We are living in an age where capital doesn’t flow quite as freely as it used to. Inflation has skyrocketed, and interest rates with it. The cost of protecting populations from the fallout of war, recession, climate change and Covid-19 has put the brakes on new investment, with venture capitalists re-evaluating their appetite for risk. Fintech has taken a real hit, with global funding falling by a third in 2022.
That means many Fintechs are no longer following a model of growth at all costs. Instead, new businesses are resetting their strategies towards securing a strong return on investment from the outset, by prioritising targeted profit growth over a more scattershot approach.
In this week’s episode of Payments Innovation, host Piers Marais spoke with Leda Glyptis, Chief Client Officer at 10X Banking, about the way the operating models of Fintechs have shifted from short-term investment to long-range planning: previously, Glyptis noted, “We had a mindset, a VC-driven mindset that treated profitability and viability as a secondary and sort of less lofty thought. So the discipline of looking at your unit economics, the discipline of knowing what your business model is and how it stacks up hasn’t necessarily been a requirement.”
That approach is one that is beginning to change. Now, Glyptis observed, “There are so many entities that are wondering, ‘Well, how do I reverse back into thinking about the future differently?’”
Making ROI a priority
As cash-holders, VCs have long set the tone on what constitutes a ‘promising business’.
But business models that worked well in a low-interest rate environment are no longer sensible, companies have had to take a closer look at the balance between profitability and growth. It’s now much more important for them to be able to show that they can generate revenue and turn a profit at the earliest opportunity.
Seasoned tech entrepreneurs have already suggested that prioritising profitability is one of the best protections against an economic downturn. Securing ROI is now critical for companies wanting not just to launch, but to stay afloat for the long run.
“We’re definitely seeing pressure around us,” said Glyptis. “We’re seeing big companies withdraw from markets that they had thrown a lot of money at. We’re seeing companies shut down, and return their licenses. There’s just too much easy money. Too many companies doing very similar things. Too much expansion. Too many paper millionaires. And consolidation was inevitable.”
So what’s the solution? Seek out fast-growing markets and leverage your competitive advantage. It’s important to consider what will drive customers to you: Why are they buying this? Why are they buying it from you? Why are they paying what they’re paying? And is there anything that will change any of those factors in the immediate future?
From Glyptis’s perspective, companies that have done well have been “crystal clear at the beginning what their business model is.”
Opportunities for optimism
It’s not just existing companies that will be impacted by the change in approach. Every year, there are thousands of hopeful new Fintech startups, with more than 11,000 in the US and close to 15,000 across the EMEA and APAC regions. Glyptis anticipates that number slowing as venture capitalists take a more risk-averse line.
“I think that belief in the gold rush of Fintech, of everyone and their friends from university starting a company, that entrepreneurial madness will dissipate,” she said. “I think there will be much more of a realisation that it’s a dangerous step, that it comes with risks.”
The need to be more realistic about risk is not necessarily a bad thing. VC investment is still relatively high, and there is plenty of opportunity for those at the seed stage or approaching Series A funding, with newly minted entrepreneurs more able to attract the attention of seasoned investors at a point in their journey where there’s everything to play for and less risk for backers.
“VCs know not to feed the boom cycle,” said Glyptis. “It’s hard to do it with a Series E company; very easy to do it with a Series A company. So I think there will be much more sensible approaches and it might be a fantastic time to start a business, even though it doesn’t look like it.”
It’s not all about the money
It may be too early to gauge whether this course correction will stick. But Glyptis believes it will change the financial services landscape for the better. If more young companies come out of the current macroeconomic climate healthy and successful, then that is a positive development. If it leads to more thoughtful behaviour, so much the better, she said, because the vast majority of entrepreneurs are not in it for the money when they start out.
“If somebody says you can be a multimillionaire, you’re not going to say no to that,” she observed. “But the vast majority of people I speak to, both now and in my career for the last 20 years, want to solve a problem really, really passionately. If they make a lot of money in the process, great. But for most of them, that is not the primary motivator.”
Until next time!