In a challenging macroeconomic market that has led to a sharpened focus on belt-tightening, FinTech firms are under mounting pressure from investors to pivot from growth to profitability.
It’s a shift in strategy justified by some investors as a way to win back increasingly cautious investors. But Zeynep Yavuz, FinTech partner at early-stage venture capital (VC) firm General Catalyst, is of a different view.
“I don’t think any venture investor wants profitability,” Yavuz, whose firm has backed fast-growing companies like Stripe, Airbnb and Instacart, told PYMNTS in a recent interview, adding, “The quality of the business model, the scale needed to generate positive contribution margins and gross profit margins — that’s what investors really care about now.”
A narrow focus on profitability instead of efficient growth also risks stifling creative thinking and founders’ ability to innovate, she added: “If you’re profitable, it means you’re not really investing in growing and [as a result], you’re not innovating enough.”
Certainly, times have changed, and compared to a couple of years ago when there was an abundance of VC capital on the market, easy access to funding has dried up following interest rate hikes and public market challenges, making it more challenging for firms to secure the capital needed to scale.
It’s a situation that’s been particularly challenging for growth-stage startups and scaleups, she explained, which have been operating in a capital-abundant market for years and have adopted a spend-to-grow mindset along the way.
But in the face of tightening investor purse strings, growth-stage firms have now seen the merits of adapting to evolving market conditions and changing ingrained company cultures — processes which can take several months, she said.
Startups that are now launching don’t have that problem, however, and can build company cultures from the onset that will thrive regardless of the VC funding environment at a given time.
This, according to Yavuz, is going to lead to a boom in new companies emerging on the scene in the coming years: “Overall, we’re going to see better business models that are being built today because of the lack of capital.”
In terms of challenges facing the VC landscape today, Yavuz pointed to the growth-stage space as where the biggest hurdle lies: “The first category that gets hit [during stock market challenges] is whoever is closer to the public markets, and those are growth-stage companies.”
For these firms, she said it’s no longer a question of whether they are overvalued — “They are probably overvalued looking at the public markets,” she argued — but rather a question of whether they have enough time to grow into the valuation they’re currently pegged at.
For early-stage companies or firms who are not confronted with that challenge, she reiterated the advantage they have to implement best practices right from scratch. That, and the fact that there’s still a lot of dry powder in Europe targeted at young firms, creates a conducive environment to drive their growth.
“I believe it’s an amazing time to build a company,” she said, “and because the funding market has slowed down in the growth and late-stage space, a lot of the capital is shifting to early-stage.”
Finally, when it comes to Silicon Valley Bank (SVB) and its impact on the global financial services sector, Yavuz said the crisis has shone a spotlight on gaps in the market, particularly in the area of cash management, foreign exchange (FX) management and payment operations. Closing these gaps, she added, is even more critical for European FinTechs that are operating across multiple markets with different currencies.
It’s a need that will put enterprise software technology at the heart of FinTech innovation moving forward, she said, helping firms better manage cash flow and FX demands: “The future of FinTech is going to be in enterprise and it’s going to be in software.”
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