Don’t let doom and gloom clip your fintech wings

All of the recent economic news seems to indicate that the long-predicted tech downturn has begun.

The key to dealing with this downturn is to focus entirely on your own circumstances

Funding is drying up, redundancies are being announced and a number of prominent start-up companies are scaling back operations. It is clear that we are entering a downturn, but the extent and duration are far from certain.

Many of the arguments and actions taken by start-ups seem to be based on experiences from previous bubble bursts. The received wisdom is that every technology vertical will suffer, and both good and bad startups will take a hit. It may seem prudent to take action now to protect your runway through layoffs. But while it always makes sense to ensure you have a streamlined operation, in many cases it’s counterproductive to focus on cutting headcount first.

The last tech recession back in 2008 isn’t going to be very helpful in telling founders what to do now. European technology is radically different and areas such as fintech are almost unrecognizable. In terms of scale, the industry is many multiples larger.

While in 2008 fintech mostly dealt with payments and transfers, today it affects all parts of how businesses and consumers spend money. Fintech infrastructure startups are an inherent part of how many businesses operate in most countries and almost all verticals. The same applies to other technology categories, from SaaS to e-commerce to cyber security and martech.

We’re not going to see a recession that uniformly knocks back all types of startups. The European tech industry is simply too broad and deep for that to happen practically. Fintech itself is likely to experience more of a mixed bag. Pure technology start-ups that have higher margins and good capital efficiency are going to do much better than their “technology enabled” counterparts.

The other important difference is that the startup scene is not entirely dependent on VC capital to drive growth. In 2008, the collapse in funding meant that new start-ups were hobbled, errors worsened and growth was severely limited.

The decisive factor was that viable start-ups were caught up in the storm. Without the ability to extend runways, they had to make deep cuts that damaged their operations and made recovery difficult—and in some cases—impossible.

Not only did this prolong the recession, it helped cause a domino effect that affected pretty much every technology vertical. Now we have a large and rapidly growing alternative financing scene. There are many companies that offer many ways for viable startups to continue raising capital.

Traditional finance is also very different. In the past, getting a loan from a bank was largely out of the question for many start-ups. Now there is a real option. Although many startups in alt-finance get their capital from VCs, most have built up huge war chests over the past few years. The sector is more than capable of picking up a lot of the slack when VCs pull back.

The final difference, which I will mention briefly, is that the nature of this downturn is very different. 2008 was a broad financial crisis. This recession is inflationary and largely due to supply chain and political issues. It’s not going to be as deep as 2008 – and may even, with luck, be quite short.

You have to remember that when the pandemic hit in 2020, most commentators believed we were headed for a huge global downturn and even a global depression. The reality was that economies bounced back and the tech industry actually experienced its biggest year in 2021.

With this context in mind, fintech entrepreneurs should not feel pressured to quickly downsize their team. Making layoffs to protect the bottom line can actually become a self-fulfilling prophecy. This is because the first team members to be let go are often in functions such as communications, sales and customer service. This inevitably affects the customer experience and the ability of a start-up to continue to grow. It also reduces team morale, as they have to pick up the slack and realize that the promising startup they joined is now struggling.

If, as I suspect, the recession is going to be shallower and focused on overheated parts of the tech industry, startups that have been rapidly downsizing will find it difficult and much more expensive to hire talent. Their competitors who have not made the same layoffs will have a distinct advantage in taking advantage of any post-recession boom. In some cases, they may find that their former team members have created their own businesses that represent a direct challenge.

The key to dealing with this downturn is to focus entirely on your own circumstances. Block out the noise of the wider market and instead talk to your existing customers and teams to see what’s happening practically.

Use this period as an opportunity to see where operations can be made more efficient. For example, consider making temporary reductions in spending such as freezing peripheral activities such as team parties and business trips. Make sure your existing customers are happy and consider how you can pursue a more aggressive sales or marketing strategy to ensure continued growth. Keep a very close eye on your runway, but remember that alternative financing can provide an easy way to extend it if you want more buffer.

Finally, remember the basic fact – if your startup is well run with a strong offering, you and your team will be fine.