Fintech Startups: Don’t Build A House Of Cards During A Market In Flux

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A major topic in FinTech today is valuation and funding. The public markets for technology stocks have been in freefall. The Nasdaq Composite Index is down 30% this year. Many publicly traded fintech companies have underperformed. Square, PayPal and Coinbase are down 50, 60 and 75% respectively (as of May 24).

This is against the backdrop of record venture capital raising and startup funding last year. 2021 saw $621b in venture capital funding, more than double that of 2020. A record 959 new unicorns were minted – a 61% growth relative to 2020,

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The problem is that the current enterprise modus operandi has been blitzscaling – sacrificing efficiency for speed: where it’s okay to sacrifice unit economics in service of growth and a shaky cost structure and burn cash in service of becoming a unicorn.

This has worked through the moving days of 2021, and driven our collective joyous round of capital funding. More funding leads to more spending on development, which in turn increases revenue. It also prompts the need for more venture capital. New rounds were raised at higher valuations, and so on.

Until records began to drop.

When public market valuations come down, as they have for many recent IPOs, the context changes. All are closed except one technical IPO in 2021, and because the public markets are part of capital supply chainThis will affect every stage of startup funding.

Each VC appears to be writing their own version of the Black Swan memo. Some are bolting or moving towards the exit rapidly (too soon?)

What should fintech (and all) startups be doing now?

I want tech startups be a camels. Camels are animals that can survive in the harshest environments in the world. But when times are good, they can drink water and run in the desert faster than any other animal. In short: they thrive when times are good but survive when times are bad.

In this piece I offer a few pieces of strategic advice for founders looking to navigate the situation.

Lesson 1: Focus on the Foundations of Permanent Unit Economics

As the old saying goes, startups are not companies. They are projects looking for a business model.

That’s why it’s so important to find the business model as early as possible. And there is a way to know if a business model works at its simplest core: entity economics. Camels build on the foundation of permanent unit economics. This means that they don’t increase revenue or customers until they have that underpinning approach. Startups have a firm handle on metrics like LTV/CAC, churn and renewals, and sales efficiency (depending on the business model) and toggles to adjust levers.

As we navigate the current crisis, the focus should be on ensuring the core part of the business model works. Nails unit economics. After that find the development.

Lesson 2: Manage Cash Burn

The default for startups should not be venture capital. It should build a business that can grow and succeed over time.

Venture capital is a tool in service of that goal, and used for a specific purpose – to accelerate product development, make acquisitions, turbocharge customer acquisition when the times are good, etc.

As we’ve seen, venture capital rounds are getting smaller (and at lower valuations). The right move to manage cash burn. This does not mean that tomorrow will be profitable. But it does mean that it takes a strong understanding of levers to get there over time.

Fortunately, there is still capital out there for the best startups. And for those who were lucky enough to raise the big rounds last year, they enjoy a nice battle chest today.

Startups must play to win (not just to survive), but do it on a foundation that provides optionality to achieve profitability when down the line.

Lesson 3: Have a Long Term Approach

Startups should have a long-term outlook. Building a startup into a sustainable business doesn’t happen overnight. It requires a foundation (points one and two) and long-term execution. Camels aren’t just adapted for evaluation when they are raised. They think about what the right amount of cash (and dilution) is needed to stay disciplined. They think about what is the right valuation for them that prepares them to raise (they want) in the future at a price that is attractive to all.

The last two years were dominated by the SPAC frenzy and the lure of easy money. Almost all SPACs are below their IPO prices: SPAC Index Drops 23% in January, and more than ever since. Many of these companies were listed very early in their travels. And in any case, going public is only a milestone, not an objective in itself.

While the road may be bumpy, the right move to manage the current headwind is to keep looking at both the short term, but the horizon.

where do we go from here

The camels survive. They are successful and also scale. They are, in any macroeconomic context, the more reliable route to becoming a unicorn.

The news is dominated by a range of events that could shock the system – from the war in Ukraine to Chinese deleveraging to runaway inflation. Technical changes will be a long-term trend, and will show resilience to these short-term shocks. But each individual startup needs to be resilient if they are to navigate the turbulence.

Now is the time to think like camels.

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