In the Face of a Funding Freeze, Experts Urge Fintech Founders to Have a 12-18 Month Runway

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.

FREMONT, CA: This is one of the most vital pieces of advice that all leaders have for fintech founders in India, given the turmoil the sector is experiencing as a result of the ongoing Russia-Ukraine conflict, fears of a recession in the US and other countries, and the sector's transition to funding winter. Inflation has risen, indexes have crashed, and market capitalizations have shrunk so far in 2022. As a result, the number of fintech funding agreements has decreased as well. According to Inc42's State of Indian Fintech Report, in Q1 2022, growth-stage businesses raised USD 782 million, while late-stage startups raised USD 835.4 million of the USD 1.76 billion raised by 81 Indian fintech startups between January and March 2022. In Q4 2021, 86 fintech startups raised a total of USD 3.2 billion, with growth and late-stage startups raising USD 1.19 billion and USD 1.93 billion, respectively. In Q1 2022, this suggests a financing reduction of 34.7 per cent for growth-stage fintech businesses and 56 per cent for late-stage fintech startups, respectively, on a quarter-over-quarter basis. Gaurav Kumar, the founder and CEO of CredAvenue, commented on the fundraising issue, saying that fintech businesses who have raised multiple rounds at substantial value leaps have enough capital and are not planning to raise at current lower valuations.

Corporations that are not profitable have been penalised by public markets around the world, particularly high-growth companies with high valuation multiples. The public market's concern is naturally mirrored in private multiples and valuations. Fintech innovators at all phases are vying for the biggest part of the USD 1.3 trillion Indian fintech market opportunity, from customer acquisition to monetisation, and from unit economics to top-quality IT talent. While funding has decelerated, the opportunity is greater than ever, thanks to India's push toward digitisation, rising technological innovation, favourable demographics, and a slew of government-funded financial inclusion initiatives like the United Payments Interface (UPI), Aadhaar-enabled payment system (AePS), and India Stack, to name a few.

In the current environment, fintech entrepreneurs should focus on profitable expansion rather than growth at any cost, and enhance their fundamentals rather than chase prices. Entrepreneurs, particularly those in the development and late stages of their businesses, may need to go back to the drawing board and rethink their strategy with a laser-like emphasis on the fundamentals — unit-level profitability and long-term business models. The market will reward real enterprises with a well-defined product plan and a long-term growth trajectory. Companies like Oxyzo, Pine Labs, CredAvenue, and Niyo, for example, all raised USD 100 million or more in fundraising rounds in Q1 2022. According to the Inc42 research, Indian fintech unicorns had a median EBITDA of USD 200K in FY21, up from a negative USD 1.1 million in FY20, demonstrating a shift toward profitability among India's fintech ecosystem's top players.

The margin pressure on fintech founders is projected to be the most intense in general. They are confronted with the difficulty of lowering yields and the prospect of price wars as a result of increased competition. Starting interest rates in lending, brokerage margins in wealth management, and take rates (commission fees) in insurance companies and payment gateways are all being reduced by traditional players and competitive fintech startups. Furthermore, there is an inherent trade-off between asset under management (AUM) growth and book quality as lending organisations scale up.