Do fintechs need to be profitable? It’s a bit of a mixed bag. It would be convenient if the answer were a simple “yes” or “no”, but in reality, it’s not that straightforward. Most people assume that businesses must be profitable to survive, but the truth is more complex. Let’s delve into the question: do fintechs have to be profitable?🧐
Actually, No
Let’s start with the argument that fintech startups do not necessarily have to be profitable. Many businesses, including growth-stage fintechs, can operate without turning a profit for an extended period. This may be due to their business structure or model.
As long as cash flow is not an issue, lack of profit is acceptable. Profit and cash flow are not the same thing. What matters is having supportive shareholders who are willing to invest in the company. For instance, Amazon was not profitable for many years. In industries like financial services, profitability often requires large scale, especially for activities like payments or investment management. As a result, it’s not surprising that many fintechs are not profitable…
But in Fact, Yes, Fintechs Need to Be Profitable
Startups are facing challenging times, especially with the changing economic environment and investor sentiment. Some companies are experiencing declining valuations and tough market conditions. To survive, cost-cutting, layoffs, and restructuring may be necessary, even though it’s not pleasant. This is the harsh reality for many businesses struggling to stay afloat.
“Right now, the startups that are in the trickiest situation are growth-stage startups with unicorn-type valuations, a high burn rate, good but not great metrics, and 12 months of cash”
Matt Turck from venture capital firm Firstmark
The challenge for companies unable to turn a profit in the short term is their reliance on external funding to survive. Regardless of how well the business is managed or how satisfied customers are, external funding is crucial to keep the company afloat. It’s like needing someone to put money in the jukebox to keep the music playing…
Finding a Balance
While some businesses may not be immediately profitable, it’s important for every company, including fintechs, to have a plan to pivot to a sustainable business model eventually. Even if funding is available and there’s confidence in its continuation, having a path to profitability is essential. This ensures that the business can operate without relying solely on external funding. Many fintechs should consider aligning their strategies to eventually generate profits.
So, while it’s great to be innovative and disruptive, it’s also important to consider the financial aspects and work towards making a profit in the long run.
