With global, crossover capital fading in the market, the mid-stage funding gap in the country’s fintech space has widened. US-based venture capital firm QED Investors, which has backed companies such as Jupiter and OneCard, sees that as an attractive gap, says Sandeep Patil, partner and head of Asia. In a conversation with Ayanti Bera, he explains why the firm is now eyeing Series B and C deals, how valuations are behaving, and where the next big fintech opportunities lie. Excerpts:
Earlier this year, QED began looking at Series B and C deals in India. What drove this decision?
There is a meaningful gap in financing at the Series B and C stages. A lot of capital is available at seed and Series A, but after that, until an IPO, companies often get stuck for capital. Many cross-border and crossover funds have faded from the market, so founders end up looking abroad for capital. That gap is attractive for us because we are a group of operators. Once the basic foundations is in place such as unit economics, a growth strategy, that’s where people like me can plug in and help founders think about profitability, growth and building a competitive moat.
Valuations in AI seem to be running hot. How are fintech valuations trending in comparison?
In AI, growth rates are unprecedented and potential is unproven, so the multiples look wild. In fintech, especially lending, you don’t want hyper-growth until you understand NPAs and unit economics. I’m actually happy when lending companies take time to slow down, prove economics and then accelerate. So, we haven’t seen fintech valuations go crazy in the same way.
You invest across Asia. How does India’s regulatory landscape compare with Southeast Asia and other emerging markets?
India’s regulators are very progressive. UPI couldn’t have happened without regulatory support and UPI itself sits on top of Aadhaar, IMPS and years of infrastructure building. Singapore is probably the gold standard in terms of regional regulation – very measured but very progressive. Dubai is more progressive and open. But India stands out for encouraging innovation.
You mentioned insurance looked promising earlier, but now seems to have slowed. Is that because of regulatory hurdles?
Pure distribution businesses are harder to defend in India. Margins are thin because incentives and commissions can redirect customers easily. Someone else can do to you what you can do to them. In India, because the economy is still expanding and the biggest financial services companies are yet to be built, manufacturing matters more. If you control product manufacturing, underwriting, data, and technology, you can build very large institutions. That’s harder in insurance, and that’s why we pause to ask whether venture-funded companies are best suited for that space.
Lending has been the biggest fintech category in India. Within that, Buy Now Pay Later saw a spike and then cooled off. Do you see that coming back?
Personally, I’m not a fan of BNPL in fast-growing markets like India. BNPL works best when it is a convenience product and not when it becomes subprime lending. Some BNPL models here were being used to reach subprime customers without strong underwriting. That never ends well. Lending will definitely expand, but secured lending may be a better model to extend credit coverage. We have a company that enables secured credit cards for low-income customers. Models like that make more sense.
Do we have enough creditworthy borrowers for all these fintechs?
I believe everyone is lendable if there is predictable cash flow and if your cost of customer acquisition is low enough. The real barrier is the cost of acquiring and servicing the customer. If a bank has to spend `5,000 to acquire someone who will borrow `10,000, it doesn’t work. A fintech with digital acquisition that costs `500 can lend profitably.
Beyond lending, which areas in fintech look promising to you?
Wealth management has a lot of promise. India has moved from being a deposits-led country to having a large segment that accumulates wealth early in life. They have disposable income and need guidance on how to deploy it. We don’t have enough relationship managers to service that demand, and fintech can fill that gap. On the B2B side, cross-border payments and related areas like financing and insurance are becoming interesting as supply chains diversify.