Why Do Some Fintech Startups Struggle to Make a Profit?
Fintech seems to be disrupting the way we handle our finances (in a good way) yet fintechs are finding it increasingly difficult to be profitable. Even though it’s a booming industry, why would these businesses struggle?
Most of the fintech startups today are created by young professionals. While they have a great idea and have the drive to do well, they don’t have the experience and knowledge necessary to raise adequate venture capital, which is where profitability starts. Venture capitalists are also extremely picky in who they invest in – only choosing between 1 – 2 percent of the opportunities that cross their paths.
Not Necessarily the Next Big Idea
While fintech is a booming industry and promises to change the way we handle money, it’s not a billion dollar idea. Since venture capitalists want those billion dollar ideas, they pass over most of the fintech opportunities that they see.
But most fintech startups are so focused on getting venture capitalist investors that they lose focus on growing their business and instead focus on getting investors. They waste precious time that they could use to get more customers and grow their business on potential investors that they don’t get.
Most Venture Capitalists Don’t Understand Fintech
Fintech is still fairly new and most venture capitalists aren’t new. This leaves them with the opportunity to invest in something that they don’t understand, which means they probably won’t invest. When you have young founders pitching ideas to older venture capitalists who are set in their ways, it doesn’t turn into a profitable deal.
Low profitability comes down to low growth. Sure, founders are knowledgeable and have high hopes for their company, but actions speak louder than words. Even if they have high hopes and sell those high hopes to investors, if they can’t deliver what they promised, it doesn’t lead to much profitability. Many fintech startups have much slower growth than they anticipated.
Most Money Comes from Family and Friends
Most fintech startups start with money from family and friends. While it’s a great way to get up and running, it’s not going to provide the necessary funds to keep going beyond the first few months. If venture capitalists don’t see something promising right from the get-go, they won’t find a reason to invest in the startup, which means the money used to start up the company is all founders have, leaving little room for profitability.
Could Fintech Startups Make a Profit?
This doesn’t mean all fintech startups fail or even that most of them do. It does mean they may have a slower start, and some may struggle for a while. It all comes down to the business model, who you hit up for investments, and how you go about it. The potential is there, and even if all don’t make it, many will because fintech is the way of the future for money management around the world.