“These are unprecedented times, bringing huge shifts in trade, consumption and investment,” said Lawless, CEO of PYMNTS, Karen Webster.
Even in an era marked by soaring inflation, supply chain difficulties, and civil and geopolitical unrest, as Lawless put it, there is at least one certainty: the transitional economy is here to stay.
This transitional economy is being shaped as trillions of dollars of capital have been withdrawn from the United States, amid cryptocurrency crashes and a loss of purchasing power, he said, noting that inflation is the main culprit here.
We have seen a decoupling between China and the United States, marked by tariffs and economic contests over intellectual property, he said. The Russian-Ukrainian war and soaring energy prices have also shaken the global economy. All of this has had a huge impact on private companies, which have had to, and still have to, re-examine their business models and how their supply chains are intertwined, he said.
Related: China moves closer to launching ‘sound’ fintech
China, instead of becoming a purely production-based economy, has become a consumption-based economy. The United States, on the other hand, is on the way to becoming a production-based economy, home to about 4% of the world’s population but contributing more than 15% of the world’s gross domestic product (GDP).
“We will have to look at different regions and different countries to produce and consume goods, and we will have to look to our northern and southern neighbors as potential partners,” Lawless said.
Payments will play a central role in consolidating these partnerships, helping to modernize logistics and freight, he said. Innovation is the main driver of this change, and what we are seeing across the world is a shift towards technology to make everything done faster, easier and at scale.
There are parallels to what has happened before, he said. Just a few decades ago, at the dawn of the millennium, almost every company was looking to be a technology company. Many companies are embracing the cloud these days, looking to streamline operations and improve margins.
The United States has an inherent advantage here, given that the country has the strongest financial and credit markets in the world, he said. Access to capital and credit is essential for businesses looking to not only survive, but also thrive and move from transforming concepts on a whiteboard to disruptive new technologies.
The long term horizon
At the moment, turbulence reigns. Conversion Capital, in an effort to navigate the market and macroeconomic turmoil, must find investment opportunities that may remain masked by headlines and volatility.
At a high level, this is an interesting time to put money to work, as many investors are taking money off the table. But some themes persist, including that financial infrastructure continues to migrate to the cloud and is unbundled, and that corporations, banks, and financial institutions (FIs) are taking advantage of these new capabilities.
See also: Integrated finance puts banks and FinTechs on a level playing field
Go a step further, and the push to the cloud is transforming some pillars of the US economy, including manufacturing, construction, and technology, as well as the service industry.
A common thread runs through these distant verticals as payments are integrated into all sorts of front-end and back-end processes, Lawless said.
Integrated payments have the potential to improve supply chains, which will be needed under the great decoupling between China and the United States, he said.
The vast majority of small, nimble startups — especially those disrupting financial services — are based in the United States, which Lawless says is the most successful startup in history. And this despite the regulations (which are changing rapidly in Europe), which he likened to a tax on innovation.
Much of this innovation stems from the fact that dozens of companies grew in size in the era of easy capital, grew too big, and lost at least some of their luster. Google and Facebook may not have had the pulling power they once had, and dozens of engineers decided to look at new opportunities and industries to transform. And now, with the downturn, these engineers, having worked for these (and other) big name names, are actively looking to create the next bumper crop of innovators.
The balancing act is about going against the grain while taking stock of what’s trending now and what will be trending in the future. The conversion has seeded companies over the past few years that have focused on machine learning (ML), artificial intelligence (AI) and even the early ripples of the metaverse, he said.
In contrast (and with comments on less attractive areas), he said cryptocurrency remains too complicated and relatively slow to replace existing payment rails. There’s no real reason why Visa should be trading at an implicit discount versus Ethereum, he said, given Visa’s triple-digit multiples in trading volumes versus crypto firms. .
Asked by Webster how long the downturn will last, Lawless said the “clean-up period” could last five years as geopolitical tensions ease, inflation is brought under control and supply chains unravel.
But beyond that time, payments will be an integral part of digital transformation, especially since every physical interaction will have a digital touchpoint. Late last month, the company said it had closed its oversubscribed and largest fund to date, its $122 million Fund III.
Read more: Conversion Capital Raises $122M for FinTech Investments
In terms of investment strategy, the company will deploy the capital into 25-30 pre-seed Series A FinTech companies that build software, cloud infrastructure and data technologies. Investments range from $500,000 to $5 million, the company said in its announcement of the last fund launch.
Lawless was quick to remind Webster that Conversion Capital operates like a venture capital (VC) firm and as such has a longer-term investment horizon than, say, a hedge fund. . This horizon extends far beyond what happens in, say, 2023.
“Our job is to invest in the next 10 years,” he told Webster.
And the best places to invest right now, he argued, are in the US and UK, as well as a wide range of stable democracies. The change we see as trading blocs and alliances are reformed, well, it’s all happening in real time and will constantly spawn new businesses built on the principle of changing the way it’s always been done for the way of which things should be done.
“That’s the beauty of innovation; it continues to evolve,” he said, invoking Moore’s law of growth, “and along the way will create entirely new industries.”