Fintech has taken a hit, which means now is the time to invest and build
Almost two and a half years have passed since COVID shut down large parts of the world. As many of us predicted, the crisis led to incredible hardship for low-moderate income (LMI) consumers and small businesses. But it also inspired a once-in-a-generation outpouring of entrepreneurial activity and new investor interest in fintech around the world, including companies explicitly seeking to include underserved markets. For investors like myself, who have spent the last decade investing in early-stage fintech from the Philippines to Colombia, the last two years represented a long-sought realization among mainstream capital markets of the enormous opportunity to create scalable and impactful fintech businesses around the world.
But we are now in the early stages of a new phase, with nine months of dramatic declines in public stock markets finally affecting early venture capital flows, particularly in fintech. We have seen a dramatic decline in VC fintech investments in Q2 2022: venture capitalists are increasingly postponing funding rounds, calling for tightening and in some cases pulling term lists.
This is an error. While a significant drawdown from the manic fintech investment days of 2021 is warranted—and indeed necessary—for the long-term health of our industry, an exodus from efforts to build and invest in early-stage startups focused on fintech for inclusion would be a miss both from an impact and profit perspective.
In fact, there has never been a better time to start or invest in an inclusive fintech startup. This is for two main reasons:
Indeed, fintech for inclusion markets is getting bigger
The VC withdrawal from fintech comes just as the challenges of the world’s most vulnerable are exacerbated by inflation, food shortages, supply chain challenges, global conflict and the growing threat of climate change. These challenges are only getting worse, as the public support that supported many LMI households and small and medium-sized enterprises (SMEs) during COVID is withdrawn. More and more Americans are forced to borrow to meet rising costs, and consumer confidence is plummeting.
Given this volatility, consumer needs remain huge and growing, especially for resilience-oriented financial services. LMI populations and SMEs are increasingly focused on how they borrow, save, allocate and spend their money; as a result, real innovation for these populations will have outsized impact. And companies that build for leverage during the current downturn will be in a strong position to quickly acquire customers and scale as markets recover.
Real, sustainable innovation takes time – something we have now
In the decade before COVID, those of us actively investing in inclusive fintech witnessed how less frothy markets enabled certain fintech models sufficient time to innovate and solve major problems, before they withstand the pressure of massive capital injection. For example, Konfio (which I previously invested in at Accion Venture Lab) raised a seed round in 2014, ~7 years before becoming Mexico’s second fintech unicorn. Coming of age during a period of capital scarcity drove Konfio to build a robust, customer-oriented business, one that now thrives through crises. I expect that today’s apparent downturn will give many large enterprises the time and focus to build and ultimately become more resilient.
Inclusive fintechs will also reap another benefit from today’s slower funding environment: a compressed funding band that should give more startups, especially in the earliest stages, more time to build before they are outcompeted by capital. As the market booms, smaller startups must compete with larger, better-funded businesses that can rely on big slugs of venture capital to expand their runway. Now the capital is more even. Startups that remain nimble and flexible, with minimal overhead, can use this time to build superior products, without the risk of being “chewed up and spit out” by the markets that loom so heavily over their heads.
Another benefit of this “funding winter” environment: companies can once again focus on the core drivers to build robust and scalable businesses. The high valuations and frothy markets of recent years caused companies to focus on vanity metrics and pure user growth rather than revenue, customer retention and unit economics. Operators and investors are moving back to unit economics as the core indicator of value in venture capital – and startups will be more robust and ultimately valuable for it.
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For me, it’s clear that fintech entrepreneurs, forged in the fire of today’s tough market conditions, will stand stronger than ever. As investors, we must continue to support these companies for the long term, with the goal of building impact and resilience in anticipation of more shocks to come. For VCs, that means returning to a core investor mandate built around fundamental business principles and rigorous due diligence, and adequately capitalizing companies so they are built to innovate and grow for the long term.
