The global turmoil has led to a decline in the number of funding deals for the fintech sector between Q4 2021 to Q1 2022
It is expected that the funding for private companies will be tight over the next 12-18 months, say experts
In the current scenario, fintechs should stick to the philosophy of profitable growth instead of growth at all costs
“Prepare for anything.”
This is one key piece of advice all leaders have for the fintech founders in India amid the turmoil the sector is witnessing due to the ongoing Russia-Ukraine war, fears of a recession in the US and other nations, catapulting to funding winter.
The year 2022 has so far seen rising inflation, crashing indices, and shrinking market caps. As a result, the number of funding deals in the fintech sector has also declined.
According to Inc42’s State of Indian Fintech Report, Q1 2022, out of the $1.76 Bn raised in January-March 2022 by 81 Indian fintech startups, growth stage startups bagged $782 Mn, while late stage startups raised $835.4 Mn. In comparison, 86 fintech startups raised a total of $3.2 Bn in Q4 2021, of which $1.19 Bn and $1.93 Bn was raised by growth and late stage startups, respectively.
On a QoQ basis, this indicates a funding decline of 34.7% and 56% for growth stage and late-stage fintech startups, respectively, in Q1 2022.
Commenting on the funding issue, Gaurav Kumar, founder and CEO of CredAvenue, indicated that fintech startups that raised successive rounds at significant valuation jumps have enough cash and are not looking to raise at current lower valuations.
“In such a scenario, demand and supply will take time to adjust. However, it is expected that the funding for private companies will be tight over the next 12-18 months, and it is prudent for companies to focus on cost-cutting and boosting cash runway without baking in additional funding rounds,” he added.
Do Not Get Paralysed With Fear
Globally public markets have been penalising companies that are not profitable, especially high-growth companies trading on high valuation multiples. It is only natural that the public market stress is reflected in private multiples and valuation.
From customer acquisition to monetisation, and from maintaining unit economics to good quality tech talent, fintech founders at all stages today are battling to get the maximum share of the $1.3 Tn Indian fintech market opportunity.
While the funding has slowed down, the opportunity is larger than ever considering India’s push towards digitisation, rising technological innovation, favourable demographics, and a host of government-funded financial inclusion initiatives, including United Payments Interface (UPI), Aadhaar-enabled payment system (AePS), India Stack, among others.
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“This is not the time to get paralysed with fear. The (fintech) founders at early stage should focus on getting the product market fit. Others (at growth and late stages) should be focused on delivering best value to their associated partners and customers and be careful of the burn,” said Madhu Shalini Iyer, partner at rocketship.vc.
Recalibrate Strategy To Lower Cash Burn
In the current scenario, fintech founders should stick to the philosophy of profitable growth instead of growth at all costs, and strengthen their fundamentals instead of chasing valuations. The entrepreneurs, particularly at growth and late stage, may need to go back to the drawing board and re-evaluate their strategy with a razor-sharp focus on fundamentals – unit-level profitability and sustainable business models.
Real businesses with a clearly-defined product roadmap and sustainable growth trajectory will be rewarded by the market. For instance, companies such as Oxyzo, Pine Labs, CredAvenue and Niyo – all have raised $100 Mn or above funding rounds in Q1 2022. As per the Inc42 report, Indian fintech unicorns had a median EBITDA of $200K in FY21, a 115% increase from a negative $1.1 Mn in FY20, indicating a shift towards profitability among the key players in India’s fintech ecosystem.
“The fintechs that are well-capitalised and on the road to profitability will not be impacted by any changes in the market sentiment. However, companies that do not have a sustainable business model yet will have to re-calibrate their strategy to lower cash burn and focus on real business, as there will be less room for mistakes,” said Suhail Sameer, CEO of BharatPe.
Combating Price Wars
Investors are now bullish on vertical/specialised players that have built deep product and distribution moats as they may thrive in this environment.
The fintech founders are expected to face most pressure on the margin side in general. Due to increasing competition, they are facing the challenge of reducing yields and the threat of price wars. Traditional players and competing fintech companies are reducing the starting interest rates in lending, brokerage margins in wealth management, and take rates (commission fees) in insurance companies and payment gateways.
Moreover, as lending companies scale up, there is an inherent trade-off in assets under management (AUM) growth and book quality.
“Companies must keep a laser sharp focus on book quality while aiming to continue growing at a fast pace. It will also be interesting to see the impact of rising interest rates cycle in various businesses,” said Rohit Sood, partner at Bertelsmann India Investments.
Stay Prepared For Regulatory Challenges
Fintech, at large, is directly or indirectly a regulated industry and there are changes that are happening within the regulatory environment. Experts believe these regulatory changes must happen as early as possible to allow fintech startups to adapt to them and build their business models on top of it.
Until then, there will remain a sense of uncertainty and slowdown, but that’s not going to be detrimental for the sector.
It is advisable that the fintech ecosystem should stay prepared for regulatory/policy changes that may alter the fundamental value proposition of the product. India is constantly pushing the boundaries of financial inclusion through technology. UPI made the wallet business completely unviable.
“Fintechs focussed on narrow niches must remain agile and nimble to pivot if the moat of the business is entirely removed by regulatory/policy level changes/improvements,” added CredAvenue’s Gaurav.
Other Key Focus areas
- Enter new markets: Ensure that all efforts towards increasing penetration and monetisation of the current product/market have been taken. The founders should also focus on creating newer products and entering newer markets.
- Capitalise on team: Look for ways to increase the productivity of the team without continuously growing teams.
- Ensure cash runway for long term: Ensure there is cost discipline so that there is a cash runway at least for 18 months so that key employees can continue performing without worrying about the startup’s survival.
- Keep an eye on government initiatives: In Union Budget 2022, the government announced setting up 75 digital Banking units. This is an interesting window for banks to create virtual banking offerings, and also for fintechs to partner with banks in helping them create these offerings.
- Show path to profitability: Reducing cash flow will certainly be a priority, and being able to show the path to profitability will be the key focus. Growth capital will be available for category creators, even if they’re unprofitable today.
Join us and navigate the downturn with India’s top 1% fintech and BFSI leaders at Fintech Summit 2022 by Inc42.