In today’s challenging macroeconomic market, FinTech firms are facing increasing pressure from investors to shift from a growth-focused strategy to one that prioritizes profitability. However, Zeynep Yavuz, FinTech partner at General Catalyst, holds a different view. In a recent interview with PYMNTS, Yavuz stated, “I don’t think any venture investor wants profitability. The quality of the business model, the scale needed to generate positive contribution margins and gross profit margins – that’s what investors really care about now.”
Yavuz believes that a narrow focus on profitability may stifle innovation and creative thinking among founders. She argues that if a company is solely focused on being profitable, it may not invest enough in growth and innovation, ultimately hindering its long-term success.
In recent years, access to funding has become more challenging for growth-stage startups and scaleups due to factors such as interest rate hikes and challenges in the public markets. This has led to a shift in mindset for many firms that have been operating in a capital-abundant market for years, adopting a spend-to-grow mentality along the way.
However, startups launching now have a unique advantage. They can build their company cultures from scratch, with the ability to adapt and thrive regardless of the VC funding environment at any given time. Yavuz predicts that this will lead to a boom in new companies emerging on the scene in the coming years, resulting in the development of better business models due to the lack of capital.
The current stock market environment has presented challenges for growth-stage companies. Concerns about overvaluation and the ability to grow into their current valuations have come to the forefront. Yavuz acknowledges that these firms are likely overvalued when looking at the public markets. However, for early-stage companies or those that are not facing valuation challenges, there is an opportunity to implement best practices right from the start, setting a solid foundation for future growth.
Yavuz also points out that there is still a significant amount of “dry powder” in Europe targeted at young firms, creating a conducive environment for early-stage startups to drive their growth. With funding shifting towards early-stage firms, Yavuz believes that it’s an amazing time to build a company.
Additionally, the current crisis has highlighted gaps in the market, particularly in areas such as cash management, foreign exchange (FX) management, and payment operations. These gaps are particularly critical for European FinTechs that operate across multiple markets with different currencies. Yavuz emphasizes that closing these gaps is essential for the future success of FinTech firms, and she predicts that enterprise software technology will play a central role in driving innovation in the industry.
“The future of FinTech is going to be in enterprise and it’s going to be in software,” Yavuz stated.
In conclusion, early-stage startups in the EU are benefiting from the availability of VC dry powder, despite the current challenging macroeconomic market. While there is pressure to shift towards profitability, Yavuz emphasizes the importance of a quality business model and scale for positive contribution and gross profit margins. Startups launching now have the advantage of building company cultures from scratch, and there is still ample funding available for early-stage firms in Europe. As the FinTech landscape evolves, enterprise software technology is predicted to play a central role in driving innovation and addressing market gaps. Overall, the future looks promising for EU early-stage startups with access to VC dry powder, setting the stage for continued growth and success in the FinTech industry.