How Fintech Can Cope With the Investment Crash

The days of easy money may be over, but that doesn’t mean worthwhile startups can’t start up.

“Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times.” So said author G. Michael Hopf in the quote which has become something of a catch-all sentiment for “decadence.”

This dynamic is illustrated well by The Great Depression in the 1930s, when economic turmoil challenged communities and individuals, making it necessary to adapt, innovate, and endure severe economic hardships. This gave rise to a tougher generation that understood the value of hard work, saving pennies, and supporting the wider community.

The metaphor also works if we change “men” to “companies,” and even serves to shed some much-needed light on the direction in which business in the 21st century is likely to go. In good times, investors, flush with cash, invest in thousands of “weak” companies.

These businesses fail, and investors are forced to find more reliable sources of profit. Then, once again flush with cash, they return to splurging billions of dollars on any startup that has managed to design a logo.

With fintech investment now a quarter of what it was a year ago, it seems hard times are back in earnest. Key to this has been interest rates. The very same mechanism that means that fuel and food are now more expensive than ever before also means that it is more expensive to borrow large sums of money.

Following the Great Recession of 2008, many first-world nations adopted Zero Interest Rate Policy (ZIRP) as a means of boosting investment. If companies can borrow at zero or close to zero percent interest, then they should, economists say, start profitable businesses, create jobs, and stimulate the economy.

Theoretically, this approach is solid—except for the fact that it doesn’t always work. Japan did just this, going so far as having negative interest rates in the 1990s “lost decade,” and it didn’t work.

But a byproduct was the emergence of massive investment funds like Softbank Vision Fund, which in turn supported many of the big names of the ZIRP-era: Doordash, Uber, WeWork, Revolut, Slack, FTX, and Klarna, among others. (That being said, FTX has since collapsed due to fraud, while WeWork went bankrupt and Uber posted its first profitable quarter this year, despite having been founded in 2017.)

However, every crisis is an opportunity. Fintech now has a chance to get more practical about creating companies that actually add value, that are of service to the community, and that actually solve problems instead of jumping from one VC cash infusion to the next.

Opportunities in Crisis

Fintech investment in 2023 was a quarter of what it was in 2022, and one-fifth of its peak in 2021. In the United Kingdom, one of the world’s great fintech hubs, investment is down 57%. This isn’t the same across the board. The fraction of venture-capital funding going to fintech startups was down 5% in 2022 and 7% since its high in 2021.

The creation of unicorns is also down significantly: 59 companies had exits of over a billion dollars in the second quarter of 2021. In the same quarter of 2023, the figure was only two. In short, VCs seemingly just aren’t that into fintech any more.

Compare this to the previous decade. PayPal, Revolut, Venmo, Stripe, and Klarna became multi-billion-dollar businesses almost overnight, and remain so by giving people access to services that traditional financial-services companies couldn’t offer: instant payments or buy now, pay later financing.

To find these diamonds in the rough, the venture-capital world had to burn through hundreds of not-so-shiny diamonds, often at great cost. Those 59 startups with exits in 2021 aren’t likely to be household names today, if they even still exist.

Anyone who has been at a fintech conference in last 10 years might have been given a business card and tote bag by a company with a clever name, slick logo, and scads of VC money, but with no offering that solves any problems. Such companies might not provide a new or better solution to an existing problem or have a real addressable market, and quite often they have no plan to become a profitable business.

This preference for growth over profit is key, and is one of the defining aspects of the ZIRP era. Of course, there are examples where this approach was been responsible for massively successful companies. Amazon dramatically cut the prices of books to the point that physical bookstores went out of business, eventually expanding its customer base so much that it could not fail to turn a profit. In fact, it is selling so much that even the pennies it makes on a sale add up to hundreds of billions of dollars in gross profit each year.

That being said, Amazon’s rate of growth is falling, despite a marked upturn during the pandemic, from an average of around 40% year-over-year quarterly growth in the early 2010s to 30% later in that decade and now a flat 20%. It has now transitioned from a period of rapid growth to a profit-driven model, something that many other growth-oriented companies have failed to do.

The Road Ahead 

The days of easy money in fintech are over. Gone are the shotgun-blast investments in hundreds of startups, hoping for a few unicorns. The good news is that this reckoning is forcing VCs to sharpen their focus to seek out rare gems: companies with genuine profit potential and solutions to real problems. This makes for a stronger, more reliable sector.

Fintech investment continues of course, but at a slower, more deliberate pace. This pushes some startups, wary of the volatile VC roller coaster, to explore alternative funding options. This shift could be a positive turning point if it means  prioritizing problem-solving over hypergrowth, leading to a more sustainable and impactful industry.

The road ahead may be bumpy, but this reality check could be just what the sector needs. It’s time to build for value, not just valuation.

—Scott Dawson is head of sales and strategic partnerships at DECTA.