Insights & Trends

Living through the Fintech crash—and what it means for founders

Insights & Trends

Living through the Fintech crash—and what it means for founders

Words Olly Betts

October 10th 2022 / 10 min read

Just a few months ago, I started writing an article under the title, “The year that Fintech matured”. 

At the time, the headline couldn’t have been more accurate. Decacorns were no longer a rare sighting: we’d seen Coinbase hit an $86 billion valuation (higher than UBS) after its IPO, Klarna reaching a $46 billion valuation (higher than Barclays) after their $600million+ raise, while Brazilian fintech Nubank hit a $41.5 billion valuation post-IPO (higher than the country’s largest bank). In 2021 alone, investors gave fintechs $170bn to fuel growth. 

Over a matter of weeks in 2022, the climate quickly turned. The tech-dominant NASDAQ plummeted, recording its worst months since 2008. Redundancies have been widespread, with fintechs like Bitpanda and Freetrade, letting go of swathes of staff and VC and fintech founders little secret, the ‘Down Round’, was all over Twitter, with Klarna raising at a 85% lower valuation than their previous round. 

Being immersed in the ecosystem—launching new fintechs, helping founders scale and investing alongside Aviva, I have been feeling the impact of this paradigm shift from all angles. 

So what has changed, and what has remained the same? As I get flashbacks to 14 years ago I’ll aim to reflect on the fintech market downturn, predict what the next 12 months may have in store, and propose the founder mindset required to win in this market.

Read for insights into:

  • The options that remain for founders, with IPOs and huge funding rounds largely off the table

  • Tips on how to extend your runway and consolidate your current position

  • Switching from a growth-at-all-costs mindset to a profitability mindset

  • Why the current market may favour new ventures over incumbents

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The last eighteen months in fintech

  • April 2021: Plaid reaches $13.4 billion valuation after $425 million Series D

  • April 2021: Coinbase goes public, reaching valuation of $85.8 billion

  • June 2021: Klarna raises $639m at a valuation of $45.6 billion

  • December 2021: Nubank launches IPO at valuation of $41.5 billion

  • January 2022: Block acquires Afterpay for $29 billion 

  • March 2022: Visa acquires Tink for $2 billion

  • April 2022: Robinhood acquires UK crypto company Ziglu

  • April 2022: One-click checkout startup Fast shuts down, just a year after raising a $102 million Series B

  • April 2022: Nasdaq falls by 13.3% over the month, its biggest fall since 2008

  • June 2022: Fintechs including Klarna, Bitpanda, Nuri, Curve, and Freetrade all lay off large swathes of staff

  • July 2022: Klarna raises ‘down round’ of $800 million at $6.5 billion valuation, 85% down from its previous valuation. Losses triple in H1 2022.

What might the next 12 months look like? 

The IPO exit door is shut

As investors seek safe harbour in value stocks, a growth-at-all-costs narrative no longer flies, and valuations of publicly traded Fintechs have plummeted. This is likely to make IPO an unviable exit route for founders (and their VC backers) for the next 12-to-18 months. Those just about to be on the 2022 IPO block (Monzo, Revolut, and N26 will be looking for alternative ways to raise money to fuel growth. With one exit door closed for now, have founders (and their investors) got the patience and energy to extend the journey and can they turn the tanker from growth to profit fast enough?

Megavaluations and huge funding rounds won’t return for some time

For the time being, consider huge funding rounds and mega-valuations extinct (although Klarna’s recent $800 million round is still one of the biggest raises of the year). Megavaluations reflected an investment thesis that, for these companies, growth was inevitable and never ending.  The investment models used by VCs to determine their level of return is underpinned by IPO as the exit option (especially in later stage VC) so as the IPO door shuts reducing the exit options valuations are further compressed. This may be exacerbated by later stage funds having to divert capital towards suring up existing investments.

"With one door closed for now, have founders got the patience and energy to extend their journey?

Big fintechs will look to consolidate and acquire

For the new breed of Fintech Decacorns born out of the bull run and filled their boots before the crash, ‘Baller’ acquisitions could be the growth lever they chose to pull. Pre-crisis, we saw Block acquire Afterpay for $29 billion, and Robinhood acquire UK crypto platform Ziglu. Expect to see more of this from well funded Fintechs, who will use their large cash reserves to consolidate their position, buy growth through acquisition and diversify revenue streams. We may even see the big old banks make moves as Fintech becomes a buyers market and they can acquire much needed tech cheaper than they can build.

Big Tech will continue to eat Fintech

Cash-rich Big Tech firms will double down on building fintech offerings and acquisitions—their share prices have been hit hard but they remain highly profitable and cash generative. In the last twelve months, Apple started to make moves at the height of the market: acquiring payment terminal startup Mobeewave and open banking data startup Credit Kudos, while also launching a ‘Tap to Pay’ feature that will allow iPhones to accept contactless payments. Scott Galloway identified banking as one of the biggest revenue opportunities for Apple in the next decade—a possible $75 billion in the bank. This type of environment plays perfectly into the hands of Big Tech: they know consumer demand for Fintech remains so now could be the right time to pounce.

In sum: Fintech valuations are down and staying down for the next 12 months. 

Investors see fintechs facing a series of challenges with a recession looming, ecommerce growth softening, increasing cost of capital and increasing operating expense due to inflation. This is leading investors to have a more pessimistic view of future performance, anticipating slower revenue growth, a longer path to profitability and lower margin at scale. For profitable fintechs with large war chests it could be a feeding frenzy.

Where does this leave founders?

Fintech founders are operating in a different world than six months ago. It’s time for a reality check. We have shifted from peacetime to wartime. 

1. It’s harder than ever for fintech startups to survive

Fast’s rapid decline from upcoming unicorn to insolvency shows how hard it is to get it right in fintech, even with significant investment. Businesses that aren’t solving painful problems, experienced by millions, in a unique way, that is hard to replicate, will fail. 

Companies that purely cashed in on the fintech hype were destined to struggle: it has become harder than ever to deliver on lofty promises, especially as investors become increasingly cautious and look for near-term metrics over long term pipe dreams. 

Raising sufficient capital to prove product market fit, build recurring revenue and demonstrate a path to profitability is hard.

2. The fundamentals are more important than ever

Regardless of wider investor sentiment the key ingredients for Fintechs don’t change:

  • Product insight (answering a real challenge for consumers, offering an innovative solution)

  • Growth insight (understanding how you’re going to acquire customers)

  • Strong unit economics (having a clear idea of how and when you’re going to get to profitability—more on that below…)

  • Defensibility (how you’re going to build a moat around your business)

Founder need to understand their fundamentals and evidence them to investors.. Before investment was driven largely by growth metrics: if you could show that you’re able get customers on board, whatever the cost, that was enough to attract investment. But investors are now looking for more than just ‘blitzscaling’: they’ll actually be looking for your understanding of how you will generate profit and margin at scale. 

3. Switch to a profitability mindset

Another key fundamental is switching from a growth at all costs mindset to a profitability mindset. 

  • Focus on monetisation of existing customers over new customer acquisition

  • Obsess about your profitable customer segments 

  • Identify new revenue streams

  • Consolidate acquisition channels

You should also focus on simplifying your proposition. Conduct an immediate review of new feature development to  features towards profitability.

This tweet is something I see across all stages of venture investing: you need to be two or three steps further up the Ladder of Proof than you did before the reset.

4. Extending your runway should be a priority

Remember there are two levers to extending your runway, 1) raise more, 2) spend less. The second has now become plan A rather than a stress test scenario. With fundraising significantly harder (and potentially off the table if you don’t have evidence of a material step forward in traction since your last round) , Founders should do what they can to decrease their burn rate. This should focus on giving yourself enough time to execute on a series of iterations (product, go to market, business model), with enough time to measure impact and adjust (not just one strategy change, given you may not get it right the first time). 

Many founders are already doing this through layoffs—typically around 10 to 15% of the workforce. I’d argue this isn’t enough to get through the storm, and would recommend a 30% reduction structured into phased cohorts so you can react if the macro environment improves faster than expected.  

Read more on how to balance growth with extending your runway.

5. And yet there has never been a better time to be a Fintech Founder

In spite of all this, it’s still a great time to be a founder.  In many ways, this market correction wipes the slate clean. The poor quality businesses will run out of cash, creating an opportunity for new businesses who are better placed to address the challenges they were targeting. New businesses have the benefit of having relatively low burn rate, giving themselves a much longer runway than established businesses who are struggling to raise. 

If you need evidence for this, just look at the last global recession in 2008. Many of today’s successful fintechs—Monzo, Revolut, Starling—were born out of that opportunity to revisit what exactly customers were looking for, and to build products that were more acutely suited to their needs.   

6. You can build and launch products faster than ever before

The foundations for fintech have been firmly laid during the bull run , and the infrastructure layers are proving themselves at scale. This means the building blocks for fintech—payments, open banking, KYC and AML technology—are enabling founders to launch and get a product to market much more quickly and with much less investment.  

This has been a huge focus for our Venture Studio businesses, allowing us to get products in the hands of users much earlier, building evidence of the fundamentals even earlier. Our Venture Studio business Nabu is providing accurate data-driven valuations for your NFTs and enabling holders to access a wider range of financial services as they would expect with any other asset class. Thanks to there being a Fintech API for every module / component / feature we were able to launch a secure and scalable NFT valuation dashboard within 90 days.

"To survive a storm is an incredible experience for any founder."

Despite the bleak outlook at present, almost everyone you speak to in fintech remains bullish on the long term outlook of the sector. The problems that fintechs solve for customers remain, and enabling technologies continue to unlock cost advantages over traditional banking. Moreover, startups that can remain capital-light and tech-led will continue to drive high valuations (especially compared to those with heavily-laden balance sheets). 

To survive a storm is an incredible experience for any founder, and the stakes are particularly high this time. Fintechs that are able to navigate this correction well will come out in a winning position. 

Are you working on a fintech venture?

Co-found a business with us in the Founders Factory Venture Studio

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About Olly

Olly Betts is the fintech sector director at Founders Factory, looking after our fintech portfolio in partnership with Aviva. Prior to this, Olly founded OpenWrks, an open banking API platform, which was acquired by Tink in 2020. He's also the Founder & CEO of Version 40, supporting founders who are building fintech products.

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