The Nordic region has long been a hotbed for innovation, particularly in financial technology or fintech. However, the ongoing crisis has dramatically shifted the investment landscape, compelling Nordic fintech startups to pivot their strategies and prioritise profitability and sustainable business models to secure funding from venture funds.
A global pandemic, geopolitical uncertainties and a war on the European continent have affected global economies and caused a great threat of economic downturn. That has caused venture capital firms to become more cautious in their investment decisions.
Numbers from Copenhagen Fintech show that investments in fintech have declined since an all-time high in 2021.
“From what we learn from our online series of ‘Nordic Fintech Trends’ with all the Nordic countries represented, we can certainly say that the Nordics follow the global trend. No doubt that 2021 was an outlier, and what we saw in 2022 and are now seeing in 2023 is probably a return to ‘normal’,” says Thomas Krogh Jensen, CEO at Copenhagen Fintech.
He also points to the turmoil that evolved in the US banking sector and the collapse of Silicon Valley Bank have fueled some anxiety among investors and sustained a slowdown in investment activity.
“You need to have a solid path to profit. Not saying you need to have everything sorted, but it needs to be a revenue model that shows a path to getting profitable.”Henrik Johannessen,
These events also impact the Nordic region. Securing funding has become increasingly competitive today, and investors now emphasise sustainable business models and revenue generation more than chasing growth. This has caused a specific question from investors showing a new trend:
“When it comes to business angels and family offices making seed investments, they all ask, “When can you become profitable?” It has definitely become a priority. It was not a question asked so early, just five years ago. Today, it has come front and centre,” says Søren Nielsen, senior manager at Thursday Consulting.
Nielsen is a seasoned fintech entrepreneur, and today, he advises high-growth startups on subjects like fundraising and scalable commercial models. According to him, companies that cannot control how it becomes profitable will have difficulty raising capital today.
He views the new trend as a backlash to several years of focus on volume and user growth without a clear path to commercialisation from the users on the platform. Many platform-focused companies require a lot bigger investment with bigger risks and, thus bigger rewards if they succeed.
“These platform-focused companies can struggle in the current environment because it requires larger ticket sizes and more patience, and they are uncertain about how to make money from it. It is the same both internationally and in Denmark,” Nielsen says.
“It is more important than ever to think about how the funding journey should look like one or two rounds down the journey. The investors do their due diligence, but so should the startup founders. More important than ever.”Thomas Krogh Jensen,
CEO, Copenhagen Fintech
Harder to raise money
Tjommi, a B2C fintech startup with Norwegian roots, is currently raising funds with the goal of completing the funding process within the next four to five months. CEO Henrik Johannessen shares Nielsen’s perspective, which he sees as a healthy sign from the venture funds.
“It’s harder to raise money now, but it’s good for the market. Over the last few years, many B2C companies have shown much user growth but haven’t shown the ability to make money on those users. And that’s the core problem in B2C fintech. The industry is stabling down right now. But that also sets requirements to raise the money in terms of showing there’s actually a possibility to make money on it, not just having the user growth,” he says.
He experiences firsthand how demands are higher around monetisation and unit economics. Investors are doing their due diligence thoroughly and are displaying heightened interest in various metrics compared to previous rounds.
The investors are now delving into greater detail during the due diligence process, particularly concerning the cost of acquisition, revenue per user, churn rate, and payback time. These are metrics that the team should know and follow closely.
“Today, only facts mean something. You can forecast as much as you want, but in the end, the numbers here and now only mean something,” Johannessen adds.
By scanning and registering prices across the internet, Tjommi helps consumers automatically claim money back if the price drops after purchase. Johannessen and the team is paying a lot of attention to generating increased revenue for existing users on the platform.
“These platform-focused companies can struggle in the current environment because it requires larger ticket sizes and more patience, and they are uncertain about how to make money from it.”Søren Nielsen
Senior manager, Thursday Consulting.
“With the increase of the ARPU (Average Revenue Per User), it’s all about activating users to use the vouchers they get through our system. So every time there’s a refund, the customer gets a voucher, and it’s our job to ensure it is used,” say Johannessen and adds:
“You need to have a solid path to profit. Not saying you need to have everything sorted, but it needs to be a revenue model that shows a path to getting profitable.” Nielsen also emphasises the need for metrics that show much money a company earns from its existing customer base.
“One of the key metrics currently emphasised is Net Dollar Retention. It also tells how many customers the company loses and how much extra it can sell to existing customers. It is a specific data point that is being asked about,” he concludes.
The need for a fundraising strategy
The changes in the industry indicate that it now requires more time and a greater number of attempts to find success, necessitating the need to encounter and evaluate more opportunities. Founders have to prepare and devise a clear strategy, including a strong narrative, especially on how they plan for scale and a clear path to profitability, according to Krogh Jensen:
“It is more important than ever to think about how the funding journey should look like one or two rounds down the journey. The investors do their due diligence, but so should the startup founders. More important than ever.”
According to Nielsen, many startups must look closely at and reduce their fixed costs. Salary costs are a significant factor, and reducing them is an effective measure. Additionally, many are trying to sell more to existing customers, as acquiring new customers involves more marketing costs. And that still requires some level of funding.
“Throughout the spring, I have seen several companies doing bridging rounds because they suddenly need to change their strategy. These bridging rounds have sometimes been as short as four months to try to get closer to a calmer venture market and closer to profitability at least.”
His observations are that investors most often prioritise companies already in their portfolio. Nielsen often advises startups to do a bridging round now and expects it to take some time before the investors become more risk willing, which could easily be another six months. He also points to public funding as a short-term solution, such as innovation fund grants or Eurostars funding.
At Tjommi, Johannesson has decided to wait five months until closing the round to boost the metrics and be better positioned to raise a round.
“I see a lot of companies fundraising all the time instead of setting a strategy
for it. And if you don’t have a strategy for it, you just end up being a little back and forth everywhere,” he says and adds:
“There are two ways to look at it. Times are harder now. But then you can also look at it differently and take it as an advantage. Tough times mean there’s still money to deploy, but the bar is higher. So how do you stand out? I think you stand out by week after week, showing the progress, executing during the hard times, and getting the team to focus on the product and the metrics. And if you do that over time, you will have the metrics they seek. So right now, we have decided to just focus on the metrics.”
At Copenhagen Fintech, Krogh Jensen is confident that Nordic fintech startups are doing their best to navigate and weather the storm:
“It’s not easy if you get stuck ‘in the middle’, so to speak, but I really do think that founders, the executive boards and their investors are doing everything they can and should to recalibrate and adjust. Being agile and adapting to a changing environment is in the DNA of a startup.”
Securing a bargain
Venture funds are telling their portfolio companies to shelter in place for uncertain months, and some have laid off staff. Those startups that don’t have a clear bridge to the other side of that chasm will be looking for buyers.
A Danish proverb says that when the storm blows, some build shelters, and some build wind turbines. And according to Nielsen, we are somewhat in that situation today:
“The companies that have capital can start buying and investing. There is a golden opportunity to invest and buy talent and these new types of products now.”
Large financial incumbents are capitalising on the uncertainty in the market by seizing the opportunity to snap up struggling startups at a discount at a lower valuation than what they were worth 18 months ago.
“By leveraging the volatile and unpredictable market conditions, these big players in the financial industry can negotiate favourable deals and secure bargains when acquiring these startups,” says Krogh Jensen.
The lower valuations of these fintech companies compared to their previous values make them attractive targets for acquisition, enabling the larger companies to expand their portfolio and enhance their competitive position in the industry. This strategy allows the big financial companies to leverage the market uncertainty to their advantage and make strategic investments at a more favourable price point.
A survey from Global Corporate Venturing with numbers from Pitchbook shows that the market turbulence led traditional venture capital investors to reduce their involvement in startup funding deals, while corporate investors demonstrated greater stability. Despite an overall 25 per cent decrease in the number of venture capital funding rounds compared to the previous year, rounds that involved corporate backing experienced a 2 per cent decline.
The return of venture investment
Today, more money is earned on interest by putting it in a passive account or investing in bonds than in recent years. Consequently, there is less risk-taking capital available. But the venture funds are obligated to invest the money and cannot keep it idle.
“We experienced the same situation during the pandemic when several funds had money but were cautious about investing due to uncertainties. That caused a ketchup effect and a sudden surge in investment activities,” says Nielsen and explains:
“We might be seeing a similar situation where some venture funds are holding onto the money because the markets are challenging to invest in. But eventually, they need to invest. The question is when.”
While that timing remains uncertain, Johannesson is optimistic about securing a fair valuation:
“The bar is higher. But you need a lot of capital to solve meaningful problems. And the investors know that to go through that long journey, the valuations must be higher on the seed stage because otherwise, the cap table would be unbalanced all the way out. So, if you’re solving a meaningful problem and taking that long journey, it’s about being convinced that you are on that journey and have the profitability.”