August 15, 2016
Doubts over business models and decreased funding
Hardly anyone would better feel the burden of ‘overnight’ success than the Ivy League of FinTech as it has experienced lately. A range of FinTech unicorns have been found themselves in puzzling market situations recently and have given reason for extra thought to investors and admirers regarding their true standing in the marketplace.
Overall, in Q1 2016, FinTech companies raised $1.32 billion in total funding globally, compared with $1.77 billion raised in Q1 2016. On a YoY basis, dollar funding in Q2 2016 was lower by 51% from the $2.71 billion closed in the year-ago period.
Regardless, some editions covering foreign markets have noticed that tech startups that are unprofitable are still raising significant capital. Particular segments of FinTech, like challenger banks, have drawn the attention of banking professionals, who fairly question their business models. In April this year, Benoit Legrand, Head of FinTech at ING, commented, Frankly, if you look at the neobank space — they’re flourishing everywhere but we’re still waiting for the business model to show up. Where is the money? Where is the return?
Some suggest that business models of FinTech startups are not sustainable and companies are growing and able to function only because of the VC and corporate funding streams. And as we have mentioned before, the stream may dry out soon.
‘Bad Boys’ of the FinTech Ivy League
No market traction or strong backers were able to save Lending Club, for example, from the hardships it went through recently. From being the 2nd profitable in alternative lending and expecting 70% YoY growth in FY 2016, Lending Club tripped up on its massive sack of loans.
Another former darling of the FinTech unicorns club does not appear to be alone in facing the harsh reality - alternative lender, OnDeck, has also been experiencing depreciation of share price in a one year span (although in the last three months, the price has moved up again).
Following the concerning news about the troublesome situation with lenders, financial professionals have started expressing concerns over business models of FinTech startups. While some saw the case with Lending Club as an attempt to silently get rid of the bad part of the portfolio, others expressed thoughts that probably were on the minds of a large community of professionals for some time - doubts over the real value of the unicorns rather than what is generally perceived.
As Caton Hanson, Co-founder of Nav, said, …the focus is more on, ‘Are these unicorns really worth what they say they are?’ It’s not, ‘Oh, my gosh, we knew this model wouldn’t work, let’s get rid of this technological disruption to the solid, respectable institutions who’ve already claimed this space for themselves.’ The story wasn’t about that—it was a human nature story.
Another member of the unicorns Ivy League, Zenefits, a SaaS provider that automates health insurance, payroll, and other essential office chores, has recently been abandoned by its CEO Parker Conrad amid questions about the actions he had taken to fuel the company’s hypergrowth, including flouting laws about who is allowed to sell insurance. However, even the new CEO did not liberate Zenefits from a chain of ‘misunderstandings’, like the settlements with regulators. In June, Zenefits was reported to cut its valuation from $4.5 billion down to $2 billion in an effort to reset its relationship with investors.
Another example: although TransferWise wasn't really tangled in lawsuits or accusations in dishonest operations, at the beginning of this year the company has reported a loss of £11.4 million (a year ago, it was £2 million) in an aggressive expansion race with hiring and expensive advertising campaigns. However, the company was still able to raise $117 million that will be used to improve the loss-making startup’s balance sheet as it continues to plough all revenue into future growth.
It’s also worth mentioning one of the hottest European FinTech players, Powa Technologies - once worth $2.7 billion, the company collapsed into bankruptcy at the beginning of this year. As CNN reported, the company expanded quickly, setting up offices in exclusive locations in London, New York, and several other cities around the world, but failed to win customers, and never became profitable.
Finally, let’s not forget Mozido, a mobile payments startup that has raised $300 million and been valued for as much as $5.6 billion. As Forbes reported at the end of July, Mozido has recently been having trouble paying its bills on time—it has delayed making payroll payments to employees several times in recent months and has yet to pay end of year 2015 bonuses.
Everything happens for a reason
Either in conjunction with problems faced by the hottest representatives of the FinTech world, or independently, the decline in global FinTech funding reveals concerns over the viability of business models being in place. The situation may perpetuate the beginning of a new curve for the industry, when a more sophisticated approach to building a business is taken and newcomers have learnt from the mistakes of older peers. In the end, any short-term challenges can be seen as largely good for the industry in the long term.