FinTechs’ Shift Toward Profitability Gets Mixed Views From VCs

In a race to break even, British FinTech giant Revolut is the latest startup to claim profitability, a milestone that few neobanks have attained despite disrupting the global traditional banking system.

And even though Revolut’s first full year of profit is now coming under question, it points to mounting pressure on startups to pivot from the growth-before-profit mindset that many have pursued since launch.

In fact, data from German consultant Simon Kucher and Partners estimated that less than 5% of neobanks globally had achieved break-even as of May 2022, a goal that firms need to target now following a year of tech investment belt-tightening and renewed investor focus on unit economics amid the current economic slowdown.

Monzo, for example, is one of the U.K. neobanks aiming to achieve annual profitability by the end of this year, after its annualized revenues increased by 250% to £440 million (about $542 million) in the year to December 2022.

Another virtual bank, Zopa, announced that it had hit the profitability landmark in April of last year, within just 21 months of attaining its U.K. banking license.

“Today’s news makes Zopa one of the fastest digital banks to achieve profitability ever and reinforces our thesis on the importance of sustainable growth as a catalyst for accelerated product and market expansion,” CEO Jaidev Janardana said at the time.

Prior to that, Goldman-backed digital bank Starling, which holds about a 9% share of the U.K. market for SME banking and is expecting to quadruple its pretax profits this year, had already joined the exclusive club.

It’s a milestone that CEO Anne Boden says they were able to reach without having to chase inflated valuations like other FinTech firms. “We’re profitable, very well capitalized and have no need to raise money,” she noted in a January letter, adding that “It’s no accident that we have never sought a silly valuation, even when the prospect of one was dangled before us.”

What VCs Are Saying

In a recent interview with PYMNTS, Thomas Cuvelier, partner at Paris-based venture capital (VC) firm Alven, said that dwindling investor confidence has led to a strategic pivot from growth in favor of profits, as investors are no longer swayed solely by a firm’s growth potential.

“There’s a major focus on profitable growth, which wasn’t the case in 2021. Now we look at [a company’s] unit economics much more carefully than before,” he said.

Cuvelier also singled out the hard-hit grocery sector — an industry which he said “grew too fast” in recent years, further underscoring investor’s preference to prioritize profitability over growth.

“From a unit economics basis, a lot of those [grocery sector] companies were not very profitable,” he said, adding that companies will have to “consolidate and grow towards profitability [a lot more] quickly now.”

But for Rob Moffat, partner at U.K.-based VC firm Balderton Capital, focusing on profitability alone is not enough to grow “great technology and software businesses.”

In fact, he said that while some businesses can quickly achieve profitability after launch, others, including loss-making businesses, can reach that milestone with time and should not be overlooked if key metrics such as gross margins and client retention show strong performance.

Once those boxes are checked and “we’re very confident that you have all of those pieces that can [help you] grow to profitability,” Moffat told PYMNTS that Balderton Capital, an early investor in FinTech unicorn Revolut, will consider investing in such firms.

Lucile Cornet, however, holds a different view when it comes to the importance placed on attaining the holy grail of profitable growth.

In a recent conversation with PYMNTS, Cornet, who is a partner at global VC investment firm Eight Roads Ventures, said that reaching that milestone is not that much of a priority for many startups, particularly those targeting another fundraising round when the environment is less challenging.

Instead, the new VC mantra is “efficient growth” — a huge difference from the growth-at-all-cost strategy that many firms have prioritized in previous years, Cornet said, adding that investors are more focused on how startups are spending funds, while weighing the tradeoffs between building critical mass or a self-sustaining business.

“With some of our portfolio companies [including Cazoo, Spendesk and Alibaba Group], we’re debating if we want to grow faster at a higher cost or if we would rather be a bit more efficient and only grow 80% this year, for example,” she added.

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