When it comes to business, I’m a traditionalist – I believe a venture should make money. Having raised over $1bn from investors, I’m also a firm believer in investing for growth. In 2020 we will understand that the two do not have to be mutually exclusive.
Ask any founder, and they'll want both growth and profitability – but that’s a rare combination to achieve, especially in the early years. In the last few years, the balance has shifted in favour of growth at all costs – in large part, due to the huge amount of money chasing few great opportunities. Fintech, for example, is now one of the most popular sectors for investors globally. In 2018, global fintech funding rose to $120bn, up from $51bn in 2017, and 2019 is set to be another significant year with $38bn raised in the first six months.
Against this backdrop of a seemingly infinite pool of funds, profits have almost become a nice to have, rather than a need to have, but I don’t believe this will last forever. Given global political and economic headwinds, 2020 may indeed be the year in which the pendulum finally swings back towards growth and profitability.
The businesses who can get to profitability faster whilst still achieving ambitious growth targets, are therefore likely to be the biggest beneficiaries of investment going forward. It took Google three years to become profitable, Facebook five, Netflix six, and Amazon seven. So, between them, the FANG companies averaged only five years to become profitable, and I don’t think anyone would argue that they sacrificed their growth to achieve this. Countless founders say they want to be “the Facebook of this” or “the Amazon of that” – ensuring they can effectively scale while also generating sustained profits is going to be key to achieving this.
The more recent cohort of technology companies to list have grown up in a post-crisis world flush with capital, where mega-rounds are a weekly occurrence, and businesses can delay the scrutiny that an IPO brings to the balance sheet for much longer than their predecessors. They might be able to get away with saying they “may not achieve profitability” because the number of customers they’ve managed to attract and continue attracting keep investors optimistic that eventually they’ll move into the black. This argument might be applicable to consumer technology, but can the same be applied to financial technology?
Regulation and the need to prevent the creation of systemically important financial institutions means fintechs are unable to scale as easily as other technology companies. So, they will have to find other ways to grow and other KPIs to measure their success beyond customer numbers. 2020 is the year investors will expect to see this.
And we can already see this balance playing out. The world’s largest and most established fintechs, such as Ant Financial, PayPal and Adyen, as well as younger players such as ourselves, have proven that striking a balance between growth and profits is possible. For us, it came from having a clear idea of what customers value and are willing to pay for, as well as developing solutions that help improve the effectiveness and efficiency of existing institutions, rather than trying to replace them. Perhaps this is the key to profitable growth in fintech – make banks your customers, not your competitors.
Rishi Khosla is the co-founder of UK bank OakNorth
This article was originally published by WIRED UK
