VCs decipher the recent fintech layoffs — and why they’re happening now

04.11.2022
Quoted: VCs decipher the recent fintech layoffs and why they're happening now (TechCrunch - Christine Hall)

Many big companies in the fintech world cut jobs in the past month. And yet Stripe’s announcement it would lay off 14% of its workforce still made a splash, proving that unicorns and decacorns are not immune to the challenging economic and fundraising conditions.

The Stripe news closely follows Chime confirming this week that 12% of its employees would be laid off and Brex revealing last month that it was cutting 11% of its workforce.

So what the heck is going on here? Well, according to Spiros Margaris, a fintech venture capitalist and founder of Margaris Ventures, the current layoffs by some of these larger fintech companies were “caused by the challenging geopolitical market environment and inflationary pressures. It affects the whole fintech startup industry — and globally all industries — since the prominent players have a strategic ripple effect on the smaller players.”

Cameron Peake, a partner at Restive Ventures who recently invested in AiPrise, concurred, noting via email that much of what we are seeing today “were the dynamics we saw play out last year,” including all of the “large funding rounds, sunny market projections and a belief that companies needed more people to fuel their growth.”

What resulted was “a lack of discipline around company fundamentals,” she added. While the frenzy was dissipating, it was then that companies “realized they were not only ahead of their skis but that they needed to cut back in order to focus more on profitability,” she said.

Alda Leu Dennis, general partner at Initialized Capital, a firm that has invested in Coinbase, Rippling and SendWave, said via email that when analyzing layoffs at these big fintech and SaaS companies, “we have to consider that the majority of their customers are small and medium-sized businesses.”

Within the Initialized portfolio, Leu Dennis noted that many of its companies “experienced increased churn over the last quarter with their small and medium business customers.” At the same time, those companies experienced “compressing multiples and a higher cost of capital, with increasing interest rates,” all of which point to “the fact that volumes will inevitably slow,” she added.

Do the companies agree?

Yep, those same sentiments from the VCs are pretty evident in the reasoning given by thecompanies doing the laying off. To see what we're dealing with, let's take the layoff announcements one by one, starting with Brex.

The corporate spend management company, as Mary Ann Azevedo reported, seemed to be going through a bit of a growing pain in trying to figure out what it wanted to be as it grew up. She outlined some of the decisions made by the company, including a move to stop serving smaller businesses, which she noted was one of the factors in the layoffs. This was just nine months after raising $300 million in a Series D-2 round at a $12.3 billion valuation.

Mary Ann did a deep dive with Brex co-founder Henrique Dubugras last month on stage at TechCrunch Disrupt. During that interview, Dubugras confirmed the business model shift was one of the reasons, along with the fact that “now we’re in a world in which a path to profitability is very important. You need to be able to make decisions like these and focus on getting there. So, you know, we did what we had to do to keep a sustainable business.”

Now over to Chime, where, according to an internal memo, co-founder Chris Britt wrote that the layoffs of around 160 people were part of a strategy to help the digital bank thrive “regardless of market conditions,” adding that the company would be looking at everything from marketing spending to vendor contracts.

A spokesperson told Mary Ann and Natasha Mascarenhas that as the company looks “at current market dynamics, we are adjusting our organization to be fully aligned with our company priorities. As a result, we are eliminating some positions while still hiring to select others.”

Meanwhile, back to this week’s Stripe cuts. The layoffs, as Paul Sawers wrote, might not have been as surprising. Yes, it is by far cutting the largest slice of its workforce — about 1,120 — but as we’ve followed this year, the economic infrastructure company made some cuts of TaxJar employees in August. Stripe was also poised for an IPO that has still not happened, and it also reportedly dropped its own valuation from $95 billion in 2021 to around $74 billion in July.

Stripe CEO Patrick Collison offered some insight into the decision to lay off more folks, admitting that the company “made two very consequential mistakes,” including being “too optimistic” about potential future growth and, in evaluating new product growth, “grew operating costs too quickly.”

Where do we go from here?

Margaris, who is on the board of WeFox and STC Pay, believes the companies making layoffs could be in danger of “throwing out the baby with the bathwater.” He also thought that some of these decisions to cut back are the result of giving in to investor demands.

“Laying off good employees endangers their strategy to succeed in the grand vision they initially sold to the VCs,” he said via email. “Growth at any price is not in vogue; profitability, the faster, the better, is what investors demand regardless of what the consequences of the business model are. When the market storm settles, which it always does, we will see which startup leaders have what it takes to succeed. True leaders will have to prove that they know when to say ‘yes’ or ‘no’ to VC demands to take off speed by laying off people.”

At the seed stage, Peake is not seeing these kinds of job cuts “right now.” As an investor at this stage, and in some cases even earlier, many of the startups aren’t yet in “hyper-hiring” mode, but rather focusing on product-market fit and identifying the best growth channels, she said.

“That said, with depressed tech valuations, increasing interest rates and changing investor sentiment, the pressure to focus on revenue and profitability has come to the seed stage as well,” she added. “That is naturally going to lead to layoffs, and I’d expect to start seeing more of that begin to happen in the coming months.”

Leu Dennis, too, believes that with the market softening, it’s a good time for companies to go back to fundamentals.

She said that Initialized “remains long-term bullish that the companies driving meaningful ROI for their customers will continue to see rapid growth.”

Gardiner Garrard, co-founder and managing partner of TTV Capital, a firm that invested in fintech companies including Bill.com, Onward and SmartAsset, has a more optimistic outlook for the sector.

“We’ve invested in early-stage fintech companies for the past two decades, and our firm has seen all types of macroeconomic conditions and market shifts,” Garrard said via email. “Through it all, there’s been one constant: Well-run companies that are bringing a truly impactful solution to market will weather the storm. While things may seem uncertain at the moment, we’ve seen enough economic cycles to know that strong businesses will endure for the long haul.”

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