Anthemis

Marin Cauvas

Arguably felt as the biggest shake-up since 2008, the past couple of years have entailed public and private market resets globally. The insurtech and fintech sectors, two of the fastest developing technology markets, were all but spared.

Simply put, deal funding started to dry up in H2 2022, and the end of the zero interest rate policy left many investors and founders awake to the concept of the cost of money. As a direct result, a small group of deep-pocketed allocators with thin venture track records ended up burning and abruptly deserted the venture asset class after having largely contributed to the exuberant mess in 2020 and 2021.

Fast forward to today, early-stage funding, defined in this case as Seed to Series A has seen a rebound. Investing dynamics are showcasing a bounce back of step-up multiples for Seed to Series A and round recovery c.20 percent down (versus the peak in 2021).

Not all venture stages are being treated equally, though. The growth stage, notably, has been substantially shaken to its core. Over the same period, funding volume decreased significantly, step up multiple at Series C decreased from 2.7x in 2019 to 1.2x in 2023, and Series C round size has compressed c.60 percent versus the peak in 2021.

Although recent data suggests a shy rebound in Q1 24 activity, we are continuing to see hesitancy from allocators vis-a-vis the growth stage. As venture professionals and long-term investors across early and growth stages, we feel urged to bring some sense of truth and intellectual honesty to the growth investing opportunity.

What is Growth in the context of venture?

The venture nomenclature is confusing. Ask any investor what defines a Series A, and you will almost certainly get divergent answers. Even worse is the confusion around Growth, which has almost no maturity limitation (e.g., Series B, C, D…. etc.) and no defined attribution of milestones attached to series letters.

"The venture growth market for insurtech and the broader fintech sector is at an inflection point"

In the context of the venture, Growth starts at the next round of financing sought directly following a Series A. By then, product-market fit should have been achieved so that founders could use growth funding to scale their businesses. Growth investors underwrite execution risk and typically seek minority ownership.

Depending on where venture growth investors are situated on the maturity curve (e.g., targeting early Growth vs. pre-IPO), their risk-return adjusted appetite will defer. Though it is further de-risked than the early stage, return distribution across a growth portfolio may present some outliers and attrition, but overall, it presents more downside risk protection than an early-stage portfolio.

The venture growth market for insurtech and the broader fintech sector is at an inflection point.

Following the major reset of 2022 and 2023, the sector as a whole has normalized, along with the Growth investing environment. As we enter into a new paradigm dictated by ‘the end of growth at all cost,’ it is becoming particularly attractive and relevant to invest at venture Growth stage.

 Let’s take a closer look:

• Valuation at growth stage has been corrected as underlined by step up multiple across Series B (e.g. Valuation multiple from Series A to Series B) and Series C respectively down to 2.3x (from 3.3x in 2019) and 1.7x (from 2.7x in 2019).

• Investors’ expectations related to target companies’ commercial traction, financial soundness, or governance structure have fallen back in line with those of public comparables on a maturity-stage adjusted basis.

• Rounds are taking longer to close on average. That is a good thing. It means that more time is allocated to running properly fit due diligence processes forcing management teams and founders to more rigor. In other words, investor expectations have been level set.

• It is a prime time for Growth investors with deep fintech expertise. Whilst there is a deficit of funding at Growth stage, the overall insurtech and fintech markets have not stopped growing, with the number of companies in existence across the sector more than doubled in the past 4 years. With many of the big 2020 and 2021 allocators on the sidelines, the overall market sentiment has shifted back to fundamentals. For founders, conducting proper due diligence on potential investors has become a key factor in shaping their cap table.

So, where does this leave us?

Allocators should care about investing at the growth stage. From a systemic standpoint, growth capital is a necessity. Venture allocators turning their back on this category are essentially ignoring the fundamental principles of capitalism: diversification, hedging, and risk protection of their book.

The overall fintech revenue pool is expected to grow 6x by 2030 to $1.5tn, or 7 percent of the global financial services revenue pool. The sector as a whole is at an inflection point, and it has arguably never been a better time to invest in the new generation of category winners reshaping the insurance and financial services.