Originally published at Forbes
Back in 2021, fintech attracted a staggering $229 billion in venture capital (VC) investment. By 2022, this momentum slowed. The decline continued in 2023, with investments dropping to $118 billion. Now the figures have been compiled for 2024, and the headlines are predictably gloomy: “Global fintech investment declines 20% in 2024 amid ‘economic turbulence’” and “UK FinTech deal activity dropped by 61% as investment hits five-year low.” All this is set against an agitated market. Back in November 2024, FinTech Finance News reported that while most fintechs were looking for investors, they struggled to secure funding.
Investors lament the changing landscape, entrepreneurs face a tougher environment for seed funding, and commentators speculate whether fintech’s best days are behind it. But for those deeply embedded in the industry, this shift could be the best thing to happen to fintech in years.
The Glut Of Investment: A Double-Edged Sword
The flood of investment into fintech wasn’t universally positive. In 2021, I wrote about the risks of overinvestment in the sector, predicting that many challenger banks with astronomical valuations would struggle. Their business models often hinged on unrealistic assumptions, like customers upgrading to premium accounts. When that didn’t materialize, many faltered.
As of 2023, only 20 out of 453 global challenger banks were operationally profitable, according to Boston Consulting Group. Many remain afloat due to hefty funding rounds at discount, but as the VC pipeline tightens, unsustainable models are likely to crumble. Across fintech, the same fundamental problem recurs: VC funding often fuels unsustainable, shortsighted growth strategies.
The Problem With ‘Growth At Any Cost’
VC funding seeks outliers—startups with the potential for explosive growth and billion-dollar valuations, a hunt for the next unicorns. This often fosters an emphasis on rapid user acquisition and top-line revenue growth. While these metrics are visible indicators of growth, they can mask deeper issues. Hyper-growth often comes at the expense of operational longevity. Products go to market before they’re ready, fundamental issues are deferred, and investor pressure perpetuates a cycle of toxic practices.
Operational efficiency—key to long-term success—becomes an afterthought. With ample funding, inefficiencies are hidden through spending. This creates a dangerous cycle: Businesses chasing unsustainable growth require more funding to survive. When the funding dries up, so does the business.
The Market Distortion Effect
Another side effect is that excessive VC funding distorts the broader market. Well-capitalized fintech startups often operate at a loss for extended periods to dominate the market, a strategy known as “blitzscaling.” While effective for the VC-backed startup, this approach can price out smaller, bootstrapped competitors. These smaller businesses—often with sounder operational practices or better products—can’t match the burn rates of their heavily funded rivals. When the VC-backed companies collapse, the damage has already been done: Smaller players have often folded, leaving a vacuum in the market.
Why Bootstrapping Beats Venture Capital
For these reasons, I’ve always preferred bootstrapping as a strategy for building businesses. Bootstrapping isn’t just about avoiding external funding; it’s about sustainable growth, operational discipline and customer focus.
• Control and independence: Bootstrapping allows founders to retain full control over their businesses. Decisions aren’t dictated by investor demands, enabling a long-term focus on building a resilient company. In fintech, where regulatory landscapes shift rapidly, having the freedom to adapt is a huge advantage.
• Scaling in line with revenue: Bootstrapped businesses grow at a pace dictated by their revenue, encouraging financial discipline. Every coin spent must deliver tangible returns, fostering sustainable growth.
• Customer-centric operations: Without the cushion of VC funding, every customer interaction matters. Bootstrapped businesses often excel at delivering value, creating stronger loyalty and retention.
The Evidence For Bootstrapping
While direct comparisons between bootstrapped and VC-backed businesses are limited, the available data is telling. Data shows that 78% of startups begin through bootstrapping and use their own funds to launch their businesses—and these businesses often have strong survival rates. Success stories like Mailchimp and Basecamp highlight the potential of this approach. Mailchimp grew into a marketing giant without external funding, ultimately being acquired by Intuit for $12 billion. Basecamp has operated profitably and independently for decades, prioritizing simplicity and customer satisfaction.
The Future Of Fintech
The tightening of VC funding is not a death knell for fintech; it’s a necessary correction. Over the past decade, the sector has been flooded with money, much of it poorly allocated. This has prioritized scale over efficiency and growth over sustainability.
Now, fintech companies have the opportunity to reset. Businesses will need to focus on building real value, achieving profitability and serving their customers—not just their investors. For entrepreneurs, this moment presents a chance to rethink how they build and grow their companies.
Bootstrapping won’t suit every business, but it offers a blueprint for sustainability that many startups would do well to follow. By embracing operational efficiency, customer focus and profitable growth, fintech can move beyond the boom-and-bust cycles of the past.
In short, the decline in fintech investments isn’t the end of the party; it’s the start of the sustainable festival season.
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