🐻This Bear Market is Ripping Right Through Fintechs. How did We Get Here? Plus the Lessons in it For You

Bear markets are nasty little buggers. They don’t just massively dent consumer confidence (which, btw is at record-low) causing even more trouble and pain but these kinds of markets hurt jobs throwing all sorts of unwanted ripple effects, making the whole thing so much worse. The fear starts to spread and once that happens, there’s no containing it. Though when there is peak-fear that’s usually when the light appears. Just saying! (Read here what you can do to protect your portfolio during bear market).

But remember that the stock market goes in cycles. Nothing lasts forever, not the good nor the bad. You’ll have periods of ups (bull markets) and periods of downs (bear markets). Bears follow bulls and bulls follow bears. In other words, when optimism is at its peak and when everyone thinks earnings will keep on rising till infinity (sound familiar?!) that’s usually when things start to turn sour, morphing into a period of contraction. And when things seem to bleak, sorry when investors think that things are peak-bleak, that’s usually when the stock market turns around since markets move way quicker than the economy since their forward-looking things.

And right now, it doesn’t take a genius to work out that we’re in a bear market. Pessimism, worry, fear and a general feeling of uncertainty over the future can be felt in every corner. My friend who interned at Goldman Sachs over the summer told me how her managers and colleagues wouldn’t risk putting even a toe out of line because the economy seems so uncertain and when you think that your job is at risk, you’d do all you can to ensure you don’t make the cut. No one’s job is safe. Not even hotshot investment bankers. After all, when the economy nosedives, dealmaking starts to look like a desert.

But if you think those guys are scared, wait till you take a look at the fintechs. Let me tell you this, an established bank like GS is far less risky than a non-profitable fintech. Much less reward for investors in established things, for sure, but much less risk too. And in this climate, all anyone is looking to do is to slash their risk. And looking at job security, you’re more likely to lose your job now if you’re joining (or already at) a fintech company. Just go to LinkedIn and see the redundancies for yourself. It’s horrible. Revolut has rescinded their grad offers, days before they were meant to start! I mean, seriously. Didn’t they see how they had over-hired? We’ll get to that soon.

Why are fintechs stuck in the middle of it all? 

Fintech pretty much encompasses anything that combines the worlds of finance and tech. It can be anything from insurance companies with digital-focused products to investment/trading apps (like Freetrade and Robinhood). Basically anything with an app can technically call themselves a fintech (ahem, Deliveroo). Oh, and not to mention digital-first banks! The likes of Revolut, Starling and Monzo. During the pandemic, these guys were all the rage. And investors lapped them up. Covid hit the accelerator on so many trends with tech being one of them.

Things like online banking and investing via apps were already there pre-pandemic but with the death of cash and the rise in first-time investors thanks to a combo of stimi checks (you lucky Americans!), spare cash plus bucketloads of free time, fintechs really took off – just look at Robinhood who was smack in the middle of this terrific trend and they were lovin’ it. They IPO’d in 2021. At a time when the stock market was red-hot and when retail traders were dancing on the moon. They managed to bag a $32bn valuation. Perfect timing, no?

The fall of (some) fickle fintechs!

This is what I always say – when companies IPO they’re doing so because it’s a good time for them (the sellers) not you (the buyers). IPOs are when founders and their VCs get to cash in their chips and they do it when markets (and by extension, sentiment) is booming. Top tip: it pays to be super-sceptical when companies go public. Always look under the bonnet and see why they’re choosing to raise capital now!

There’s usually more than meets the eye. But Robinhood (and the others) quickly got a whopper dose of reality: its market cap crumbled by 72%. They’re now only worth $8.4bn. Seems a pretty fair price tag, don’t you think! Mr Market has a way of sorting out things in the end. Have patience, my friend. Anyway, it’s not just Robinhood whose valuation has come to the ground. Look at Klarna, who, only a few months ago was valued at a (maddening) $46bn and has now fallen by 85%. OUCH.

Before these fintechs fell off their face, they were the darlings of the market. They were able to attract top-notch talent as well as top-notch buck. But as the bear market started to gather pace and tech kind of fell off a cliff, fintechs got badly injured. For their valuation to go up, they need earnings (which they’ve got none of) or low rates to boost the present value of their (non-existent) earnings.

During covid, the stimulus packages plus super-low interest rates meant that valuations for all these sort of unprofitable things started to inflate. But then came inflation. The beast many chose to ignore. With rates on the rise, investors are less willing to pay for earnings in 10 years time. No surprise there, huh! Hence the appetite for speculative, not-yet-money-making companies pretty much went down the drain.

Thinking loose conditions will go on till infinity

From crypto companies to investment apps to other snazzy tech companies, they got swept up in the bull market. They thought, wished, hoped and prayed that these comfy conditions will go on forever. They got carried away. They hired too many too quickly. And it’s no surprise that volatile hiring (and firing!) would come from crypto companies, like coinbase, because after all, crypto is the king of volatility. It’s funny how their businesses kinda reflect the nature of the assets they’re dealing with.

The best thing to do, for us and for companies, is to plan for the worst and hope for the best! These fintechs were planning for the best, not the worst. And that’s what really got them into trouble and what led many grads (and others new-joiners) to have their offers rescinded.

The easy option was to keep going as though nothing has changed! Or to keep going, pretending (or wishing) that the good times would last forever. But as a non-profitable company (like many of these fintechs still are) , prudence and care in spending isn’t to be taken likely! When they overspent and overhired, workers suffered. Not to mention investors who had poured millions of dollars at crazy valuations. Though perhaps investors should’ve been more cautious too!

No one knows how bad this recession will be, but the lesson from all this is that when the times are good (cough, cough 2020-21) put some cash aside for the rainy days which are here now! The easy route would be to spend, spend, spend when the moola keeps rolling in (or as is the case with unprofitable fintechs: their VCs’ moola) but the hard choice is to put some aside and make sure that you can survive what’s to come.

Companies who did this earlier than others will come out stronger, more robust and loads more resilient. Those like Revolut, rescinding grads’ offers just days before their start, who are way behind the curve will find it’ll come back to bite them. One day. Those who slowed hiring a few months ago are now ahead of the pack. 

When it comes to new and emergent fields like fintech, it’s competitive and gruelling. You burn through loads of cash (I know this because I invested in one myself and their burn rate is ~£1m p/month – yup you read that right!) and you get overconfident when your growth multiples are massive.

But right now, survival is key. Now’s not the time to be spending like no tomorrow. 

Be conservative so that when conditions improve and markets start to smile, you’ll be on the top. 

This goes for companies as well as yourselves! 

Emergency funds need to be build ahead of the disaster (which we hope will neve come) or the need for cash when things flop. Which will happen to a handful of fintechs! One such company that I invested into is closing down their main business arm because it’s costing them too much. They, like many others, are struggling to hang out.

Investors are starting to become loads more selective about what they invest into and simply calling yourself a ‘fintech biz’ won’t be adding millions to valuations anymore. Conservatism is back, finally! I’ll certainly be embracing it. 

Also, when there’s blood in the streets, that’s the best time to buy. Don’t get me wrong, some of these fintech guys are incredible businesses with incredible talent. So keep your eyes peeled and don’t be afraid to pounce! 

And if your job offer has been rescinded or if you’ve been fired, I’m truly sorry. Something will come up. After all it’s still a tight job market and there’s all to play for.

Perhaps now’s the time to join a steady, established player. Dial back the risk.

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.