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Do fintechs have to be profitable? Yes and no. That’s it, end of the article. Thank you very much and see you later. If only. It would be easy in life if it was just about saying “yes but no“, wouldn’t it? Or answering every question with “maybe“. However, as most things, it is not that straightforward. This is a bit a grey area. Rather than a black and white answer… Most people would think “well, yes, businesses have to be profitable to survive“. But that is not that simple or straightforward. So let’s dive into it: do fintechs have to be profitable??
Actually, no
Let’s start with this side of the (bit)coin: no, in absolute, fintech startups do not have to be profitable. Or even growth-stage fintechs for that matter. No company in fintech and beyond has to turn a profit. Never ever.
Why is that you might ask? Because many businesses are not making any profit for an extended period of time. That is fine. As they grow and scale or even beyond that. That can be due to the structure of the company or the type of business model.
That’s really fine so long as cashflow is not a problem, because profit and cashflow is not the same thing. Profit is not mandatory. But remember that cash(flow) is king. Or as long as you have supportive shareholders that are willing to invest in the company every now and then. Amazon was not profitable for many years. Typically, marketplaces are the type of businesses that require a huge scale to be remotely profitable. Because margins are very thin, marketplaces need large volumes to cover their costs. In financial services, it’s the case for most activities like payments or investment management. It is thus not surprising that many fintechs are not even remotely profitable…
But in fact, yes, fintechs have to be profitable
Tough times are coming for startups. Actually, tough times are already here in case you have not realised yet. Ask Klarna that had its valuation freefall from nearly $50 billion to just over $6 billion. That is quite a down round. But if you badly need the cash, there are no other choices…
In private and public markets, the mood is changing really fast. Buy the rumour, sell the news. Startup investors are not so bullish anymore given the deteriorating economic environment. Wall Street says a recession is coming by the way. Cost-cutting, layoffs and restructuring are coming for many companies… Although not particularly fun, that will be the difference between survival and shutting down for many businesses. Survival of the fittest you might say. Sometimes, that is just what you need. Tough medicine.
Right now, the startups that are in the trickiest situation are growth-stage startups with unicorn-type valuations, a high burn rate, good but not great metrics, and 12 months of cash
Matt Turck from venture capital firm Firstmark
That is where the big problem lies for companies that cannot turn a profit in the short term. You are at the mercy of external funding to survive. It is not all down to how great the business is managed, if customers are happy or anything related to how well the company is doing. Every now and then, someone needs to put a bit more money in the jukebox to keep the music playing…
It’s really about finding a balance…
Some businesses cannot be profitable on day one. That is perfectly fine. To be honest, if you have a business idea that can be… Go for it!
The reality is that it is nearly impossible to turn a profit in a new business in a very short period of time. Where many fintechs got it wrong over the past few years, though, is thinking that it does not matter at all. Of course it does. Every company, startup or not, should have a plan to eventually pivot to a sustainable business model. Even if funding is flowing and there is strong belief that it will keep being that way. You never know.
That means a path to profitability, even if that path is not well-defined right now. At least to have an idea that eventually, this business model can work without external funding. Otherwise, it means that the music can indeed stop at any time… Many fintechs out there cannot even pretend that they can ever be profitable.
Go on and rock the world, but think about making some money at some point somehow.
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Image and article originally from fintechreview.net. Read the original article here.