Analysis

Funding in the Time of Corona: How Fintech Startups are Surviving

The coronavirus is changing the way that fintech startups are funded. Which companies will survive--and thrive?

 

Earlier this week, multinational professional services firm PricewaterhouseCoopers (PwC) released a report suggesting that that the crypto industry should be prepared that funding deals will likely be affected even more negatively throughout 2020 as the economic fallout from the coronavirus crisis continues.

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“The global headwinds caused by the coronavirus and other related events are having an impact on many industries globally, including the crypto industry,” the report said. “We believe that the crypto industry is not immune to these conditions and the number and value of fundraising and M&A deals may be impacted as a consequence in 2020.”

While the report was specific to the crypto industry, there’s almost no question that the economic fallout from the coronavirus could significantly impact the fintech funding landscape as a whole: Toan Huynh, Venture Partner at Information Venture Partners, a venture capital firm that specializes in fintech, told Finance Magnates that “there is no doubt that we will be talking about the ‘R’ word (recession) very soon.”

Toan Huynh, Venture Partner at Information Venture Partners.

“There is no chance that the actions that will be needed to contain the virus will not have a dramatic impact on the economy. We will fall into a recession,” she said. “We have seen the beginnings of the adjustment in the public markets. What is incredible about the recent correction is that the market has adjusted before the negative economic news. It is pricing in expectations of an economic shock.”

Therefore, the outlook for companies in the early stages of growth is quite different now than it was a month ago: “as of just a few weeks ago, everything reflected the expectations of continued growth and healthy valuations,” Huynh said. “The markets have adjusted the valuation metrics to reflect more historical norms, but not yet the impact on revenue, cash flow or profitability (metrics).”

Indeed, “looking at the impact this has had on manufacturers, and the travel and hospitality industries already, and soon on retailers and other sectors, it will happen.”

What will the particular effects of this economic fallout be on crypto and fintech startups who are working on securing funding? And what kinds of strategies can these companies adapt?

Why is the coronavirus particularly bad for young companies?

Ksenia Yudina, chief executive and founder of UNest, a VC-backed fintech startup that assists parents in saving for their children’s’ college expenses, explained that the problem is particularly acute because “young companies generally can’t get to profitability without additional financing.”

Therefore, the financial impact of the coronavirus leaves these young companies particularly vulnerable: “they will need to rely on angel investors and VC’s to weather the storm.”

Ksenia Yudina, chief executive and founder of UNest.

“Smaller companies are usually running on a lean budget, and the disruption will cause them to reduce salary, offer equity incentives, deferred pay, to reduce their burn,” Yudina said. Additionally, “smaller companies don’t have access to the debt financing their larger competitors do.”

This could eventually turn into a big opportunity for larger companies in the space: “there are going to be tremendous buying opportunities,” for these more-established companies, Yudina said. “I anticipate an increase in strategic M&A, especially as the world returns to some normalcy. Those companies who had healthy balance sheets before the crisis will have their pick of their more highly-leveraged peers.”

Startups could have some advantages over their older peers

Additionally, Carlos Domingo, co-founder and chief executive of blockchain-based security tokenization firm Securitize, told Finance Magnates that “as a young company, we see Securitize having a potential advantage in that we’re more agile than an established company.”

Carlos Domingo, co-founder and chief executive of blockchain-based security tokenization firm Securitize.

“Because we’re well-funded at the moment, have lower overhead and an intact development team, we are in a great position to read the market and develop solutions that an established company with a lot more overhead would have trouble doing.”

And it’s true–Yudina said that now, especially as a result of the coronavirus, “more-established companies may face decisions to lay off staff since a lot of them received excess capital and have been hiring aggressively in the past couple of years.”

Fintech startups must stay visible

But what about companies who aren’t so well-funded at the moment?

After all, the spread of the coronavirus has “knee-capped” the fundraising world just as much as the rest of the world; startups in search of funding are having to think fast in order to be noticed.

Indeed, Christopher G. Fox, founder of content strategy firm Syncresis, told Finance Magnates that “one of the drastic changes to fintech fundraising in the coronavirus era is in the ability of companies to attract buzz or even achieve simple visibility.”

“In the pre-coronavirus world, fintechs were able to get their message out by attending networking events, industry get-togethers, conferences, and the like. In the new world, fintechs have few opportunities to show who they are or why their innovations would appeal to investors.”

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This is also affecting companies who are slightly further along in their lifespans: “similarly, later-stage companies have few opportunities to attract new clients to demonstrate the viability of their product or service offering,” Fox said.

” The best companies will still get funded.”

Therefore, Fox believes that “the fintechs that emerge from the coronavirus crisis with good investor and market traction will be those that focus on thought leadership and finding ways to get their message out in digital channels.” Indeed,” whitepapers, videos, webinars, podcasts, and other digital means to communicate and engage will help startups remain visible now, and leapfrog those who went into quiet mode.”

Indeed, Peter Colis, chief executive of venture-backed life insurtech startup Ethos (which was famously backed by Jay-Z), told Finance Magnates that now is the time to “replace traditional methods with more nimble processes.

Peter Colis, chief executive of venture-backed life insurtech startup Ethos.

In Ethos’ own sector, Colis said that” we’re seeing both insurtech startups and traditional vendors who provide tools for underwriting trying to make the business case for their tool to be more widely adopted as a replacement for traditional testing, et cetera.”

” There will be fewer FOMO rounds”

And the changes in the ways that startups are working to attract VCs might stick around long after the coronavirus is gone: Paul Murphy, a partner at Northzone, told Sifted that “VCs can and will slow down.”

Indeed, “there are a lot of funds out there with a lot of capital to deploy, but they have years to do it.”

Therefore, Murphy believes that “there will be fewer FOMO rounds because investors will take a bit more time to get to know and diligence the business, and I don’t think that’s a bad thing.”

And in the end, “The best companies will still get funded,” says Murphy. “It might take them a few extra weeks, and they might get a few less term sheets to use as leverage, but they’ll be fine.”

At the same time, companies in their very early stages may have better luck if they put off their efforts for a few months: “they can put off starting for three months — their only cost is themselves,” Murphy said.

Crossing T’s and dotting I’s is more important than ever

Therefore, when it comes to funding, covering all the basics is still very important–Natacha Rousseau, strategic communications and investor relations specialist at Diplomatiq, told Finance Magnates that even though some of the more traditional methods of networking may be off the table, startups must make sure that their basic strategy is in order.

“First and foremost, startups need to work and develop their business models and pitch decks to reflect the current economic situation and reflect their ability to adapt,” Rousseau said. “Founders need to deeply research potential investors, and take the time to perfect or develop their tech solutions during this quiet period. Focusing on crossing their ‘Ts and dotting their I’s’ to ensure they are absolutely ready to pitch or present to investors when the time is right.”

Natacha Rousseau, strategic communications and investor relations specialist at Diplomatiq.

Therefore, this time in quarantine could also be sued to “practice investor pitches and have a 30-page pitch deck and a 10-page pitch deck. Apply to accelerators and incubators; network and strike partnerships.”

Expanding revenue through customer service

And while attaining VC funding may prove to be a longer and more arduous process than in the past, fintech companies have another opportunity to raise their capital through the corona crisis: through good, old-fashioned revenue from clients.

Indeed, the fintech industry has seen a veritable boom in usage since the coronavirus quarantines began–in late March, financial advisory organization deVere Group reported a 72% rise in the use of fintech apps in Europe.

Toan Huynh told Finance Magnates that “the COVID pandemic has actually accelerated the move to digital programs and created a new unprecedented level of urgency to move to the cloud and leverage technology to handle front office and back-office work.”

“hose that are providing tools that are core to businesses and solving these complex problems will be more needed than ever as face to face engagement becomes less favorable in the current climate,” she said.

Peter Colis also explained that young companies with “speed and scale” are likely to fare the best.

“Technology is how we’ll achieve the necessary scale to meet this demand while maintaining excellent customer experiences,” he said.

And in fact, fintech companies who can do this successfully may be well-equipped to expand their business during the corona crisis: “at Ethos alone, we’ve seen a large increase in applications in the past few weeks,” Colis said, adding that “it’s our underlying technology that allows us to adjust to this influx without seeing negative impacts on the services, support, and experiences we give consumers.”

What are your thoughts on how the coronavirus is impacting startups and the VC world? Let us know in the comments below.

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