Fintech is recalibrating: here’s what founders need to know

Adaptation to new conditions

The broader economic landscape means fintechs need to adjust their revenue models to meet new paradigms.

US neobank Varo, for example, is moving from a fee-based business to a SaaS model as it shifts revenue streams. Brex, meanwhile, originally positioned as a corporate expense management solution for small and medium-sized businesses, has moved to pursue larger clients and continue its work on software. Cash will now come mainly from more diversified and predictable sources: recurring revenue from subscriptions, in addition to brokerage fees.

“Playing down the hatches” is not necessarily a bad thing in this context. By exploring new routes, fintechs continue to push the innovation needle forward, refocusing on business fundamentals. For consumers, this will result in more offers being introduced as challengers and incumbents compete to remain relevant.

On the B2B side, we see the “Amazonification” of solutions. As macroeconomic conditions change customer behavior, super apps are growing to meet them when they need it and deliver all-in-one solutions. Evolving needs mean that SME fintechs are now increasingly adjusting their offerings to include working capital, expense management, accounting, VAT and more, all within one core solution.

First movers will race to integrate as many tools as possible, and deliver one product to rule them all. This trend is exemplified by Revolut, which is pushing hard to add additional services to become a fully-fledged solution, unlike its immediate rivals. It brings business and retail banking services under one roof – offering everything from stock trading and expense management to on-demand payments and money transfers.

M&A and the investment landscape

Fintech is recalibrating, not disappearing. The M&A opportunity has therefore become obvious; there is an abundance of amazing technology on the market today and we are likely to see well-funded fintechs continue to consolidate their ecosystem.

Looking at week-to-week funding on a micro scale, what stands out from the fundraising side are the many infrastructure providers capturing investors’ money. Companies that demonstrate the value of their technology and deliver custody, payments, card issuance and expense management command everyone’s attention. These businesses offer platforms that will provide the building blocks to create new and innovative solutions.

Things are also changing on the investor side. The bell curve has changed: funding is increasingly concentrated on early or late stage deals. Valuations of mid-cap companies have become too expensive, so investors are shifting their buying to early-stage value, or safer bets at the top.

Meanwhile, there is a much stronger focus on capital efficiency rather than high growth. While entrepreneurs will always be under pressure to demonstrate rapid growth, they are now also being judged on their ability to streamline their business and focus on their core proposition. Many funds at the early end of the investment spectrum look for a 1:1 ratio of revenue to capital raised, to prove the underlying fundamentals of a business.

Challenging markets can be an opportunity – they help SMEs mature and give entrepreneurs the chance to show what they’re capable of. We don’t have to look too far back to see how much the fintech space advanced during the recent period of global slowdown due to Covid-19. After the massive ramp-up of fintech, now is the time for businesses to navigate the trough of disillusionment and maneuver through the mass adoption curve. It is time for entrepreneurs to introspectively consider whether this is the time to change their business into something that can be profitable in 12-18 months.

Time to secure extra investment or tighten your belts?

This is a question that many business leaders will be thinking about right now. After all, every founder wears two hats: one to run the business, the other to make sure they have enough money to keep the lights on and people employed.

In difficult times like these, entrepreneurs need to be clear on their long-term roadmap. They need to show investors incremental growth and cash flow efficiency with the current amount raised, but at the same time explore M&A and product expansion opportunities. Fundraising and running the business are by-products of each other, and are not mutually exclusive.

Founders should continue to focus on the current business, while thinking strategically about how to consolidate their offering or implement solutions that will provide a strong return on investment – ​​this will determine when a capital raise may be necessary. That said, it’s important to remember the hare and the tortoise – those who take it slow and steady are likely to win over those who burn money without a solid and sustainable plan.

Another important factor to keep in mind is that equity is not the only option on the table. For entrepreneurs exploring cheaper, less dilutive options, debt financing can offer a secure lifeline that they can pull up and down as needed. While this option comes with its own considerations, it is an often overlooked option for founders looking to raise capital and fund growth.

What does the future hold?

Globally, fintechs have increased 125 billion dollars in VC funding in 2021. This astonishing growth necessarily comes with a caveat; no industry can sustain exponential growth indefinitely, so a period of readjustment was due.

We are at an inflection point where things revert to the mean. Money is still readily available for visionary entrepreneurs and proven business models. Meanwhile, companies with more measured valuations have become attractive targets for acquisitions and investment, stimulating cross-investment and M&A activity.

I challenge the notion that doors are being closed to fintech operators. On the contrary, they have been given a new opportunity to pause, reassess and pursue changes that will strengthen their business fundamentals. As with any ‘cooling off’ period, the industry will come out the other side stronger and healthier.

About the author: John Clark is managing director of Royal Park Partners, a firm of corporate finance advisors with a focus on fintech. With offices in New York and London, the firm provides transactional advice to entrepreneurs, entrepreneurs and private equity funds all the way from seed capital to a trade sale or IPO.