The Pattern #27: Hunger Games - The FinTech Edition

Mayank Jain   /    Head - Marketing and Content    /    2022-09-16

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    Hello and welcome to this week's edition of The Pattern, a newsletter where I try to make sense of all the big and small rumblings in the Indian FinTech space. Let’s get started!

    “For most early-stage companies, if you’re not bringing in a healthy profit yet, that funding will be the most expensive cash you ever buy.”

    This quote from Alex Turnbull, CEO and Founder of Groove, is one of the most accurate statements I’ve read about fundraising for startups - and unfortunately, it’s now proving to be a harsh truth for several homegrown FinTechs.

    Here’s what I mean.

    In 2021, investment in tech startups globally was at its peak - with the amount reaching a colossal USD 621 billion. Over 500 unicorns were born that year, and it seemed like the sky was the limit. However, Q2’22 saw only 87 unicorn births - clearly, the pace has dwindled.

    Source: CB Insights

    A similar trend is reflected in the Indian context, where startups raised only about USD 1.1 Bn in July 2022, down 60% month on month (June 2022 saw a fundraise of USD 2.7 Bn) and 90% year on year.

    Several factors could have contributed to this funding winter that startups have been bracing themselves for a while now. Inflation, a looming global recession, and pandemic aftershocks meant that central banks significantly raised their interest rates globally. Their goal was to reduce liquidity from the global economic system.

    Investors thus shifted their focus from high-risk startup investments to relatively lower-risk products. Smart economics has devastating consequences for early-stage companies relying on them to rake in the moolah.

    I hate to say I told you so, but. . . 🤷🏽

    Third-party funding is not a reliable business model, period.  And neither is growth for growth’s sake.

    That being said (again), here’s what I think the nosedive in funding means for FinTech:

    Discipline never goes out of style - build a business, not a rocketship.

    It’s time for founders to discipline their spending and double down on their product-market fit. Go back to the drawing board - are you offering a product that’s addressing a niche, unfulfilled need, or is it simply a marginally improved version of an existing product? Have you focused too much on marketing, and too little on unit level profitability? In that case, it’s time to start from scratch, and tackle the less glamorous yet fundamental aspects of running a business.

    Growth should be sustainable - without losing pace

    Simply put, rapid growth can be disastrous. And we don’t have to look too far to see why. Remember the better.com debacle? In 2020, the mortgage company made nearly USD 900 million in revenue - up a massive 10x the year prior - which meant a net income of USD 172 million.

    Looks good, right?

    Cut to December 2021, and the company laid off 9% of its workforce (about 900 employees) over a poorly executed Zoom call. In March 2022, the company announced its plans to lay off another 3,000 employees. The layoffs were prompted by a “dramatic drop in origination volume due to rising interest rates.”

    Goes to show that when something seems too good to be true, it probably is. And fortunately or unfortunately, FinTechs must walk the tightrope between growth and sustainable economics - business is unpredictable, and having a nest-egg is non-negotiable.

    Banks are coming for FinTechs - so hold your own or be acquired

    According to veteran banker KV Kamath, FinTech and Digitech companies chasing overheated valuations may have lost the upper hand to incumbent banks. 

    For all the talk about FinTechs vs banks, the hard truth is that banks have the kind of capital FinTechs can only hope to have access to. And rather than build FinTech capabilities in-house, banks have the power to buy out these startups. And when there aren’t billions of dollars to fall back on, it’s easier to be bought out.

    If that’s not the fate you’re looking at, then it may be a good idea to be strict with your resources and focus on profitability.

    Conclusion

    Funding will take some time to pick up again, and when it does, investors will be looking at business fundamentals, product market fit, and reasonable customer acquisition costs.

    So cut the flab - say goodbye to the gym memberships, World Cup tickets, and BMW bikes. Sure, it’ll be less glamorous, but perks don’t make a strong business - austerity and innovation do.

    That’s all from me this week. As always, here are some reading recommendations below. 

     

    Reading list 

     

    Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to never miss any of our updates. 

     

    Cheers, 

    Mayank

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