July 9, 2022

How High Growth Fintech Startups Escape the Death Spiral

A wave of layoffs is sweeping through the fintech industry since inflation and the supply chain crisis have intensified. Fintechs are preparing for difficult times as they fear it will be difficult to conclude financing rounds on favourable terms as seen in 2020 and 2021.

Payment provider Klarna, which has just laid off one in ten employees is negotiating with investors such as Sequoia Capital on a valuation of USD 6.5 billion after it had been valued at USD 45.6 billion previously.

Cost of capital has fundamentally increased after two years of loosened monetary policy to combat an economic crisis due to the pandemic. While real interest rates were negative, fundraising for growth companies were effortless and record valuation levels were reached. Now that rates are rising, fintechs can no longer raise capital at prior valuations.

Sequoia Capital describes the current situation as a crucible moment for founders and a moment of uncertainty and change. Investors’ focus is now shifting towards companies that generate cash. Companies who move the quickest have the most runway and are most likely to avoid the death spiral.

Now, what should fintech founders be focusing on during the current market turmoil?

  • You must confront the new reality and market conditions and not be blind optimist.
  • You should confront your fears and trust your problem solving abilities.
  • You should recognize the current crisis as an opportunity as some competitors will run into default and leave their market shares for those that survived.
  • If you are a slower growing company that is profitable, you now have an advantage over cash burning startups. That represents an opportunity, if you see the opportunity clearly and are prepared to seize the moment.
  • Focus on your most important and leveraged investments.
  • Tighten up value proposition and solve real problems.
  • Raise equity or debt, if your investors are still willing to fund your business.
  • Track your cash runway daily.

    • And how should your teams react to the current situation?

  • Your teams should reaffirm their mission and vision and align with the overall company.
  • Team leads should show leadership and communicate with conviction and confidence.
  • Team leads should stay human and maintain balanced optimism to avoid panic or frustration among their staff (e.g. fear of being laid off).

    • How will tech recruitment change in 2022?

    Recruiting will most likely become easier as tech companies such as Amazon, Google and Facebook have hiring freezes. Also, many tech startups have cut back on hiring and the job market has shifted from candidate to employer.

    If you would like to take advantage of these new dynamics, let us know at Prisma Softwares and we will help you to find engineering talent that was difficult to attract and sign prior to the inflation and supply chain crisis.

    Sami Derian

    Sami Derian

    Project manager and expert in software development. Sami is responsible for strategic project planning and client relationships. Having worked in different web agencies he developed a passion for e-commerce and marketing.

    Leave a comment

    Your email address will not be published. Required fields are marked *