The fintech bubble of the past few years is starting to burst. After explosive growth and the sky-high valuations of recent times, a significant number of startups and scaleups are either making layoffs or introducing hiring freezes.
Examples here include US-based commission-free stock trading app provider Robinhood, which has slashed headcount by 9 per cent. The Swedish buy-now-pay-later (BNPL) unicorn Klarna has pointed to job cuts of up to 10 per cent. US-based crypto currency exchange platform vendor Coinbase has put an indefinite hold on recruitment and rescinded job offers.
But according to Tom Chambers, associate director of technology and growth at recruitment consultancy Robert Walters, the situation for a significant number of tech firms across Europe – and not just those in the fintech space – is even worse. He describes cuts as “pretty brutal”, with many laying off up to 50% of their workforce.
“Over the last 18 months, from the fourth quarter of 2020 until last month, we saw a massive tech hiring bubble as scaling businesses benefited from the investment bubble,” he says. “People overhired to meet the goals set by venture capitalists (VCs) and to improve their valuations – because the more people they hired, the more their value went up.”
But the blame cannot be laid solely at the door of VCs, says Kevin Chong, co-head of fintech specialist Outward VC. He points to the role of hedge funds which, on “finding it difficult to outperform the markets” a few years ago, turned their attention to private companies. Traditionally, their investment strategy had focused almost entirely on public markets.
“They reformed the market,” he says. “It was more important to them to invest large sums than get bogged down with valuations, as they had to find ways to compete against VCs.”
Global factors hit fintech growth
The problem now though is that, while money is still available, that market is becoming more risk-averse. This means funding is becoming less easy to access and rounds less frequent. The situation is particularly difficult in consumer-focused markets, such as BNPL and home lending, and among scaleups that have yet to turn a profit despite years of investment.
“Investors are doing more due diligence and the valuations of fintechs aren’t soaring as they have over the last five years,” Chambers explains. “Startups are being held to higher standards on revenues and profits, and some founders could be thinking twice when getting their ducks in order.”
The reason behind this shift, says David Ritter, director of financial services strategy at digital transformation consultancy CI&T, is a toxic combination of quantitative tightening, particularly in the US, rising interest rates, high levels of inflation and growing fears of a global recession.
Such factors are inevitably making investors wary. But they are also causing founders to look at how they can save money to ensure they do not run out prematurely, with headcount an obvious place to start.
“Cash is king and it’ll be important to see companies through this difficult period,” says Chong. “Because funding is now much less predictable, founders want to extend the runway for as long as possible. We’re talking about rainy days and we could see two years of that.”
A key factor, he believes, is that the widely predicted, quick, post-pandemic, V-shaped recovery is looks increasingly unlikely, which is leading experienced founders and investors alike to act.
“The bubble is bursting,” Chambers points out. “It’ll definitely get worse before it gets better because we’re not at the bottom yet.”
Although technology companies of all stripes are being impacted by the situation, the huge sums invested in the fintech space due to its disruptive promise and global potential has put it particularly under the spotlight.
Dealroom’s The State of Fintech Q1 2022 Report revealed, for instance, that startups raised $125bn (£101bn) in VC funding last year. The figure is 2.8 times higher than in 2020, bringing the total enterprise value to $3.5tn, an increase of 6.2 times on 2016.
Even during the first quarter of 2022 as economic headwinds started to become more visible, fintechs still raised $32.4bn, up 27 per cent year-on-year, according to Dealroom, although it was 10 per cent down on the all-time high experienced in Q3 last year.
Is fintech facing a market correction?
What this means, though, says Ritter, is that the current situation is more of a market correction than a radical contraction.
“If you think about the dotcom bust of the late 1990s, there were thousands of startups with business models that didn’t make sense and weren’t making any money,” he says. “So the resulting shake-out was healthy for the long-term development of the sector by creating a more balanced environment, and the same is likely here too.”
Chong agrees, not least because he now expects the investment focus to “spread around a bit more” from a handful of later stage companies towards a wider variety of early-stage startups.
Another advantage of this correction, meanwhile, is that salaries are likely to fall back to realistic levels, believes Chambers. Over the past 18 months, they had become hugely inflated because of startups “paying even more competitive salaries than large enterprises”.
But today’s uncertain times mean there will be a shift away from startups towards more stable, well-established businesses, particularly in the wider financial services sector, Chambers forecasts.
Some fintech employees could well find themselves going down this route whether they want to or not, due to anticipated high levels of merger and acquisition (M&A) activity. This situation is particularly likely among fintechs that have been unable to diversify beyond their core product or service.
“If you’re an incumbent financial services player, such as a big bank, it’ll be a great time to make an acquisition as valuations are already down quite a bit on a year ago,” Chong explains. “It’ll certainly make the trade-off between buying and building technology yourself much clearer.”
As a result, he predicts that, although this year and next year are likely to prove difficult, the fintech sector should pick up again in 2024. Moreover, “for the ecosystem overall, the current correction will be positive”, he believes.
Ritter agrees. “It’ll be challenging in the short and medium term, but long term, the future for fintech remains very bright,” he concludes.