Anyone reading the news these days would be forgiven for thinking fintech’s innovation investment is dead.
Mass layoffs, problems with regulators, and previously profitable businesses slipping into mounting losses paint a bloody picture of the year ahead.
Much of the issues lie in the challenging macroeconomic environment, as cited by the many CEOs in earning calls this year. VCs are sitting back with their mounting dry powder, and costs are being cut to meet ambitious targets.
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However, despite recent uncertainty, the appetite is still there for investment.
“We are focused on fintech and still excited. I think there is a lot of innovation that we can bring to financial services,” said Hélène Falchier, Partner at Portage.
“Honestly, we are more comfortable with this market environment because this is how we work. We are not fast movers. What we really want to do is to build a great relationship with the entrepreneur and see what we can do together around the table with a great alignment of interest.”
She explained that the changing environment is simply a shift in conditions and that the company had been working to align its strategy.
“The new market environment is more a new normal for me. It was pretty unusual to have such low-interest rates across the globe….We have just had to rethink our angle for the new market conditions.”
Short-term solutions to the long-term game
An analyst’s question in Affirm’s earnings call two weeks ago turned to the long-term trajectory of the business.
The company had hit profitability targets due to a layoff round earlier in the year. Still, there were concerns this, along with other cost-cutting methods, would affect the future acceleration of growth and innovation before the company had “really hit Escape Velocity.”
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They are not alone. Companies across the board are cutting investment in new product development and reducing headcount to fulfill targets within the challenging climate.
In late 2022, ARK Invest CEO, Cathie Wood, told the audience at Web Summit, “I do believe that during the past 20 years, we have been through the most massive misallocation of capital in history.”
“Very short-term behavior has forced management teams into basically catering to short-term desires, like buying back shares, and paying dividends, instead of investing in innovation.”
Her comment on short-term behavior echos the ethos of Simon Sinek, who has, for years, written and spoken about the finite vs. infinite mindset for business leadership.
He states that many leaders are approaching the art of running a business (an infinite game) with a short-term, finite mentality and as a result, damage their businesses and the wider economy.
“(In many cases) these are highly profitable companies that missed a projection, and so they laid people off so they could meet that projection,” he said in a podcast interview with Tom Bilyeu.
“Mass layoffs, where we use the livelihoods of human beings to meet arbitrary projections on an annualized basis at the end of the year, did not exist as a standard business practice prior to the 1980s. It was popularized during the 80s and 90s.”
He explained that the focus on meeting short-term goals, such as annual and quarterly projections (which often involves cutting funding from product development and implementing layoffs), had driven leaders to implement strategies that were detrimental to the long-term running of businesses and macroeconomic health.
“Between The Great Depression and the dismantling of the Glass-Steagall in the 80s and 90s, there were a total of zero stock market crashes. Since the dismantling – all in the name of corporate profit, we’ve had three – The Dot-Com boom, Black Monday, and 2008.”
Wood felt investing in innovation was critical in the pursuit of long-term progression, “Innovation solves problems. It becomes more important during these times.”
Innovating out of the downturn
Falchier and Wood believed innovation was the key to riding out the macroeconomic storm and long-term success.
“We have a lot of different topics we can work on with fintech. So for me, it’s super exciting. We have a lot of things to do still,” said Falchier. “I think we can give better access to financial services for everyone, also, about diversity in the financial services ecosystem. How we can onboard more women entrepreneurs and fintech.”
She said she believed the current climate for investment might only be an interim rather than the death of fintech investment.
“We have seen a lot of changes in the market environment. So we need to revisit our investment theses for the next 12 to 18 months. And we have time also to really dig into the analysis of new fintechs to see if we want to invest.”
“I think when you talk to people, they have a plan for deployment in terms of activity for the second part of the year. Yeah, so I’m pretty confident that we will see more in Q3 and H2.”
