Profitability over growth key for fintechs to secure investment

Profitability and a sound business plan are what investors will value in the coronavirus era when looking at fintechs

by | June 10, 2020 | bobsguide

Fintechs must show that they have a solid business model focused on achieving profitability, not just rapid growth if they are to secure investment, according to venture capitalist firm, Anthemis Group.

The coronavirus crisis may have already cost UK fintechs as much as £1.9bn, according to a report by Computerweekly. And with investors feeling cautious, fintechs must be able to prove they have a clear path to profitability says Farhan Lalji, principal at Anthemis Group and part-time lecturer at the London Business School.

“Before, companies would really be focused on growth, and on the unit economics or the model, they would have a mentality of ‘we're going to build this now and we'll figure out the unit economics and we'll figure out the financial models later.’

“So, paying attention to the unit economics has been definitely something that we've seen more of a focus on now than it was before,” Lalji added.

Prof Markos Zachariadis from Alliance Manchester Business School, an expert in fintechs, agrees with Lalji’s argument. He says the pandemic has seen a shift in mindset from investors.

“Investors right now during a crisis, they’re looking more at profit and sustainable business models that will secure their investment. They're not necessarily making long bets about growth because nobody knows how long it's going to take, how long it's going to last.”

Zachariadis is concerned at the way investment into fintechs has dropped since the pandemic hit, describing investors as “hesitant” due to the high levels of insecurity and uncertainty in the market right now.

However, Lalji insists that Anthemis Group are still looking to invest.

“We've made a handful of investments since the middle of March. Unfortunately, we haven't disclosed any of those yet, but we have been active, we have made investments.

“Companies that were good companies before are still good companies to make investments in.

“And other companies have been accelerated, so we've seen a number of companies that we thought would have three-to-five-year windows in terms of customer adoption and we've seen a lot of their needs accelerate from a customer perspective.”

Lalji did concede that while Anthemis Group had managed to make investments since the lockdown hit in the UK, their first priority, as was the case for many investors, was to consolidate what they already had. “Portfolio triage” was the main focus as the crisis unfolded, but now Lalji sees opportunities for acceleration in the fintech sector, which could be a challenge to some companies.

Some companies which had business models forecasting growth in a couple of years’ time are suddenly realising that the pandemic has forced them to bring forward product rollouts as the pandemic pushes potential customers into the digital world at a faster than expected rate, he says.

“[Some companies] have had to really accelerate getting their product into market sooner rather than later and not every firm can think like that, can respond like that,” Lalji says.

“There's more of a market opportunity now and there is an opportunity to get customers on board now and there is an opportunity to get customers who need these products from a financial services and FinTech perspective. I think not every firm, not every fintech platform or product can respond to that increase in demand.”

But Lalji is confident that the industry would rise to the challenge that coronavirus has brought and believes that fintechs can still thrive despite the great amount of insecurity and uncertainty.

“We've seen that actually this sector, this industry – not only is it resilient, but the innovation that we had planned out that would take years, we are seeing it being accelerated.”
 

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