The pendulum seems to be swinging from an era of easy capital and rapid growth to the more somber reality of value creation.
In this period of change, scott dawsona payments industry veteran with over 20 years of experience, currently serves as Head of Sales and Strategic Partnerships at the payments platform. Decta, Digging into this transition, Understand emerging strategic opportunities amid industry challenges.
A half-baked science fiction novel those who remainauthor G. Michael Hopp “Hard times create strong men, strong men create good times, good times create weak men, and weak men create difficult times.” This quote (in modern language is clearly relevant to all human beings) ) has become a sentiment that encompasses “decadence.”
The Great Depression of the 1930s is a great example of the era that this quote captures so well. This is when economic disruption poses challenges for communities and individuals, forcing them to adapt.
Innovate and endure severe economic hardship. As a result, a more demanding society emerged, creating a generation that understood the value of hard work, thrift, and community support. This metaphor works just as well if we replace “man” with “company.”
Indeed, this book sheds much-needed light on the trajectory of business in the 21st century.cent century. In good economic times, investors have deep pockets and invest in thousands of weak businesses, but these businesses fail, forcing investors to find more reliable sources of profit, and then cash flows again. , and will go back to distributing billions of dollars as Stanford's stock price falls. Put on your pitch deck and hoodie and let's go.
Investment in fintech is currently a quarter of what it was a year ago, and it appears that the good times are over and tough times are truly upon us. The key is interest rates. The very same mechanisms that make fuel and food more expensive than ever mean that it's also expensive to borrow large amounts of money.
After the Great Recession of 2008, many developed countries adopted zero interest rate policies (ZIRP) as a means to encourage investment. Economists argue that if companies can borrow at zero or near-zero interest rates, they should find profitable businesses, create jobs and stimulate the economy.
In theory, this approach is solid, except that it doesn't always work. Japan even went so far as to implement negative interest rates during the “lost decade” of the 1990s, but it did not go well. However, as a by-product, a huge amount of investment capital was generated as follows. Softbank Vision Fundand later supported many big names from the ZIRP era. DoorDash, Uber, WeWork, Revolt, Slack, FTX and Klarna, among others. That said, FTX has since collapsed due to fraud, while WeWork has gone bankrupt and Uber posted its first profitable quarter of the year despite being founded in 2017.
But for strategic thinkers, every crisis is an opportunity. Fintech now has an opportunity to get serious about building companies that truly create value, serve communities, and solve real problems, rather than funneling money from one VC to the next. .
The fintech cycle begins again
Fintech investment in 2023 was a quarter of what it was in 2022 and a fifth of its 2021 peak. In the UK, one of the world's leading fintech hubs, investment has fallen by 57%. This is not the same across the board. The proportion of VC funding going to fintech startups is down 5% in 2022, down 7% from a high of 20% in 2021. The creation of new unicorn companies has also declined significantly. In the second quarter of 2021, he had 59 companies withdraw more than his $1 billion, while in the second quarter of 2023, this figure was only 2 companies. In short, VCs don't seem to be that interested in fintech anymore.
This is in stark contrast to the past decade. PayPalRevolut, venmo, stripes And Klarna became a multi-billion dollar business almost overnight by giving people access to services that traditional financial services companies couldn't: pay now and pay later finance. It still maintains that position. To find these diamonds in the rough, the venture capital world had to burn through hundreds of not-so-shiny diamonds, often at great cost. These 59 startups that exited in Q1 2021 are unlikely to be famous today, if at all. still exists.
Anyone who has attended a fintech conference in the past decade has seen business cards and tote bags from companies with fancy names, stylish designs, and lots of VC funding, but no obvious reason for existing. It may have been passed on. Such companies may not offer new or better solutions to existing problems, may not have a real addressable market, and are often There are no plans to become one. make a profit work.
This prioritization of growth over profit is important and is one of the defining aspects of the ZIRP era. Of course, there are also cases where I have been in charge of highly successful companies. Amazon You can't afford to drastically reduce book prices to the point where physical bookstores go out of business, and ultimately expand your customer base significantly and make a profit. They sell so well that every penny they make from a sale makes a profit. Hundreds of billions of dollars in gross profit each year.
But despite a notable turnaround during the pandemic, that growth rate has slowed, with year-over-year growth averaging around 40% quarterly in the early 2010s, but by the second half of the decade. It dropped to 30% and is currently flat at 20%. The company is currently transitioning from a period of rapid growth to a profit-driven model, something many other growth-oriented companies have failed to do.
Think seriously about profits
Venture capital is facing liquidation as the tap of cheap money turns off. The shotgun approach of spraying cash across hundreds of companies in hopes of striking gold no longer works. A new obligation? Finding the needle in the haystack – a rare gem with real profit potential and real solutions to real problems.
It is important to say that investments in fintech are still happening, albeit at a slower pace. But some startups, wary of the venture capital roller coaster, are choosing a different path. This could mark a welcome shift in refocusing first on problem solving and then on growth. The road ahead may be rocky, but that may be exactly the reality the industry needs. The time has come to build value, not just evaluation.