VCs Place Bets on Businesses Seeing Value in Embedding Payments Into Software

In today’s economic environment, reaching profitability is considered a badge of honor.

And that means FinTechs and startups that have yet to achieve that holy grail of profitable growth continue to face mounting pressure to do so.

But according to Lucile Cornet, partner at global venture capital (VC) investment firm Eight Roads Ventures, which specializes in late-stage investing, many startups have plans to raise another round when the fundraising environment is less challenging, and as a result profitability is not currently a priority.

Instead, Cornet said “what really matters is efficient growth, which is the big difference [compared] to the years prior, when it was very much growth-at-all-costs and people were really looking at momentum.”

And while momentum remains key, she said investors are more focused on how startups are spending funds, while weighing the tradeoffs between building critical mass or a self-sustaining business.

“With some of our portfolio companies, [Eight Ventures has 45 in Europe and 200-plus globally] we’re debating if we want to grow faster at a higher cost or if we would rather be a bit more efficient and only grow 80% this year, for example,” she told PYMNTS in an interview. Companies that have received backing from Eight Roads include Cazoo, Spendesk, Fireblocks, Alibaba Group, DeltaHealth, Shadowfax and AppsFlyer.

When it comes to the metrics investors are evaluating, Cornet pointed to basic factors such as a firm’s gross margin as critical, in addition to metrics such as the net revenue retention, which measures the recurring revenue generated from existing customers over a given time period.

“[The latter], for example, is a metric that you see investors looking at much more carefully now because if some of your customers are growing by themselves and you don’t have to pay an additional cost of acquisition, that’s considered very efficient growth,” she explained.

However, beyond the market size, the business model and a company’s financials, Cornet noted that it’s all about the people — a sentiment also shared by other investors in the European space.

“A great team will be able to pivot and a great team will [help] improve the model. So, at the end of the day, even at our [later] stage of investing, it’s very much about the people,” she noted.

Overall, she argued that the role of VCs is, first of all, to connect startups to the right industry stakeholders who can help drive their growth. That, and enriching the decision-making conversations with their expertise and experience instead of imposing their views on companies.

“I’m always very careful about using the term ‘advising’ entrepreneurs because we don’t know better than they do,” Cornet said, adding that VCs often make the mistake of copy-pasting a strategy that might have worked in one situation at another firm forgetting that “every case is different.”

FinTech Scales Vertical SaaS

Investments in the DeepTech space are increasing, and in France, eight sector startups, including Flying Whales, Innovafeed and Verkor, recently made the 2022 TheNext40 list — a government-backed program honoring the 40 top-performing French startups each year.

It’s one of the promising sectors that Cornet said could potentially create significant jobs for the next generation. That, and vertical SaaS (software-as-a-service), which involves niche-specific software solutions tailored to the needs of a specific industry.

“We’ve seen a lot of interesting vertical SaaS companies that make it more efficient for certain professionals and or specific verticals to improve on the way things are done,” she said.

She added that vertical SaaS is “adjacent” to FinTech because oftentimes companies can start from industry-specific solutions and end up layering additional financial products on top of it.

For example, a TravelTech firm can initially provide hotels with a room booking software and then over time add financial services to help them accept payments and even issue loyalty cards for guests. As she noted, “I quite like those [solutions] because they’re very tangible, day-to-day use cases.”

And amid the ongoing economic slowdown, it’s all the more important to invest in tools that are a “must have and not nice to have,” Cornet said, particularly tools that industries rely on heavily in their day-to-day operations and simply “cannot live without.”

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