The 2023 LEAP Outlook

Top 10 Investment Themes Worth LEAPing Into

We have spent several months recalibrating some of our key investment themes. While we remain laser-focused on secular growth opportunities in our key sectors (Fintech, Commerce, and SaaS), we are reassessing the tactical approach to our overall investment strategy in light of the macro backdrop. Below, we summarize our top 10 themes for 2023. We will revisit and take deeper dives into these themes throughout the year.

1. Fintech and Commerce Will Get More “SaaS-y.”
We expect founders building applications across financial services (including payments, banking, insurance, and proptech) and commerce (including D2C, delivery models, and aggregator models) to add more SaaS-type revenues into their overall business model. New and existing companies will find creative ways to swap transaction-based fees for recurring-based revenues.

The combination of (1) an explosion of finance and commerce-related APIs and (2) a greater emphasis from both founders and funders on attractive margins, revenue predictability, and healthy cash flows will lead to a shift from transaction-based models to SaaS-based monetization models in these sectors. We started seeing this in certain areas of fintech (B2B payments) and commerce (subscription boxes), but that was only the first wave of the SaaS-ification of fintech and commerce.

2. Cue in the “Orchestra-tors.”
A new generation of businesses and consumers embraced many digital tools over the last few years, given the rise of remote/hybrid work models and an acceleration in digital commerce. But these tools also added several layers of complexity for decision-makers. We expect increased demand for orchestrators — platforms that help businesses (and sometimes consumers) optimize their decision across commerce, delivery or payments applications.

With so many new communication/collaboration tools, how do CTOs choose the best option? How do CIOs ensure the new tools are integrated with existing platforms so that information is seamlessly stored/shared/leveraged across the enterprise? How do medium-sized restaurants choose the best delivery platform for their end consumers? How do independent retailers choose the best site to list their products? Cue in the orchestrators.

3. The CFO will Soar Further into the Cloud.
Over the last decade, the CFO made great strides in taking payments into the cloud. But B2B payments automation was just the tip of the iceberg. The CFO will take other areas of the broader finance organization into the cloud, including enterprise billing, invoicing, budgeting, and even rev ops.

In 2018, we noted the CFO stack had lagged behind the rest of the enterprise in adopting the cloud. B2B payments automation was the first and perhaps the most important piece that needed to shift to the cloud. Payments are after all, directly tied to cash flow, the lifeblood of any company. But now that the modern CFO is aware of the importance of automation and more open to embracing digitization, we expect to see the rest of the CFO stack head into the cloud.

4. M&A and the “Great Rebundling”.
We expect strategic and private equity M&A to result in a “rebundling” of features under consolidated platforms. This will have profound implications on entrepreneurs and venture investors as M&A could redefine the competitive landscape, value propositions, and pricing power across many tech sub-sectors. Companies with the ability to consolidate market share, differentiate their product offerings, and leverage structural competitive advantages (i.e., category winners) will be best positioned to compete in this new environment.

This represents a major reversal in the status quo over the last decade, where many companies building a feature vs. a platform or copycat platforms successfully raised multiple rounds of funding (often at lofty valuations). The new environment will not be so kind to these types of startups and M&A will play a big role in defining category winners, ultimately rebundling features under consolidated platforms.

5. Proptech and Insurtech Are Down But Not Out.
While Proptech and Insurtech companies that raised capital or went public during the 2021 peak have fared poorly over the last 12 months, they were successful in creating new user experiences, digitizing most of the value chain, and introducing nontraditional risk-scoring models into conservative sectors with legacy processes. We believe these innovations will launch a new phase in Insurtech and Proptech and expect to see several long-term winners emerge from this market downturn.

We saw a similar occurrence during the 2008/2009 financial crisis when many fintech companies — particularly those that were credit sensitive — went out of business or were forced to find strategic alternatives. Investor sentiment for new fintech companies was sour at that time, but the demand for alternative financial solutions was strong. This created a window for new fintech pioneers to emerge, with companies such as NetSpend and Green Dot in prepaid debit; LendingClub and Ondeck Capital in credit; and Wealthfront and Betterment in wealth management, thriving during a tumultuous economic period.

6. Contextual Financial Services: Follow the Money Flow and Data Flow to Pick Long-term Winners in Fintech.
The combination of Themes 1–5, will accelerate the rise of contextual financial services — an age where trusted brands will offer timely, relevant, and often customized financial services directly to their customers. These solutions could adapt to the customer’s changing financial reality, and these trusted brands need not be traditional financial services companies. Companies that can position themselves within their customers’ money and data flow will have long-term competitive advantages in this new era.

We previously wrote about how the combination of open banking APIs and embedded financial services has ushered in a new, exciting era of contextual financial services. On the business side, for example, companies like PayPal and Square offer their business customers merchant working capital, where a fixed percentage is automatically deducted from sales until the loan is completely paid off. The percentage approach helps merchants smooth out their cash flow, paying more toward the loan in strong months and less in slower months. On the consumer side, companies like Affirm and Klarna offer customers “buy now, pay later” options within their shopping experience. We believe the era of contextual financial services is just getting started.

7. The Silver Lining in Crypto Winter: It’s Finally More about the “Bit”, Less about the “Coin”.
Now that the market has removed some of the hype around Web3, founders and funders will focus on real-world applications vs. get-rich-quick schemes. Use cases leveraging identity/authentication, fractional ownership, and B2B applications will drive transformational impact across every major sector.

The industry will need time for the dust to settle after several high-profile implosions. Institutions will need time to regain trust in key actors and assess the impact of new regulation (which is most certainly coming). VCs will need time to understand what this new normal means for the competitive landscape and fair valuations across web3. All of this means that founders will have no choice but to focus on real solutions for the long term. It is finally more about the “Bit” and less about the “Coin”.

8. LatAm Forecast: Cloudy with Chance of BaaS.
An increase in internet adoption, mobile penetration, and digital commerce post-Covid have created the perfect backdrop for cloud adoption in Latin America. As large cloud providers look to shed off non-core assets (see: Intuit exiting Mexico) or slow down investing in Emerging Markets, we see the next few years as an opportunity for local cloud/SaaS companies to gain market share in the region. The stakes are high as we estimate less than 10% of businesses have adopted a CRM/ERP/HR or other cloud-native application in Latin America.

Banking-as-a-Service (BaaS) represents one bright spot in Latin America. BaaS companies can take care of a lot of the heavy lifting across infrastructure, regulatory compliance, and banking system integrations, all of which are highly fragmented across key LatAm countries. Given the size of the financial service sector and gaps that exist within most financial asset classes, we expect to see several BaaS winners emerge in the region.

9. After a Wild Ride in 2021 and 2022, We Expect Valuations to Reset to a New Normal in 2023.
Buoyed by a historic level of liquidity, risk appetite, and cross-over funds driving up competition in venture, 2021 valuations clearly overshot the upside. We believe that the pendulum will likely also swing too far the other way. As higher interest rates reduce the level of liquidity and risk appetites, and as cross-over funds pull back venture investments, less competition in VC will lead to valuations overshooting the downside. We expect valuations to reset to a new normal sometime in 2023 as interest rates peak, the economic picture gets fully priced in and VCs restart to deploy capital at a normal pace.

10. Market Downturn is a Moment of Truth for Emerging Managers.
Given the tough market backdrop, the next 6–18 months will represent a golden window of opportunity for Emerging Managers (EMs). Many of these EMs were funded over the last few years due to an attractive combination of domain expertise, differentiated networks, and unique perspectives. EMs have an opportunity to leverage these key strengths and compete for top founders/opportunities when it is no longer all about “which VC can write the largest check at the highest valuation”. The VC business is hard and not all EMs are going to make it, but we predict the foundations for new long-term franchises will be forged over the coming years.