The massive amount of capital poured into Fintech over the past couple of years now looks like a pandemic-induced anomaly. As a wave of digital disruption crashed over the financial services sector, venture firms invested around $123bn in 2021 and $80.5bn in 2022, compared to annual figures in the high forties from 2018-2020.
Today, things are different. We’re back to more realistic valuations and funding is harder to come by. Even the smartest entrepreneurs must now up their game.
No one ever ran a successful venture capital firm by moving slowly and, during the boom of the past couple of years, many investors weren’t spending quite as much time evaluating the nuances of each deal as they could have been.
Now, sitting in the aftermath of the boom, it's no longer about simply having a great idea that is going to attract users – investors expect founders to have a tight business plan that stands up to scrutiny and a clear path to profitability. From the makeup of their team and where they’re allocating funds to the revenue model and exit strategy, the people handing over the money want to know exactly how it will be used.
The other side of this, of course, is that it’s a great time to be a founder if you’ve got what it takes. Not only does this increased scrutiny make it easier for the businesses with real potential to stand out, but the recent layoffs across Fintech and the wider technology sector mean there are some great people out there to bring on board.
There’s almost limitless potential to talk, listen and learn from others in the same boat. Find other founders and executives, former startup employees and investors and share what went wrong, right and what you and they would do next time.
There are two main areas founders should prioritize. The first is compliance. With the increased scrutiny on business plans and the demand for short-term results, Fintechs’ ability to collaborate with regulators and stay on top of compliance developments will be vital. Regulators are cracking down on the sponsor banks and forcing them to have greater oversight, and that’s now trickling down.
Second, revenue is now king. Some of the traditional metrics to determine an early-stage Fintech’s success – think high numbers of active users or sign-ups – are now the bare minimum expectation. Founders need to be able to communicate the fundamentals and set out a convincing revenue strategy. The good news, believe it or not, is that it can be just a matter of focus – keeping that lens on the customer, your segment of the market and the problem you’re trying to solve.
As I’ve said before, if your Fintech is global in nature then offering FX can be a great way to drive and diversify your revenue. Consider the as-yet-untapped potential in cross-border. Community, regional and top-tier banks are currently handling the vast majority of this but they’re focused on servicing larger industrials and certain retailers.
Small businesses can be charged as much as 5%-10% on their FX from the mainstream banks and have to visit branches multiple times a week to process many of their payments manually. Any Fintech offering more competitive rates and smoother customer service would be a compelling proposition.
And don’t forget about the potential value partnerships can bring. Getting the right partnership in place can open up all sorts of opportunities, new markets, and new customers who you may not otherwise be able to reach.
Partnerships can also give your business access to more diverse expertise and a global network, and if you’re able to partner with firms who have already built a lot of their own infrastructure (for example automating compliance procedures) then they can help you get to market faster and cheaper.
These are just a few ways a startup’s leadership can show how their business can cut costs and provide a better customer experience for SMEs and digital businesses that sell overseas – and drive the all-important revenue that investors now prioritize.
And that’s what will determine success in this post-boom Fintech era. The CEOs that can point to the numbers and have a firm grasp of the fundamentals will be the ones whose businesses take the lion’s share of the available funding.