Alexandria, Virginia-based QED has backed payments startups such as Remitly, Flywire and Klarna, and helps later-stage portfolio companies prepare for sale or public exit, QED co-founder Nigel Morris recently told TechCrunch.

The VC firm has about $4 billion under management, with the majority of its investing activity done in early stages, Cilluffo said. So far this year, the firm’s investing pace has been slower than previous years.

On May 23, QED said it had closed two new funds totaling $925 million. That includes a $650 million early-stage fund, and a $275 million early growth-stage fund mainly to support its portfolio companies. The firm doesn’t have a specific number of investments or a dollar amount it’s aiming to invest this year, but expects to activate the new funds in the fourth quarter of this year, Cilluffo said.

“More than half of the new funds will be invested in U.S.-based fintech companies over the coming cycle,” Cilluffo said. Amid the uncertain economic climate, QED is investing in its existing portfolio companies to ensure they’re healthy, as many VC firm peers are doing with their investments, he said.

It’s not just a tough environment for acquisition targets in the payments space. Would-be buyers shopping for a good deal are also experiencing more challenging capital markets, leading them to be more conservative about bringing additional burn rate into their ecosystem, Cilluffo said. 

The firm has seen a few situations where a larger fintech might be prepared to buy a smaller peer for cheap, but they’re being forced to assume an expense rate that’s contributing to an unprofitable operation, Cilluffo said. “That’s become a significant lens that buyers are looking through,” he said. 

Companies pursuing acquisitions have become more mindful of the amount of capital they would need to put into the business before it achieves its objectives, Cilluffo said. A key consideration for acquirers is how ready a fintech’s technology is, or how much investment is required for it to reach that point, he said.

Still, if the current market conditions persist, Cilluffo fully expects increased M&A activity. Capital-intensive businesses, such as those in the buy now, pay later space, will need to raise funds, or they’ll run out of money, leaving them with little choice, he said. 

Cilluffo declined to identify when he thinks M&A might pick up, but said the venture funding climate isn’t bouncing back to 2021 levels any time soon.

The flood of venture capital into the payments space has resulted in some interesting capabilities at young payments startups, and larger financial technology companies and banks are among those looking to scoop up that technology, Cilluffo said. 

Companies such as payments processor Fiserv have been highly acquisitive in recent years, as have some smaller players, including integrated payments player Shift4. In the banking space, Fifth Third Bank this month said it was acquiring embedded payments company Rize, and JPMorgan Chase last year acquired payments firm Renovite Technologies. 

“When fintech multiples were sky-high a year and a half ago, it was very difficult for a bank to consider buying a fintech,” said Cilluffo, who spent about two decades at Capital One. “Now that those multiples have gotten much more in line, those conversations become viable.” 

Over the past year, some startup founders have become more accepting of the prices buyers are willing to pay, “but that’s not fully played out yet,” he said, adding that many founders still have to acknowledge lower valuations. 

There’s more to consider than just purchase price though. The typical culture of a fintech doesn’t match that of a bank, Cilluffo pointed out. Plus, banks might make an acquisition at a certain point in time that, two years down the road, no longer fits with the bank’s strategy, he added.

High-profile examples that didn’t go well, such as JPMorgan Chase’s acquisition of college financial planning platform Frank, or the collapse of cryptocurrency exchange FTX, haven’t helped, and have likely caused some potential buyers to “be a little gun shy,” Cilluffo said.

Clarification: This story has been updated to make clear that QED’s financial support for its existing portfolio companies is alongside its investments in new businesses.

 

By Caitlin Mullen on May 31, 2023
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