If anyone knows what’s hot in European fintech, it’s Index Ventures.
Index is one of the most active VCs in European fintech, investing early and riding the wave. To date it's raised over $9bn and has backed 11 fintech unicorns globally.
But Index’s European fintech investments are maturing, with several big exits already banked. That means it now needs to find its next crop of winners.
Sifted sat down with partners Jan Hammer and Mark Goldberg to hear about their fintech plans.
They discussed Index’s shift towards B2B, the power of fintechs’ brand, the valuation threat facing Buy Now Pay Later and “headless payments”. (Don’t worry, Sifted found out what that means.)
The Index fintech landscape
First, here’s a little reminder of what Index’s fintech portfolio looks like today, in Europe.
Aside from unicorns like Revolut, Index’s next crop of rising stars include Taxfix, Auxmoney, Codat and Alan.
The analysis below also shows Index has been consistently more active in France’s fintech scene than anywhere else in Europe in the last two years.
So far, Index hasn’t yet announced any European fintech investments this year.
So where has it been focusing its attention?
The conversation with the two Index partners is outlined below, and has been condensed for brevity.
What’s your thesis when it comes to consumer finance?
Mark: Ultimately, whoever creates the best consumer experience will win. I don’t think that’s going to come from the [big] banks — it’s going to come from technology companies, maybe a neobank, maybe not...fintech is coming from everywhere.
Why not a big bank? The data shows the incumbents got a big Covid-bump.
Mark: I see the banks as the offline retailers pre-Amazon. Incumbents aren’t totally asleep, I think they’re going to fight tooth and nail, but if you look at the best technologists, they don’t tend to want to work for banks. But even Goldman Sachs...look at the last 2 months, they’ve had executive departures to go work at Ramp, or other fintechs. I think we’re still in the first innings, but in the long-term, the online will be dominated by [the] tech side.
Jan: The banks have done ok, but look at the performance of technology. If you look at the financial sector, vs tech-enabled sector, the [latter] has outperformed by 2 to 3x.
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But it’s so easy to say tech is at the forefront. We’ve seen that not all fintechs are equal when it comes to tech — do you care about the infrastructure that startups use before you invest?
J: Maybe in the early days, you’d have [fintechs] plastering some veneer on top of a bank solution. But we’re well past those days.
M: Of course there are [lending] businesses that say they’re a tech company to get the multiples, and we’re always vigilant...But the growth of infrastructure is going to underpin all the interesting consumer applications.
We spend a lot of time thinking about who the AWS of fintech will be… In the last 18 months, we’ve seen a wave of tools. I feel so bad for companies that say they spend four years building the infrastructure to launch. If you’d started 3 months ago, you might be in the same place…
J: There’s some merit to full-stack, but there’s also merit to [focusing] on product. The best companies both build their product and distribute.
Right, but then instead, *brand* is fintechs’ biggest asset. Is that a vulnerability? How do we stress test a brand?
M: I think brand is one of the most fascinating things happening right now. Fintech is becoming part of culture [in the US]. There are clothing lines. Your choice of banking services is actually becoming a representation of your personal brand. That’s a tectonic shift.
J: I think the underestimated variable is trust. Brand value creates trust. It’s both individuals to the brand, and it’s also to the whole category. It takes years, but once brands have built their brand, the whole asset class — the whole cohort — build a bundle of trust.
What’s the top fintech lesson that’s come out of Covid-19 for you?
J: Fintech is becoming horizontal rather than vertical. It’s becoming part of our daily life. If you isolate technology as the driver, it’s really driven vast outperformance.
M: We have software companies that a year ago I would have called SaaS. And now I call ‘a payments companies that happen to sell software.’... Like Patreon is going to be a fintech company. Very much so.
Given infrastructure is so key, do you spend more time on B2B than consumer now?
J: I probably do.
M: Infrastructure is becoming a more attractive asset class. Because you don’t need to pick the winner, you need to get the trend right.
And in consumer, where’s your focus for new deals? Is it B2B2C fintechs?
J: We’ve been searching for something in consumer payments ever since Adyen [which was merchant side]. Now we're thinking about payment enablement, or “headless payments”. It’s like headless commerce. So rather than transacting on a merchant website, you move away from the property (like a website) and you can click a link in an email and you’ve bought it.
M: I’m interested in social payments, like group payments. There’s a disconnect right now that needs to be fixed.
Any excitement around blockchain-based payments, like DeFi (decentralised finance)?
J: ...What’s DeFi?
M: I’ll take this one. We’re trying to figure out what’s the insertion point...I think the way we’ll likely play it — which is different from Andressen and some other competitors — is we’ll start with businesses that are a little bit more traditional. It will look less like a portfolio of crypto assets and more starting to dip our toes into infrastructure.
J: We do have a couple of crypto investments [like Argent], and we've made one token investment [instead of taking equity].
Did you miss a trick by not having a Buy Now Pay Later space?
M: I wouldn’t say that at all. We have been very thoughtful about capital intensive sectors. Companies with a heavy balance sheet component may not trade forever like tech companies. We’ll see how these businesses perform.
OK, so has BNPL been overly hyped?
J: We don’t predict where the [share] price is going. But’s too capital intensive. What’s going to happen to balance sheets and borrowing and financing costs?
Still, it’s a spectrum between the fin and the tech and we’ve seen these companies become more tech driven. That’s where we’re looking.
M: If that ‘tech’ component shoots up [instead of just fin], we’ll be all over it.
How closely aligned is Index’s fintech thesis between the US and the UK?
J: Very. Mark and I work very closely together, like we probably talk every day. A trend will come up in Europe before it comes to the US, and vice versa. So what you often have is these pockets of excellence, and then there’s spillover [into other markets]. Europe has led with neobanks and payments, and the US has led with lending — and you see both spilling over.
M: Yeah, a lot of the macro trends are super similar.