Ivan Maryasin, co-founder and CEO of monitor.
Capital is not cheap anymore. Investors are feeling the pain after the 2021 fintech gold rush as capital inflows hit $131.5 billion worldwide– nearly three times the $49 billion invested in 2020.
As the capital environment has become more difficult, fintech startups have naturally become more vulnerable. Down rounds are common and painful. Klarna is a dramatic example, forced to accept a $6.5 billion valuation in July 2022, down from $45.6 billion just 13 months earlier. The damage is across the board. Andreessen Horowitz (a16z) says valuations of listed fintech companies collapsed from 25 times expected revenue in October 2021 to four times expected earnings in May 2022.
Today’s landscape looks very different from a few months ago. Vision and growth potential were kings in 2021. Today, investors have drastically changed their requirements. They want a solid unit economy, ROI-oriented cost discipline and a clear path to profitability. As the a16z authors note, “Every other blog or tweetstorm seems to give the same general advice: save money, lengthen the runway, shift from focus on growth to focus on efficiency.”
Due to the capital inflow of 2021, there is much more competition. Any niche that a fintech managed to identify was quickly copied by multiple look-alikes. This competitive intensity has made growth more expensive, with acquisition costs rising every year. And it’s even harder to get the capital to fuel those costs unless you can clearly demonstrate that the associated ROI is compelling.
Consolidation is starting to happen, but there’s a lot more to come. No one can say for sure where the investment and startup scene is headed, but we’re sure things won’t get any easier for startups anytime soon.
But this article is about how to survive, not how to be defeatist. With that in mind, here are some best practices I believe fintech leaders should adopt in 2023 and beyond.
1. Product-market fit (PMF) is no longer enough.
Yes, of course you still have to find it. But then you have to build on that and add new value. When capital was cheap, profitability was a lower priority, and reduced competition meant companies could rely longer on the visionary effects on investors of a viable PMF.
But now much more is needed to achieve sustainable growth and remain investable. When your startup is pre-PMF, your focus is naturally on achieving PMF. Once you’re there, it means you have a solid user base and a good handle on the basic product. This user base is a great asset to increase value and revenue tenfold. But now it’s up to you to be very explicit about how you’re going to achieve that, in the context of your roadmap.
Revolut has done a great job in this regard. Immediately after hitting PMF, which aimed to lower foreign transaction costs, it added merchant, premium and junior accounts, a “metal” card, insurance, personal loans and other features. Based on them report from 2020 to 2021, Revolut’s average revenue per user increased by more than 700%!
As Revolut shows, super app strategies are breaking new ground. Why then are there so few adopters? Where are the great super apps outside of China? There is certainly a lot of low-hanging fruit available. Take retail banking: why doesn’t every B2C bank already have integrated commerce? Integrated APIs make that a quick win and yet there are players who haven’t taken advantage of it. Given investor demand for neobanks to generate new revenue streams, this is unlikely to be sustainable. If fintechs don’t get on board soon, they may not survive much longer.
2. Fintech Fintech leaders need to get faster or risk falling behind.
We are all used to the slow pace of corporate sales cycles. Surprisingly, startup sales cycles are often not much shorter. While capital was cheap and the competition fair, taking years to make decisions about adding the super app value additions we discussed above didn’t pose much of a risk.
Abundance of capital created complacency, which lacked urgency. Many people in those companies were unmotivated to bring in new projects and integrations, which were seen in some startups and bank innovation departments as unnecessary noise that was never prioritized.
Organizations need people on board who can quickly validate and review solutions and get them on the roadmap. Time, like capital, has become incredibly expensive!
3. Leaders need to stop using development resources like it’s still 2021.
With the latest VC influx safely in the bank, startups got used to feeling like they could just set up multiple new teams and hire hundreds of people to build just about anything, whether it was in the core focus area or not. Now we see cutbacks and job freezes. It’s a healthy shift to tracking profitability and optimizing team size and costs. And it teaches us what to focus on: the core product.
So how does that align with my first two points of offering value and building it quickly?
If 2022 brought crisis and the mindset change that came with it, it also brought the opportunity to deliver great things to customers without building them yourself. Today you can integrate just about anything from bank accounts to loans, commerce, payroll or full finance/ERP functionalities. Vendors who make these APIs invest a lot of time and money into making a high-quality product, so you don’t have to. And you can go live in weeks and accelerate revenue delivery and value creation without increasing team size.
Do not lose sight of the main vision. The main goal is to have good income and become profitable. Once there, you can become a viable mid-sized company and be in a much better position to raise the money from equity investments that will be needed to scale globally.
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