FinTechs decide whether they are businesses or functions

According to a recent analysis, 91 publicly traded FinTech companies burned through $12 billion in venture capital by 2022, and only 17 made a net profit from those investments.

If that sounds like a familiar story, then you’ve probably been through at least one market downturn in your career, so the cyclical nature of markets is something you’ve encountered before. That so many companies burned so much money and so few made a profit shows that the mindset of growth at any cost is not new. It often ends badly, and fixing it takes a pivot.

To that end, PYMNTS’ Karen Webster invited Sezzle CEO Charlie Youakim and Bond CEO Roy Ng to unpack the FinTech tap to profitability, which is seen as the best way out of the current mess. Since both have put profitability at the center, they are trendsetters for the next phase.

All agreed that part of the COVID startup problem was too many hopefuls trying to build an entire operation around a feature that had no chance of becoming a viable business.

That was Ng’s summation, as he said, “My observation is not only in FinTech, but in software and technology in general, there are a lot of companies that were started that probably didn’t end up being a long-term stand-alone business because of the business model and economics of long term. They are more of a feature that can be additive to a broader solution set.”

Youakim sees it much the same way, although he finds some upside to irrational exuberance.

“One of the great advantages of cheap capital is that you get a lot of founders to take big swings at testing whether something is a feature or a business,” he said. It is often not a viable business, but his point is that the idea from these periods can fuel innovation later on.

“There are pros and cons and the key is transition [between] time periods, he said. “That’s the hardest part right now.”

This isn’t Ng’s first rodeo either, having ridden out the dot com bust as an investment banker with Goldman Sachs and the housing market collapse at software firm SuccessFactors. With that background, he focused embedded finance company Bond on profitable growth before it caught on – too late for many – as Youakim did with BNPL firm Sezzle, both with good results.

They did it by asking their customers (and themselves) what value they were delivering.

Read: FinTech Cash Burn Totaled $12 Billion in 2022

Pressure makes diamonds

The basic idea of ​​achieving profitable growth by delivering genuine value to users and customers is what these two companies in very different sectors have in common. Consequently, their pivot to profitability was already underway when talk of inflated valuations heated up.

For FinTechs now crashing and burning, Ng said most never defined what being truly profitable meant in practice, so they continued with costly customer acquisitions and oversized teams.

He said: “Tighter market environments are forcing businesses to take a closer look [whether] these growth areas are the growth areas I want to be in. Are these businesses going to be a long-term business or, to our discussion earlier, are they functions?”

This is where bitter experience is an advantage. Youakim said the COVID spike that pushed e-commerce to unprecedented heights, for example, gave many younger founders the wrong idea. “Some founders who are probably younger and less experienced think it’s just going to go back,” he said.

“I think it’s going to come back, but it’s not going to be a setback. We’re going to see a slow, gradual return. But I also feel like the tide going out has left some people without shorts. People has been exposed and now it is difficult to get backers again.”

As much as they agree on ups and downs, the two don’t see the ultimate recovery the same way. From Ng’s perspective, “This is probably a little more benign than the great financial crisis of the 2000s.” Youakim replied: “I think it’s going to be a tougher time for some of these companies to recover. I’m a bit more pessimistic than Roy on this one.”

Sensing a shift in the market in early 2022, Ng decided to “flatten out” the organization, eventually laying off about 22% of his workforce and obsessing over value. “We were early on doing that and it was a pretty meaningful adjustment,” he said.

“The aha moment for me is that more people or resources don’t equal more results, so to speak,” he added. “Our biggest quarter was when the team was actually smaller than when we had a bigger team. It’s a bit counterintuitive, but at least that’s my experience.”

See also: The eight trends that will shape payments, retail and the digital economy in 2023

Recovery path

Meanwhile, in the ghost town that Silicon Valley is portrayed as, deals are being made, especially seed rounds, and companies are continuing to plan initial public offerings (IPOs), albeit more cautiously.

Again, Ng’s view differs from Youakim’s in that he is optimistic about this recovery.

In 2007, you talked about big banks like Citi collapsing. It’s a different thing than Covid-induced inflation,” Ng said. “It’s still an issue, but when you compare in relative terms, I think this is something the market will get over. But I agree with Charlie. It won’t to become a V-shaped extraction.”

What can hold back recovery is being too careful. At least that’s Youakim’s opinion.

“I think that the good money going after bad companies has stopped, almost to a fault. The pendulum swings both ways. Two years ago we had good money going into bad companies, but at the same time going into good companies, many times in the same sectors. I think now we are seeing the opposite.” He added that it is a good time to buy valuable intellectual property at bargain prices.

Asked about the toughest decision he has faced in the current market, Ng said maintaining a positive team and culture through the cutbacks and bad news. Reflecting back on the 2021 hiring frenzy, he said: “The mindset was very different from a human resource standpoint because it was so difficult to recruit and retain people. Having to make changes, for me it’s not just the act itself, but how does it affect the culture?”

Youakim had to cut his team almost in half, but from the leaner operation comes more of a personal sense of entrepreneurship and commitment from the staff. Sometimes less is more, and as Webster added, it’s easier to be profitable when the basics are in place.