WORKWEEK

Last Friday, I wrote about public market fintech companies getting hammered by Wall Street. But the dip was largely warranted—companies posted lesser numbers as the economy adjusts to a post-COVID world.

Here’s what I wrote on Friday:

“Robinhood’s getting hammered—revenue fell 43% year over year, just a few days after announcing its laying off 9% of full time employees. But, in the earnings call, both the CEO and CFO emphasized that in most of Robinhood’s existence, they’ve been operating in an almost-ideal macro environment that was changing dramatically. 

Nothing is trending in the right direction: Q1 transaction revenue dropped 48%, average revenue per use dropped 62%, crypto revenue fell 39%, and monthly actives dropped 10%. So, Robinhood’s not making as much money and their users aren’t even using the app as much as it was during peak COVID.”

Block, Sofi, and Affirm are also all down 60+% year to date. 

Now, there aren’t as many public market comparisons for enterprise infrastructure fintech companies. That’s might be because the sector is still relatively new—infrastructure companies really started attracting VC dollars only over the last 3 years or so. But, because of it’s such a new subsector, there’s less that we know about how resilient these businesses are. 

It’s different around consumer fintech—historically, it’s been dependent on marketing spend. Tons of money is spent on custom acquisition: paid marketing on platforms like Facebook, Instagram, and Google; referral programs that are a bit outdated in 2022 (Especially in a world where tokens can be the new customer acquisition tool). Influencer marketing has been the current thing in fintech marketing over the past year, but companies seem to be giving up a lot in both cash and equity to get big influencers on board; a bit antithetical to the successful tactics e-commerce brands implemented, which was more focused on finding microinfluencers that resonated with audiences that actually converted. (On the bright side, it’s at least a step up from Fintech 1.0 companies like marketplace lenders that used direct mail via USPS.)

The consumer markets have been pretty frothy for the past 16 years with a prosperous economy driving consumer discretionary spending and trading volume. But, with the macro economy turning, consumer behavior has already started to shift a bit. Robinhood’s CEO Vlad Tenev said as much on the company’s last earnings call:

“Now, at the top of the call, I mentioned the challenges presented by the macro environment. For most of our history, Robinhood has operated in a period of low interest rates, low inflation and rising markets.

Our customers are now experiencing all three of these trends going in the opposite direction, perhaps for the first time in their lives. As a result, some are engaging with us less regularly and reducing their trading activities. 

So overall, our customers are continuing to engage with us. But the total numbers have come down a bit with MAUs falling to 15.9 million in March. When we look a level deeper, our larger customers are still remaining active, but we are seeing more pronounced declines from those that have lower balances. With the uncertainty in the market, our customers became more cautious with their portfolios, trading less frequently and in smaller amounts across all asset classes, although crypto activity, in particular, came down pretty significantly. But we’ve seen some encouraging signs.”

Now it’s not doom and gloom—there are a ton of different ways Robinhood can spur growth. One is crypto—Vlad mentioned their crypto wallet rollout, the company acquired a UK based crypto company, and there’s a lot of International growth and revenue to be generated from that sector. 

On the flip side, the playbook for enterprise fintech companies is the same: keep selling to a rapidly growing customer base. While the public markets don’t have many examples, Sofi does own banking-as-a-service platform Galileo, which recently disclosed some very bullish year to year stats. Over the past year, Galileo’s business has grown tremendously: In Q4 2021, accounts grew to 100 million (up 67% YOY), revenue hit $53 million (up 42% YOY) and, most pertinently, B2B clients grew 40%. 

There’s reason to believe the market is expanding for B2B infrastructure companies offering easy to build fintech products. In this example, more diverse customers coming on to the Galileo platform, particularly non-financial companies like Verizon and Toast, and incumbents like H&R Block. Previously, Galileo’s customer base was fintech companies like Chime. As newer players look to develop their own fintech products to combat pressures on their own businesses, the TAM for these enterprise infrastructures can expand dramatically. 

In the private markets, valuations are falling but deals still seem to be getting done. According to a April 27th, 2022 report from Angellist and SVB on the state of early stage investing, Q1 2022 was the most active Q1 recorded. “The high volume of dealmaking in 1Q22 and the generally positive tenor of those deals suggests the early-stage venture market has largely been spared from broader market turmoil thus far,” according to the report. 

One reason might be that, while VC’s are slowing down their pace of investments, the dramatic increase in fund managers means that there are more options for founders to raise from new sources of capital that didn’t exist before. So, while there will be some pullback in the private markets, it may not be as catastrophic as we think, particularly in the early markets. 

My bet is that a lot of this new money raised is going to get spent on critical infrastructure and services that are in many cases required by law for companies to implement. What’s critical for enterprise companies is to make sure that they are top of mind for new founders getting started, and their products work so that founders don’t migrate to something else (something that’s happened a lot in fintech.)