If Sezzle CEO Charlie Youakim had to write a book about the FinTech bubble that burst in 2022, he’d call it “Crazy Money.”
That nugget came up in a conversation between Youakim and PYMNTS’ Karen Webster during the first discussion in the new series “FinTech Reset: The Pivot to Profitability.”
Webster tossed out some startling statistics to set the stage, noting that roughly $130 billion was invested in FinTech startups in 2021 alone, a 169% increase over 2020. During that year, Twitter and Block founder Jack Dorsey was worth more as an individual than U.S. Bank, and for a while, PayPal had a higher valuation than J.P. Morgan.
It’s all to illustrate the “crazy money” that investors and venture capitalists threw at any idea, as the growth-at-all-costs mentality put profits and sustainable business models aside, promising “growth.”
“We had such a hot market for so long, it just became money chasing money; reason had left the building,” Youakim said, recalling companies that raised $300 million to $400 million, and when the hammer came down, some had just $20 million in revenue.
“It’s absurd,” he said.
In the buy now, pay later (BNPL) installment credit space in which Sezzle operates, the crazy money atmosphere found some FinTechs paying $500 apiece to acquire a customer.
“This irrationality of money flowing in and creating competition for customers and mindshare created tons of irrationality where rationality used to exist,” he said.
Going into 2023, Yoakim said Sezzle is profitable, but it took hard choices and tough actions to get there.
The Pivot to Profits
To Youakim, a survivor of the dot-com bubble, it started to feel a lot like déjà vu all over again in late 2020 when Sezzle went to remote work during pandemic lockdowns, and he spent some of his time in Puerto Rico. There he watched as the cryptocurrency money began flooding the real estate market, and developers were working seven days a week putting up $38 million houses for this newly minted crop of crypto millionaires.
It just didn’t add up, he said, and soon, FinTechs were taking their place alongside crypto companies, fueling a faux sense of business prosperity and success.
“It was becoming pretty obvious that things were getting inflated because you saw this crypto money flowing in, and you could sense that these were not real businesses, not real ideas,” he said. “It was just, ‘Make a coin, convince a bunch of people to invest in it, and you’re going to make a bunch of money.’”
The war in Ukraine that started in February 2022 was an inflection point. Inflation was already rising to scary levels, and VCs were questioning business models. Even Sezzle’s stock took a hit.
But Sezzle had already begun strategizing on how to pivot from acquiring as many new customers as possible to becoming a profitable business when yellow arrows started to flash red.
“That’s when I started to feel like, ‘Oh no, things are going to start heading south,’” Youakim said. “That was probably in November of 2021. So, we started to talk internally about what we needed to do to get to the point of profitability as a company.”
Sezzle found itself “challenged unit economics-wise as a company,” which meant that some deals with large merchant customers had to be repriced, he said. Going back to enterprise partners and renegotiating pilots was difficult, and not without consequences as some of those deals fell apart.
Additionally, he said too many cohorts of its portfolio were unprofitable due to processing costs or their lack of purchase frequency and had to be cut. Because of Sezzle’s scale, many of these changes took months to implement, including lending parameters that were tightened and unprofitable cohorts that needed to be culled.
Sezzle also began incentivizing customers to use automated clearing house (ACH) bank transfers instead of cards for payments, which Youakim said was easy compared to other difficult choices that had to be made.
“We had to do a layoff,” he said. “I’m not proud of that. It’s the only time I’ve ever done it in my career, and I don’t ever want to do it again.”
Along with that, Sezzle disbanded its international businesses because they were some of its most unprofitable on a unit economics basis.
Fast-forward to late 2022 and early 2023, and some of those frustrated partners started to see that Sezzle was perceptive about market problems and transparent in its approach to fixing its model.
“Because we were so early in the path, I think in some ways it’s a feather in our cap because they saw, ‘Hey, this partner, Sezzle, had a lot of foresight,’” he said. “‘They saw this coming and adjusted earlier than most.’ Most people want to work with smart partners. I think in some ways it helped us with those relationships because we were so honest about it.”
Building a Better Business 101
Changes enacted during this time included taking a different view of how to spend capital responsibly when surrounded by others spending like the proverbial drunken sailor.
Youakim spoke of the leadership at other FinTechs “that wouldn’t mind playing financial mind games or tricks in terms of where the true costs are,” harking back to the example of the FinTech that was spending $500 to acquire one customer.
“That’s not realistic,” he said. “That’s not sustainable. That’s a game. You’re only playing a game to float numbers higher, but really the game is going to come down on you in the end.”
Another part of the internal work the company did was a series of town hall meetings with younger staffers who had never been through a market crash, at least not as working adults.
“Most of them have never experienced a downturn,” Youakim said. “They don’t even know what the hell we’re talking about, quite frankly. We were explaining that we had to go from growth to profit in town halls. I would do business basics courses on gross profit, profit margins, operating expenses, and how we have to have operational leverage.”
Staffers were terrified about stakeholder reaction, and not without reason. He said he knew that changes the company was making would upset some stakeholders — and did. His job was to manage and “mitigate that part of the journey.”
Today, as one of those that took the bitter medicine and is thriving, Sezzle’s advice to FinTechs trying to do the same comes down to a few basic but vital pointers, Youakim said.
The first is to “be the biggest critic of your own business,” which is an unfamiliar mindset to many, he said. He also advises taking a clear-eyed look at run rate and burn rates.
“If you only have 18 months of runway, … you should make sure that in six months you’re already profitable, so you have some cushion,” he said. Otherwise, you become the subject of “are they going to make it” talk.
“I think the pendulum has definitely swung towards profitability,” he concluded.
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