Layoffs could signify the fintech bubble is about to burst

The fin­tech bub­ble of the past few years is start­ing to burst. After explo­sive growth and the sky-high val­u­a­tions of recent times, a sig­nif­i­cant num­ber of star­tups and scale­ups are either mak­ing lay­offs or intro­duc­ing hir­ing freezes.

Exam­ples here include US-based com­mis­sion-free stock trad­ing app provider Robin­hood, which has slashed head­count by 9 per cent. The Swedish buy-now-pay-lat­er (BNPL) uni­corn Klar­na has point­ed to job cuts of up to 10 per cent. US-based cryp­to cur­ren­cy exchange plat­form ven­dor Coin­base has put an indef­i­nite hold on recruit­ment and rescind­ed job offers.

But accord­ing to Tom Cham­bers, asso­ciate direc­tor of tech­nol­o­gy and growth at recruit­ment con­sul­tan­cy Robert Wal­ters, the sit­u­a­tion for a sig­nif­i­cant num­ber of tech firms across Europe – and not just those in the fin­tech space – is even worse. He describes cuts as “pret­ty bru­tal”, with many lay­ing off up to 50% of their work­force.

“Over the last 18 months, from the fourth quar­ter of 2020 until last month, we saw a mas­sive tech hir­ing bub­ble as scal­ing busi­ness­es ben­e­fit­ed from the invest­ment bub­ble,” he says. “Peo­ple over­hired to meet the goals set by ven­ture cap­i­tal­ists (VCs) and to improve their val­u­a­tions – because the more peo­ple they hired, the more their val­ue went up.”

But the blame can­not be laid sole­ly at the door of VCs, says Kevin Chong, co-head of fin­tech spe­cial­ist Out­ward VC. He points to the role of hedge funds which, on “find­ing it dif­fi­cult to out­per­form the mar­kets” a few years ago, turned their atten­tion to pri­vate com­pa­nies. Tra­di­tion­al­ly, their invest­ment strat­e­gy had focused almost entire­ly on pub­lic mar­kets.

“They reformed the mar­ket,” he says. “It was more impor­tant to them to invest large sums than get bogged down with val­u­a­tions, as they had to find ways to com­pete against VCs.”

Global factors hit fintech growth

The prob­lem now though is that, while mon­ey is still avail­able, that mar­ket is becom­ing more risk-averse. This means fund­ing is becom­ing less easy to access and rounds less fre­quent. The sit­u­a­tion is par­tic­u­lar­ly dif­fi­cult in con­sumer-focused mar­kets, such as BNPL and home lend­ing, and among scale­ups that have yet to turn a prof­it despite years of invest­ment.

“Investors are doing more due dili­gence and the val­u­a­tions of fin­techs aren’t soar­ing as they have over the last five years,” Cham­bers explains. “Star­tups are being held to high­er stan­dards on rev­enues and prof­its, and some founders could be think­ing twice when get­ting their ducks in order.”

The rea­son behind this shift, says David Rit­ter, direc­tor of finan­cial ser­vices strat­e­gy at dig­i­tal trans­for­ma­tion con­sul­tan­cy CI&T, is a tox­ic com­bi­na­tion of quan­ti­ta­tive tight­en­ing, par­tic­u­lar­ly in the US, ris­ing inter­est rates, high lev­els of infla­tion and grow­ing fears of a glob­al reces­sion. 

Such fac­tors are inevitably mak­ing investors wary. But they are also caus­ing founders to look at how they can save mon­ey to ensure they do not run out pre­ma­ture­ly, with head­count an obvi­ous place to start.

“Cash is king and it’ll be impor­tant to see com­pa­nies through this dif­fi­cult peri­od,” says Chong. “Because fund­ing is now much less pre­dictable, founders want to extend the run­way for as long as pos­si­ble. We’re talk­ing about rainy days and we could see two years of that.” 

A key fac­tor, he believes, is that the wide­ly pre­dict­ed, quick, post-pan­dem­ic, V‑shaped recov­ery is looks increas­ing­ly unlike­ly, which is lead­ing expe­ri­enced founders and investors alike to act.

“The bub­ble is burst­ing,” Cham­bers points out. “It’ll def­i­nite­ly get worse before it gets bet­ter because we’re not at the bot­tom yet.”

Although tech­nol­o­gy com­pa­nies of all stripes are being impact­ed by the sit­u­a­tion, the huge sums invest­ed in the fin­tech space due to its dis­rup­tive promise and glob­al poten­tial has put it par­tic­u­lar­ly under the spot­light. 

Dealroom’s The State of Fin­tech Q1 2022 Report revealed, for instance, that star­tups raised $125bn (£101bn) in VC fund­ing last year. The fig­ure is 2.8 times high­er than in 2020, bring­ing the total enter­prise val­ue to $3.5tn, an increase of 6.2 times on 2016. 

Even dur­ing the first quar­ter of 2022 as eco­nom­ic head­winds start­ed to become more vis­i­ble, fin­techs still raised $32.4bn, up 27 per cent year-on-year, accord­ing to Deal­room, although it was 10 per cent down on the all-time high expe­ri­enced in Q3 last year.

Is fintech facing a market correction?

What this means, though, says Rit­ter, is that the cur­rent sit­u­a­tion is more of a mar­ket cor­rec­tion than a rad­i­cal con­trac­tion. 

“If you think about the dot­com bust of the late 1990s, there were thou­sands of star­tups with busi­ness mod­els that didn’t make sense and weren’t mak­ing any mon­ey,” he says. “So the result­ing shake-out was healthy for the long-term devel­op­ment of the sec­tor by cre­at­ing a more bal­anced envi­ron­ment, and the same is like­ly here too.”

Chong agrees, not least because he now expects the invest­ment focus to “spread around a bit more” from a hand­ful of lat­er stage com­pa­nies towards a wider vari­ety of ear­ly-stage star­tups. 

Anoth­er advan­tage of this cor­rec­tion, mean­while, is that salaries are like­ly to fall back to real­is­tic lev­els, believes Cham­bers. Over the past 18 months, they had become huge­ly inflat­ed because of star­tups “pay­ing even more com­pet­i­tive salaries than large enter­pris­es”.

But today’s uncer­tain times mean there will be a shift away from star­tups towards more sta­ble, well-estab­lished busi­ness­es, par­tic­u­lar­ly in the wider finan­cial ser­vices sec­tor, Cham­bers fore­casts. 

Some fin­tech employ­ees could well find them­selves going down this route whether they want to or not, due to antic­i­pat­ed high lev­els of merg­er and acqui­si­tion (M&A) activ­i­ty. This sit­u­a­tion is par­tic­u­lar­ly like­ly among fin­techs that have been unable to diver­si­fy beyond their core prod­uct or ser­vice. 

“If you’re an incum­bent finan­cial ser­vices play­er, such as a big bank, it’ll be a great time to make an acqui­si­tion as val­u­a­tions are already down quite a bit on a year ago,” Chong explains. “It’ll cer­tain­ly make the trade-off between buy­ing and build­ing tech­nol­o­gy your­self much clear­er.”

As a result, he pre­dicts that, although this year and next year are like­ly to prove dif­fi­cult, the fin­tech sec­tor should pick up again in 2024. More­over, “for the ecosys­tem over­all, the cur­rent cor­rec­tion will be pos­i­tive”, he believes.

Rit­ter agrees. “It’ll be chal­leng­ing in the short and medi­um term, but long term, the future for fin­tech remains very bright,” he con­cludes.