Layoffs, down rounds & uncertainty: The big fintech divide

A peculiarity of the fintech space in the past few years has been how normal it became for companies to rapidly increase their headcounts. 

Even large firms where the total number of employees numbered in the hundreds or even thousands went through rapid periods of hiring that would see their total workforce increase by 50 per cent or even 100 per cent in less than a year. 

Paris-based Spendesk for example increased its headcount in 2021 by 100 per cent to c.300 people and had planned at the start of 2020 to double this again through the year.

That of course has gone into reverse for a number of the most high-profile fintech companies such as Klarna,Curve and Freetrade who in recent weeks have shed up to 10 or 20 per cent - and even in a third in the case of Bitpanda -  of their employees overnight in fear that a recession and tighter capital markets could spell an existential threat.

Tough market conditions

Railsr (formerly Railsbank) CEO Nigel Verdon says it's a very difficult market owing to both geopolitical issues and macroeconomic issues combining to create unprecedented uncertainty.

The company, he says, will likely increase revenue in 2022 by over 100 per cent to c.£50m but may have to cut back on its growth ambitions and focus on existing clients as well as improving its infrastructure. It has also laid-off staff in the past month or so.

“The playbook within this type of environment is to control costs and manage the business very much on a capital efficiency basis and give a clear route to profitability,” he said. 

“You've got to then also really focus on where your real strengths are, and focus on product because proving the product when it comes to the end of a three-year cycle... you're in a good place to capitalise on that.“

Verdon says despite Railsr’s leadership team has experienced a number of different similar crises including the 1998 Russian default, the 2000s dot-com bust as well as the 2008 credit crunch it has also been one of the companies forced to make redundancies. 

“That is about creating a business that's survivable in this market,” he said. 

“We did the same during covid to batten down the hatches and get safe,” he added.

The key reason for slowing hiring or even making redundancies is lowering cash burn. This is the monthly amount that a company spends in order to grow itself to a sustainable financial footing and is common across most startups and the reason so many are always looking to raise new equity capital. 

However, inflation is high and interest rates are moving upwards at the same time the economy is moving to a weaker footing. The danger in this scenario for startups is that costs will spiral while demand for their products might go down. 

It then becomes harder to raise new capital at the same valuations which mean employees’ equity compensation becomes less worthwhile and they may command higher salaries to make up the difference as well as combat the rising cost of living. This can further speed up companies' burn rate while also lowering incentives making, them arguably less competitive. 

Many fintech companies currently now face a challenge when their burn rate is worryingly fast. Cut jobs, raise a ‘down round’ and/or pay more for equity capital.

“Equity capital is very expensive at the moment,“ said Verdon. 

“Growth isn't being priced in equity markets at the moment,” he added.

Railsr more recently opted to raise debt capital which Verdon says is “reasonably priced” at the moment and has the added benefit of being non-dilutive to existing shareholders.

A tale of two HR departments

The layoff trend which has become increasingly common in a matter of weeks doesn’t tell the whole story, however. Many firms have not only avoided redundancies but are still actively hiring and hoping to scoop up the best talent from rivals. 

Eileen Burbidge, a partner at venture capital firm Passion Capital and backer of Monzo, said at Money 20/20 earlier this month. what is happening now has some parallels with the beginning of the pandemic and says she is not entirely convinced that the bad news will persist. A similar thing happened in 2020 when panic turned to euphoria for growth-focused tech.

“I think it's entirely possible that this will last a year but…I think it could bounce back relatively quickly. I think the market is so irrational over the last few years that you some macro event could actually trigger a nice [bull] run on the market,” she said. 

One larger fintech company N26 has about 1500 employees across eight offices but is still looking to increase its staff tally this year by several hundred people, according to its CEO Valentin Stalf who also spoke at Money 20/20.

“With the current market...we are also reviewing our plans and how many people, it makes sense to bring in this year or next year,” he said. 

“But I think the big differentiation for us is that we still stick to bringing people in. We think it's a huge opportunity for us now that a lot of bigger companies in tech cut headcount. that frees up a lot of great talent,” he added.

For some the trends they are capitalising are so powerful, that recession or no recession growth is still the focus.

Open banking platform Token is aiming to capitalise on the card to account-to-account bank payments in Europe and is looking to double its headcount in 2022 to achieve this. 

“Over the next six months there will be a lot of new job opportunities at Token, as we continue to drive the shift from traditional payment methods to account-to-account payments,” comments Tim Corke,Token’s Chief Customer and Strategy Officer. 

The company says it grew eight times in terms of volumes in Europe in the past year, with its payment volumes also accounting for over 20 per cent of all open banking payments in the U.K. 

“That proportion is set to rise as more customers go live with their open banking solutions,” said Todd Clyde, Token CEO. 

“It’s a really exciting time for the company; we are creating a lot of new roles. That’s a great position to be in as I know others in the fintech space are facing some real challenges right now.”

“To support this expansion, and following our $40m investment to scale open banking in Europe, we’re dramatically increasing the size of our team, particularly in Berlin. 

Zopa is another firm still hiring. Its CEO Jaidev Janardana told AltFi that the company was on a firm financial footing and would be operating at a profitable margin going forward. 

“We're still hiring, we still want to grow our technology function or product function, marketing function, across the board, more or less…and we are seeing strong revenue from the business to be able to support the expansion of our people.” 

Yolt, another open baning provider backed by Dutch bank ING, is also still hiring, according to its CEO Nicolas Weng Kan

“We’re still hiring. We need data scientists, we need data engineers and developers,” he said.

“You still do have to keep an eye on costs. That is one of the basic tenets of startups,” he added.

While growth may not come at any cost - literally - at the present juncture. For many it is still worth investing in despite the turbulent times.