Early stage startups ready to receive VC money
In a challenging macroeconomic market that has led to a heightened focus on belt-tightening, FinTech firms are under increasing pressure from investors to pivot from growth to profitability.
It’s a shift in strategy justified by some investors as a way to win back increasingly wary investors. But Zeynep Yavuz, FinTech partner at early-stage venture capital firm General Catalyst, takes a different view.
“I don’t think any venture capitalist wants profitability,” Yavuz, whose firm has backed fast-growing companies like Stripe, Airbnb and Instacart, told PYMNTS in a recent interview, adding: “The quality of the business model, the scale needed to generate positive profit margins and gross profit margins — that’s what investors really care about now.”
A narrow focus on profitability rather than efficient growth also risks stifling creative thinking and founders’ ability to innovate, she added: “If you’re profitable, it means you’re not really investing in growing and [as a result]you are not enjoying yourself enough.”
Times have certainly changed and compared to a couple of years ago when there was an abundance of VC capital in the market, easy access to funding has dried up following interest rate hikes and public market challenges, making it more challenging for companies to secure capital needed to scale.
It is a situation that has been particularly challenging for startups and scale-ups in the growth stage, she explained, who have operated in a capital-rich market for years and have adopted a spend-to-grow mindset along the way.
But in the face of tightening investors’ wallets, growth-stage companies are now seeing the benefits of adapting to evolving market conditions and changing entrenched corporate cultures — processes that can take months, she said.
However, startups now launching don’t have that problem, and can build corporate cultures from the ground up that will thrive regardless of the VC funding environment at any given time.
This, according to Yavuz, will lead to a boom in new companies appearing on the scene in the coming years: “Overall, we are going to see better business models being built today because of the lack of capital.”
Enterprise Software is shaping the FinTech Future
As for challenges facing the VC landscape today, Yavuz pointed to the growth stage as where the biggest hurdle lies: “The first category to be hit [during stock market challenges] is the one that is closer to the public markets, and there are companies in the growth stage.”
For these firms, she said, it’s no longer a question of whether they’re overvalued — “They’re probably overvalued when you look at the public markets,” she argued — but rather a question of whether they have enough time to grow into that valuation they are. currently attached to.
For companies or early-stage firms that are not confronted with that challenge, she reiterated the advantage they have by implementing best practices from the ground up. That, and the fact that there is still a lot of dry powder in Europe aimed at young companies, creates a good environment to drive their growth.
“I think it’s a fantastic time to be building a company,” she said, “and because the funding market has slowed down in growth and late stage, a lot of the capital is moving to early stage.”
Finally, when it comes to Silicon Valley Bank (SVB) and its impact on the global financial services sector, Yavuz said the crisis has highlighted gaps in the market, particularly in cash management, foreign exchange (FX) management and payment operations. Closing these gaps, she added, is even more critical for European FinTechs that operate across multiple markets with different currencies.
It’s a need that will put enterprise software technology at the heart of FinTech innovation going forward, she said, helping firms better manage cash flow and currency requirements: “The future of FinTech is going to be in the enterprise and it’s going to be in software. “
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