By Scott Dawson, Head of Sales & Strategic Partnerships, DECTA
The cycle of work ethic and business success is perpetual: investors pump their cash into weak businesses during good times, which inevitably fail. They are then forced to find more reliable sources of profit and then, when they are flush with cash again, go back to handing out fistfuls of money to anyone with a pitch deck and a business degree.
There’s no doubt that the initial boom of the fintech industry is over, and we’ve entered our first real phase of hard times. Investment figures are at just a quarter of what they were in 2022. Central to this shift has been soaring interest rates, making it increasingly expensive to borrow large sums of cash. There’s a quote from author G. Michael Hopf that originated in a Sci-Fi novel but perfectly sums this up:
“Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times.” ~ G. Michael Hopf
From ZIRP to tough times
The 2008 recession had a wide-reaching and lasting impact on investment, so many first-world nations adopted a Zero Interest Rate Policy (ZIRP) to stimulate growth. The theory was that if companies can borrow at as close to zero percent interest as possible, they should create profitable businesses and jobs and kickstart the economy. However, it isn’t a foolproof plan. Japan adopted this method in the 1990s, going so far as having negative interest rates, and despite these efforts, it has had next to no economic growth for more than 25 years.
The movement hasn’t been entirely unsuccessful, creating investment funds like Softbank Vision Fund, which paved the way for many of the big brands of the ZIRP-era to succeed, such as Doordash, Uber, WeWork, Revolut, Slack, FTX, and Klarna. That being said, all that glitters is not gold, with FTX collapsing due to fraud, WeWork going bankrupt, and Uber only enjoying its first profitable quarter in 2023 despite taking off in 2017.
The crisis we now find ourselves in as an industry could be an opportunity to get real about developing companies that create value and solve real problems rather than going from one VC cash infusion to the next.
The great fintech regeneration
Last year, investment in fintech was the lowest since 2017, and for the UK, one of the world’s great fintech hubs, investment was down 57%. New Unicorns are – without stating the obvious – increasingly rare. By December 2023, there were 86 new unicorns, compared to the 318 companies that gained the status in 2022 and 617 during the peak funding market in 2021. In short, VCs seemingly just aren’t into fintech.
Compare this to the 2010s: PayPal, Revolut, Venmo, Stripe and Klarna became multi-billion-dollar businesses almost overnight. They remain invaluable because they continue to give people access to services that traditional financial services companies couldn’t offer, such as instant payments or buy-now-pay-later financing. Yet, for this number of valuable companies to exist, venture capitalists had to burn through hundreds of other, less effective companies, often at great cost.
Those startups that earned Unicorn status in 2021 aren’t likely to be household names today, if they still exist. Probably not. Many organizations might not offer a new or better solution to an existing problem or have an addressable market. Others simply have no plan to become a profitable business.
If you’ve attended a fintech conference in the last ten years, you’ve likely come away with pockets full of business cards, techy nick-nacks and pens all emblazoned with branding from a company with a clever name, stylish design, and shed loads of VC money. But could you tell me what they did?
A preference for growth over profit is key and is one of the defining aspects of the ZIRP era, and there’s no doubt that it has produced some exceptionally profitable companies. Amazon cut the price of books to the point that physical bookstores started going out of business, eventually expanding its customer base so much that it could not fail to turn a profit. It now sells so much that even the pennies it makes on a sale add up to hundreds of billions of dollars in gross profit each year.
However, even Amazon isn’t immune to market changes, as its growth rate is falling despite a marked upturn during the pandemic. Instead, it has effectively transitioned from a period of rapid growth to a profit-driven model, which many other growth-oriented companies have failed to do.
Turning profit against the odds
As we enter an era of hardship for business, investors must change their tactics. No longer can they hand out cash hand over fist to anyone who knocks on their door. Instead, they must look at those that are genuinely likely to turn a profit. People will only part with their cash for something that will improve their lives or solve a problem, so look at many people’s problems and find the companies that can solve them correctly.
While it might have slowed significantly, fintech investment is still happening – some startups are even refusing VC money, recognizing that there are other ways to build successful companies. I hope that in the coming years, we focus on solving problems, and then growth will follow – these next few years won’t be easy, but perhaps that’s precisely what the fintech industry needs.
About the Author
Scott Dawson is Head of Sales and Strategic Partnerships at DECTA. Scott is a highly motivated and results-oriented individual with over 20 years of experience within the payments industry. Previously, he served as Commercial Director at Neopay, the market leader in delivering compliance solutions to eMoney and payments institutions. Scott has also held fraud management positions at PSI Holdings and Neteller before becoming Senior Fraud Manager and then Business Development Manager at ClickandBuy, which Deutsche Telekom acquired.
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