

And not all areas of FinTech will win out with investors, he added.

“Certain areas are more in favor than others,” Hartwig said. “For example, alternative lending the Untied States had a bit of a venture funding pullback, whereas other areas, like insurance and payments, continued strongly.”

Hartwig also offered insight into Sapphire’s preferences when it comes to the various pockets of FinTech — which, he said, includes B2B players.

“Over 50 percent of B2B payments are still made by check,” he said. “We believe there has to be another way.” Sapphire’s relationship to SAP, which means startups that secure Sapphire investment then have access to SAP’s corporate client base, pulls the venture capital group into a position prime for reaching the B2B crowd.

Some of the B2B FinTech startups it’s already backed include cross-border payments player Currency Cloud and alternative SME lender OnDeck.

“Given our relationship to SAP, we feel like we have a good viewpoint, and we’re looking for businesses with momentum,” the executive noted. “There’s a concept of business networks, looking at connections between companies and determining if there are ways to create a win-win based on the often complementary needs and strengths of business partners.”

Hartwig explained that Sapphire has been eyeing companies that provide financial services via infrastructure and application — a large, attractive market, he said. The rising availability of financial and corporate data, too, offers opportunities for startups to harness that information for their financial services, and these businesses are also attractive to venture capitalists.

That’s about as specific as Hartwig would get, and while he wouldn’t disclose specifics of the companies Sapphire is looking at potentially boosting with part of its new $1 billion fund, there’s no doubt that Sapphire will continue to focus on FinTech.

“We’re uniquely positioned and well-versed in enterprise companies, including those in the B2B FinTech space,” he stated. “We think that’s where the greatest possible opportunity exists, which is why we’ve decided to focus our investments there.”