“Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times.” This quote from author G. Michael Hopf (which in modern terms obviously relates to all human beings) has spread far beyond its origins in a middling science-fiction novel and has become a catch-all explanation of ‘decadence’.  

It has been used to explain, for example The Great Depression of the 1930s. The economic turmoil tested individuals and communities, compelling them to adapt, innovate, and endure severe economic hardships. In response, resilient individuals emerged, creating a generation that understood the value of hard work, frugality, and community support. 

But if we switch ‘men’ to ‘companies’ and you have a succinct explanation of the history of business in the 21st century. In good times investors, flush with cash, invest in thousands of weak businesses, these businesses fail and investors are forced to find more reliable sources of profit and then, again flush with cash, they return to spraying billions of dollars at any Standford drop-out with a pitch deck and a hoodie. 

With investment in Fintech this year at a quarter of what it was a year ago, it would appear that we are out of the good times and the hard times have begun again. Key to this has been interest rates: the very same mechanism that means that fuel and food is now more expensive than ever before also means that it is more expensive to borrow large sums of money.  

Following the Great Recession of 2008, many first-world nations adopted Zero Interest Rate Policy (ZIRP) as a means of boosting investment. If companies can borrow at zero or close to zero percent interest then they should, economists say, found profitable businesses, create jobs and stimulate the economy.  

While great in theory, it doesn’t always succeed. Japan did just this, going so far as having negative interest rates, in the 1990s ‘lost decade’ and it didn’t work. It did create massive investment funds like Softbank Vision Fund, which in turn supported many of the big names of the ZIRP-era: Doordash, Uber, WeWork, Revolut, Slack, FTX, and Klarna, among others. That being said, FTX has since collapsed due to fraud, while WeWork went bankrupt and Uber posted its first profitable quarter this year - despite being founded in 2017. 

This crisis could be an opportunity. As an industry, we could look at this as an opportunity to get real about creating companies that really create value – that solve real problems instead of jumping from one VC cash infusion to the next.  

Fintech’s rise, fall and rise 

Fintech investment in 2023 is likely to be a quarter of what it was in 2022, and a fifth of its peak in 2021. In the UK, one of the world’s great Fintech hubs, investment is down 57%. This isn’t the same across the board: the percentage of VC funding going to fintech startups is down 5% on 2022 and 7% since its high of 20% in 2021. The creation of new Unicorns is also down significantly: 59 companies had exits of over a billion dollars in Q2 of 2021 – in Q2 of 2023 the figure was only two. In short, VCs seemingly just aren’t that into fintech anymore. 

Compare this to the previous decade: PayPal, Revolut, Venmo, Stripe and Klarna became multi-billion-dollar businesses almost overnight and remain so by giving people access to services that traditional financial services companies couldn’t offer – instant payments or buy-now-pay-later financing. To get to this handful of useful companies the venture capital world had to burn through hundreds of no-so-effective companies, often at great cost – those 59 startups with exits in Q1 2021 aren’t likely to be household names today, if they even still exist. 

Anyone who has been at a Fintech conference in the last decade might have been given a business card and tote bag by a company with a clever name, stylish design, scads of VC money but with no obvious reason to exist. Such companies might not provide a new or better solution to an existing problem or have a real addressable market, and quite often no plan to become a profitable business. 

This preference for growth over profit is key and is one of the defining aspects of the ZIRP era. There’s no doubt that it has in fact produced some staggeringly profitable companies: Amazon dramatically cut prices of books to the point that physical bookstores were going out of business, eventually expanding its customer base so much that it cannot fail to turn a profit – it is selling so much that even the pennies it makes on a sale add up to hundreds of billions of dollars in gross profit each year. If you look at its rate of growth then you will see that it is falling, despite a marked upturn during the pandemic, falling from an average of around 40% YoY quarterly growth in the early 2010s to 30% later in that decade and now a flat 20%. It has now transitioned from a period of rapid growth to a profit-driven model, something that many other growth-oriented companies have failed to do. 

Getting real about profit 

With the well of almost-free money having run dry, the investors who decide which companies become ‘real’ and which never get beyond the pitch stage are going to have to change tactics. Hedging their bets by investing in hundreds of companies in the hope that one pays off isn’t going to work in this environment, so what will? To many the answer will be obvious: find the rare companies that are likely to be profitable and invest in them. Look at the problems that a large number of people have and find the companies who can solve them in the right way.  

Overall, fintech investment is still happening, and some start-ups are even refusing VC money, recognising that there are other ways to build successful companies. What I hope that we see in the coming years is a refocus on solving problems and then growth will follow. There’s no doubt that the next few years won’t be easy, but perhaps that’s exactly what the fintech industry needs.