The world-famous song “Wind of Change” by the band Scorpions intoned the end of the Cold War in 1990 and gave us all the feeling of a “turn for the better” with our Russian neighbors. Since February 24, we have been abruptly taught otherwise, and since April 27, we have known officially through our Chancellor that we are in a “turn of the times”.
Since then, the word “turnaround” has become almost inflationary. In order to effectively combat the same in the war-wounded European economy, Ms. Lagarde announced an “interest rate turnaround” via blog on May 23. What consequences all these “turns” will have for us is hardly foreseeable. While the Chancellor’s proclaimed “turnaround of the times” remains rather vague in terms of timing due to the time-consuming search for solutions to substitute fossil Russian fuels and the “supply chain problems” for heavy weapons plus ammunition, Ms. Lagarde’s turnaround of interest rates is precisely set for July in order to counteract galloping inflation. And in the middle of these “watershed times”, the startup and fintech scene also finds itself and must now (re-)act on what is brewing…
A turning point for fintechs as well?
If you follow the scene a little more closely, you will have come across more and more “warnings” from analysts and/or from the venture capital scene in recent days and weeks, the tenor of which points to a “change in sentiment” that will logically have consequences for the strategies and business models of VC-backed companies. The figurehead fund in venture capital, Sequoia, presented a 52-page presentation to its portfolio companies on May 16, titled “Adapting to Endure,” which talked about so-called “crucible moments.” The message to the founders is clear: now is the time for necessary adjustments if you want to continue to exist in the market.
The days when money cost nothing are obviously over. Fundraising is becoming more difficult and valuations that were possible in the last 12 months may come under pressure today. The fact that this presentation went viral in the startup scene in the last few days is certainly intentional on Sequoia’s part.
Because actually there are no really new findings in the document for the knowledgeable reader, except that they are logically prepared and well illustrated.
Since journalists also make diligent use of this document, we have recently been able to read articles in one or the other medium. They addressed the question of how the ratings of German “unicorns” could possibly develop in the coming weeks.
Adapting business models and expansion plans in the changing times
Terms like “flat rounds” or “down rounds” made the rounds. The fact that startups have had and continue to have such scenarios does not necessarily have anything to do with the current “turn of the times,” but has always been part of the entrepreneurial risk. However, it has to be said that current economic and political events have made the situation for startups even more complex. Unicorns that enjoyed the highest pre-money valuations and fundings of several hundred million dollars/euros just a year ago, such as Klarna or Revolut, are now well advised to rethink their business models and expansion plans against the background of their own run rate – i.e. the period for which the funding is sufficient – and the new market situation and make adjustments.
Klarna, one of the best-known fintech unicorns, made all the headlines a few days ago with its announcement that it was laying off 10% of its workforce. The June 2021 funding round of more than $600 million gave the buy-now-pay-later specialist a valuation of more than $45 billion. In this specific case, the outlook for a timely IPO, the hype around “BNPL” and the Covid-driven growth in eCommerce certainly played a big role in the valuation for investors.
Do not draw false conclusions
With last year’s funding apparently already quite exhausted, the timing for a new funding round is not exactly optimal at the moment. However, whether this approach is called “stepping on the cost brakes” or, as in the case of crypto fintech Nuri, a “turnaround from growth to profitability,” it should not lead to the conclusion that one is now questioning the business models or strategic potential of Klarna & Co. overall. Nor should we make the mistake of assuming that this situation and constellation applies to all other fintechs, regardless of their size.
Perhaps one should rather ask why such a large venture capital firm as Sequoia would so readily leak such an “internal” document? Is it the desire to do something good for the entire industry in the sign of the changing times, to “educate” it? Or do they just want to set off some reflection processes among the numerous founding teams with a well-prepared collection of generally available information and truisms? It’s probably a mix of everything… And it can’t hurt if the founding teams of the many younger startups are given pointers to question their own business idea and its implementation once again.
Evaluate situation in detail
For fintech brown-ups, I think the situation is different. Unicorn companies have usually proven that their business models are firmly established in the market and that their fundamental positioning is the right one. Acceptance of purely digital and thus often more cost-effective services will tend to increase in times of crisis. Citizens are now taking a much closer look at their spending and will ask themselves whether the fee models for financial services are really fair or whether it might not be time to change service providers.
Depending on the funding situation, more questions are now pushing to the forefront for grow-ups. How can growth, operational resilience and the pursuit of profitability be reconciled more quickly against the backdrop of the changing times? One advantage that these larger companies have over the younger startups is, among other things, that the former young founders have in the meantime brought experienced entrepreneurs or managers on board. This is not the first time they have designed and gone through such transformation processes in their professional lives.
Speed to change instead of speed to growth
Therefore, we can expect to see some exciting developments in the fintech scene in the coming weeks. This can be anything from layoffs to mergers or acquisitions. And those who can position themselves as consolidators in such a market situation and make strategically sensible acquisitions will not only gain access to top talent, but may also be able to push their own greenfield product developments through buyouts. After speed to market or speed to growth, speed to change now takes precedence. And this can have value-stabilizing or even value-increasing effects in the next funding round.
And with this, a quote that is (wrongly) attributed to Charles Darwin in the Sequoia document actually comes true: “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change”.