Meet the Chilean team that will transform payments for Latin American businesses

After publishing our thesis on payment orchestration in TechCrunch last year, we’ve come full circle: I couldn’t be more proud to announce our latest seed investment in Toku. Cristina reached out after reading our thesis, and after the first meeting we immediately fell in love with the team and the business.

Why payment orchestration?

Fragmentation: The payment landscape in LatAm is highly fragmented. 38 different countries use their own payment infrastructure and more than 39 currencies. Each country has its own card network, gateways, processors, cash, and voucher system. But we believe this fragmentation is a “blessing in disguise,” and offers a huge opportunity for payments orchestration startups.

Low Approval Rate: The payment rejection rate in LatAm is four times higher than in the US due to chargebacks, lack of funds, and ineffective fraud algorithms. Acceptance rate is as low as 30 percent in some countries.

High Fraud Rate: Stripe has reported that LatAm fraud rates are 97 percent higher than in North America, and payment acceptance rates are therefore anywhere from 30 percent in Brazil to 70 percent in Mexico.

High payment processing fees: Traditional LatAm companies do not have the 80 percent gross margins that US software companies enjoy — in fact, it’s closer to 15 percent. This means that a three percent processing fee can equal 20 percent of company margins every month. As account-to-account transfers make headway across LatAm (see Pix in Brazil, SPEI in Mexico, Transfiya in Colombia, and so on), the recurring billing value proposition will be even more attractive, faster, and cheaper, and provide a better experience.

Manual collection process: Fewer than 10 percent of active Latin American subscriptions have an automatic payment process, adding a lot of administrative burden on companies to collect payments manually every month which is prone to human errors. A lack of self-service options and cultural norms also adds to the low penetration of automatic payment processes. Subscription and recurring billing in the US are a major tailwind (we were investors in Recurly), and we believe that LatAm poses an even a bigger opportunity for a broad approach by being vertically integrated — orchestrating payments with recurring billing functionality and CRM back-office support, and so on.

A Carefree Way to Collect Recurring Revenue

Toku has become the one-stop shop for companies collecting recurring revenue in LatAm. It offers subscription management software, payment orchestration, account-to-account payments, and CRM back-office support.

The entire team is a force of nature, with best-in-class execution velocity and customer instinct. Their team culture is unparalleled, and I will never forget the night captured in the photo above when we had carne asada and sang along to guitar melodies in Toku’s home base of Santiago de Chile.

Partnering with Toku to Accelerate the Digital Transformation in LatAm

I feel incredibly fortunate to be joining the journey, particularly in the middle of Women’s History Month, of this woman-led startup in a continent where only 23 percent of funding goes to mixed-gender founding teams. Our entire team at F-Prime Capital is thrilled to partner with Toku (YC S21) to revolutionize how 50,000 businesses collect recurring revenue in LatAm. We led this seed round together with Wollef and Honey Island Capital, with other participants including existing investors FundersClub and Clocktower Technology Ventures, and individual investors such as Matias Muchnick (NotCo), Sebastian Kreis (Xepelin), Santiago Lira (Buk) and Daniel Guajardo Kushner (HealthAtom – Dentalink – Medilink). We are impressed with how the team has accomplished so much with so little. Their elegant product solution along with deep customer understanding, top-quartile SaaS metrics and exceptional execution skills — just like the bird in their new logo, the sky’s the limit for Toku.

Onward and upward Cristina Etcheberry, Francisca Noguera Astaburuaga, Enzo Tamburini Heinz, Luis Borgoño, Ignacio Errázuriz and everyone on the Toku team!

A previous wave of fintech IPOs shows us that this over-correction will be only temporary for those who do prove to be genuinely disruptive.

Originally published in Financial Revolutionist

In an op-ed for The Financial Revolutionist, Sarah Lamont describes how 2022 affected fintech companies differently across the industry’s many subsectors, outlines fintech’s revised priorities, and envisions a positive future for fintech.

Read the full story here.

Dig below the scary numbers in F-Prime’s State of Fintech 2023; there’s still plenty to be optimistic about. Fintech Nexus News sat down with John Lin to discuss the team’s findings in our latest State of Fintech Report, adding some nuance to the headline takeaways.

John Lin is quoted at length in Fintech Nexus News. Read John’s perspective here.

While it takes time for LatAm companies to mature and exit in public markets, we remain active and optimistic about the region’s startup ecosystem at the earliest stage.

With last year’s addition of Nubank, the number of Latin American companies in the F-Prime Fintech Index grew to five, including PagSeguro, MercadoLibre, Stone, and dLocal. The F-Prime Fintech index is designed to track the performance of emerging, publicly traded financial technology companies.

In this story for LatamList, Rocio Wu discusses the year that was for public Latin American fintech companies, and their unusually strong performance relative to the broader sector in 2022.

Read the full story here.

Last year was the calm before the storm for private fintech companies, so we are going to see a lot of market consolidation this year.

Rocio Wu discusses our State of Fintech Report with Jill Maladrino on Nasdaq TradeTalks, covering how investors weighed the growth potential in the fintech sector in 2022, how they’re being valued now, and what investors can expect in 2023.

 

Originally published by Nasdaq TradeTalks

Fintech was on fire in 2021. A record 77 fintech companies went public, which included eight of the largest 10 exits in history.

However, in 2022 public investors re-appraised many fintech companies, prioritizing capital efficiency and shifting valuation multiples to align more closely with traditional financial services businesses. The F-Prime Fintech Index declined 72% over the course of 2022. Rising interest rates and macroeconomic uncertainty added to the significant valuation declines with certain fintech verticals seeing larger declines. Despite the drop in valuations, fintech disruptors grew rapidly, continued to capture market share, and give venture investors many reasons for long-term optimism.

New Logos in the Fintech Index

The average company in the Fintech Index lost 56% of its value in 2022. Companies that listed between 2020 and 2022 — two thirds of the companies in the Fintech Index — fared even worse, falling 65%. Because the IPO market came to a halt in 2022, there were few additions to the Index. Of the six new companies added to the Index last year, only Dave went public in 2022. The others — AvidXchange, Bakkt, Expensify, NerdWallet, and Nubank — all went public in Q4 of 2021 and, per our methodology, required 90 days to “season” before we added them to the Index.

We also saw three acquisitions of Fintech Index companies in 2022. Metromile was acquired by Lemonade, Vista Equity Partners took Avalara private, and EQT Private Equity did the same with Billtrust. Meanwhile, Katapult, Root Insurance, and Sezzle failed to meet the criteria to remain on the Fintech Index, and were therefore removed at the end of 2022.

Variation Across Verticals

While nearly all tech and fintech stocks fell in 2022, the Fintech Index reveals meaningful differences across fintech verticals. We saw the steepest valuation declines in proptech, insurance, lending, and wealth/asset management — verticals that are especially exposed to rising interest rates and thin liquidity markets. Unsurprisingly, B2B fintech and payment companies saw less than average declines.

Fintech Index companies that went public in or after 2020 exited at a peak market, leaving them vulnerable to significant losses in the next downturn. Companies like Coinbase saw a 90% decline in market cap over the course of 2022.

Some of those corrections appear to revert company valuations to historical norms. Others are especially large, with multiples significantly below historical averages as public markets begin to distinguish tech-enabled versions of existing financial institutions from truly disruptive approaches to financial services.

New Metrics to Capture a Diverse Sector

Compared to SaaS companies, fintech business models vary greatly across verticals. Thus, we need to evaluate the diverse set of companies within each fintech vertical distinctively. In response, we are adding new vertical specific metrics to the Fintech Index so they may serve as a quick reference for founders, investors and others to benchmark against recently listed public disruptors and incumbents in the financial services sector.

In its current state, the Fintech Index can highlight top-performing companies in each category, however over the coming months we will roll out dynamic charts showcasing key benchmarks across fintech verticals.

The Year Ahead

We’re tracking a number of disruptive trends across all fintech verticals, however below are some of the areas we are particularly excited about in 2023:

While 2022 was a tough year for fintech, we remain steadfast in our conviction that this is a great category to build and invest in. For one, fintechs are still in the early innings of capturing financial services revenue share — right now, fintech companies have captured approximately five percent of total financial services industry revenue.

Meanwhile, fintech continues to eat the world as the embedding of fintech products accelerates across new verticals. As early backers of Toast and Flywire, we saw this first-hand in the restaurant industry and higher education. We see this in other verticals where disruptors like Shopify, ServiceTitan, Procore, Mindbody, and others are doing the same. Embedded fintech not only centralizes and improves the experience for users — it also increases TAM and makes previously overlooked verticals more interesting as ARPU/ACVs can increase 2–5x.

Finally, disruptors are both growing the pie and taking market share from incumbents. In the first three quarters of 2022, Fintech Index companies grew revenue 45%+ on average, and added $19 billion in revenue collectively to the Index. Furthermore, the vast majority of that growth was organic, as no new companies were added to the Index after Q1 2022.

We also expect M&A to pick up dramatically in 2023 and especially in 2024, as buyers and sellers find valuation alignment. As mentioned earlier, private equity firms have increased their acquisitions of Fintech Index companies and we expect more buyout transactions — for example, DuckCreek is due to be acquired by Vista Equity Partners in 2023. We will remove the company from the Index once the transaction closes, as we did with the three aforementioned acquisitions in 2022.

Beyond that, we encourage you to dive into the report and join us on Thursday March 9th for an online discussion of its findings with the F-Prime team. What do you think of our conclusions? How excited are you for those new dynamic metrics to drop? And what are you most looking forward to in fintech-land in 2023? Drop us a line on Twitter and LinkedIn — and if you’re building or investing in fintech, let’s connect!

Our Series B investment in Canoe Intelligence

I recently wrote about the need for a new digital tech stack for the Alternatives fund industry. The human and paper-based workflows of venture capital, private equity, and private credit create a generational opportunity for entrepreneurs to a) digitize investor onboarding, b) modernize the back office, and c) generate an unprecedented layer of analytics-ready private fund data.

Many talented founders are building businesses to address the first two opportunities. It is still early in product execution and adoption, but startups like Flow, Entrilia, Juniper Square, +Subscribe, LemonEdge, PassThrough, Sydecar, Asset Class, and Canopy are building the future of private fund infrastructure.

The Data Problem

The data layer, however, is another matter. Fund managers almost exclusively rely on PDFs to share data with their limited partners (LPs), and there is little sign of this changing soon. We estimate that well over 100 million PDFs are sent annually, with most recipients manually entering the data into their accounting, reporting, and analytics systems.

That is too much redundant data entry, and ultimately leaves a lot of valuable data unextracted and under analyzed. Until fund managers digitize their fund operations and add APIs for data distribution, LPs are going to suffer. Players like Cambridge Associates will retain well-paid analysts to speak with fund managers, gather their data manually, and distribute benchmarks (and yes, really) through more .pdfs.

A Better Future

Now imagine a world where all private equity performance and holdings data is digital, where investors can download historical performance, review investment history, and create their own benchmarks and reporting. It is not hard to imagine because it would look like the public markets, where even Yahoo Finance has decades of analytics-ready data on nearly every equity and debt security in the world.

I anticipate three phases to this transformation. First, startups must meet the Alternatives industry where it is today – flat files like PDFs and spreadsheets. Domain-specific machine learning (ML) models can automate data extraction, classification, and normalization. While some worry that open-source ML models threaten these businesses, I see startups building defensible businesses across many industries through the thoughtful integration of open-sourced ML-models, proprietary domain-specific AI, and humans. Over time, their focus on one industry also yields a data advantage and network effect –  multiple investors in the same fund using the same quarterly report, for example. Ocrolus in SMB lending, Snapdocs in mortgages, and BenchSci in pharma R&D are all good precedents.

Eventually, fund managers will modernize their accounting and fund admin, and some will distribute data digitally. This will be a great step forward. As an early investor in Quovo, I recall the initial reaction when banks did the same thing. They published APIs and told aggregators like Plaid and Quovo to use them. At first that was concerning, but aggregators quickly realized their data aggregation costs would actually decrease – while their real value-add remained. In Alternatives data, startups that have built strong customer relationships will also benefit; LPs/investors in private funds are really paying them to distribute clean, normalized data from thousands of private funds that lack common data definitions and categorizations.

And that leads to the third phase, where the leaders have the chance to become the Bloomberg of Alts data. It’s hard to believe, but there is no official “security master” for private funds, like we have for stocks and bonds. There isn’t even a common taxonomy for fund returns – I say MOIC; you say CoC. And, of course, not all funds report all metrics. With access to years of fund performance data from a broad universe of private funds, startups will have a remarkable opportunity to help investors analyze fund performance better and faster. Another exciting implication is that easily accessible alts data and analytics will lower the barrier for financial advisors and accredited investors to participate. Ultimately this is great for advisors who need to explain their recommendation to clients, and for private funds who are working to expand their investor bases.

Partnering With Canoe Intelligence to Build that Future

Abdul and I, and everyone at F-Prime Capital, are thrilled to partner with Canoe Intelligence in their pursuit of this goal. Together with Alston Zecha and Jens Neisius from our European fund Eight Roads Ventures, we led their recent Series B and are impressed with everything Canoe has accomplished already. They have a great ground game, stellar customer list, top-quartile SaaS metrics and a leading tech platform that is only getting better with scale and network effects. We have wanted to be a part of the solution in Alternatives data for many years, and we’re excited to see Canoe lead the industry. Paddle on Jason, Mike, Vishal, Michelle, Josh, Seth, Tim, and everyone on the Canoe team!

The employer sales channel has inherent and often overlooked advantages.

In 2021, nearly 50 million workers voluntarily left their jobs. The median tenure of employees over the age of 25 has dropped from 5.5 to 4.9 years since 2014. On average, employees 25 to 34 now stay at jobs for less than three years.

This isn’t just “quiet quitting.” U.S. workers are ready to move on from their current jobs — and they’re sending that message loud and clear.

In a story for VentureBeat, John Lin and Sarah Lamont outline how a tight labor market poses a number of opportunities for certain startups to sell their products and services as employee benefits.

Originally published in VentureBeat. Read the full story here.