Scaling a business and achieving success in the process is a significant milestone for entrepreneurs throughout the lifespan of a business. The process can be quite challenging, and entrepreneurs need to thrive in multiple areas such as team management, financial planning, and strategic planning to succeed. As per a research conducted by McKinsey, only 22% of the new businesses launched were able to successfully scale. To achieve scale, many times you put your existing business at risk to build new growth areas. However, if you achieve success, sky is the limit.
The same thesis holds true when we talk about scaling a Fintech startup. In fact, scaling a fintech startup is much more difficult than other businesses due to the high level of technology involved along with an evolving market. As such, you need to strategize carefully before on boarding the ship to scale your fintech startup. Before asking how to scale, you must first understand when to scale and benefits of scaling your fintech startup.
When to scale your Fintech Startup?
If a fintech startup wants to successfully scale its business, it must first understand the growth cycle it is operating in to attract the appropriate funding. The S-Curve is an important tool that measures the adoption of an innovation and is also useful in analysing the growth paths of innovative companies.
EY has mentioned this model in an article to help fintech founders understand the growth stage that their business is operating in along with the different methods of financing available. The stages of the S-curve are validation, early and later stage startup, scale up, mature and turnaround or decline (x-axis). The model below mentions the different financing instruments in volume (y-axis) depending on the stage (x-axis).
The model can be used by Fintech companies to plot their own roadmap and develop a better understanding of their long term growth. Each growth stage represents certain characteristics that businesses exhibit. During the validation and startup stage, your primary focus should be on market validation, securing funding, and ensuring survival. During the scale-up stage, the focus is on exploring new markets, growing the business, and increasing the workforce. Lastly, during the mature stage, you'll encounter a growing number of competitors and narrower profit margins. During the turnaround stage, the focus shifts towards ensuring survival and successfully adapting to new business models. For each stage of the life cycle, here are new funding possibilities and the maximum amount of investment differs. Fintech companies need to know where it sits in the life cycle, what is available at each stage and explore funding possibilities early.
Some common guidelines that fintech founders need to keep in mind before going to ask money for scaling their business are: -
- Investors typically show limited interest in funding ventures during their early stages. They require some form of validation and sales traction to be convinced of investing in a business. Speaking with VCs early on can be beneficial as fintech startups get visibility on the areas they should focus on. If there is a market fit, this can expedite the process of securing funding.
- Typically, it takes around 6 months to wrap up a funding round. Investors place a strong emphasis on the funding mix (debt-equity ratio) when evaluating a funding round.
- Using combination of funding solutions can improve the success rate of scaling up the business
- The firm must develop a concrete plan for its investors on how the scale-up plays a role in their overall business story and future growth plans. They should also outline a long-term financing strategy along with measures to ensure the scale-up goes as planned
Some other general guidelines for scaling up-fintech companies include ensuring you have the relevant number of resources with skills that are require to scale-up and complying with laws and regulations.
Benefits of Scaling your Fintech Startup
In today’s VUCA (Volatility, Uncertainty, Complexity, Ambiguity) World, markets and consumer demand are evolving constantly and businesses need to diversify along with being resilient survive against the whirlwinds. The need for scaling up a fintech varies from one company to another depending on their unique business requirements. However, the move in general offers various benefits that allows companies to grow their business and make headways towards achieving the dream of becoming a unicorn.
Let us understand some reasons for scaling up your fintech business and how it may work wonders for you:-
Fighting against Competition
By scaling up, fintech companies can enter new areas of business, enter new markets, and obtain funds for growing their existing business. As a result, they are in a better position to face the competition and grow their market share. Entry to new markets is the biggest advantage as companies no longer need to compete with local businesses and their business is more diversified.
Diversified Revenue Streams
When scaling up their business, fintech companies can focus on new product launches or entry into new markets that reduces their dependence on a single market or customer segment.
Longevity and Resilience
Majority of the businesses fail within 5 years of their inception. Also, the level of technology evolves constantly in the fintech sector and companies to focus on having more customers along with presence in different markets to survive. For example, while major fintech startups failed in the prior years due to the funding winter, big payment giants such as Stripe and Square are thriving due to a highly diversified revenue stream.
Taking advantage of a Bull Market
In a bull market, startups are easily able to get funds on the cheap from VCs and financial institutions. In the meanwhile, during a bull market, the consumer market is generally booming, leading to higher revenue and profits. As a result, by focusing on obtaining funding and scaling up during a bull market, fintech companies can improve both their valuations and financials. Also, they are better prepared for a funding winter in case the situation arrives.
On an overall basis, scaling your fintech startup is the right decision for companies that want to grow their business on a global scale and become the market leaders.
Scaling your fintech business: Global perspective
At a global level, fintech companies were booming highly in the pre-covid era with reaching sky high valuations and importance on growth regardless of the burn rate. Now, fintechs have entered a new era wherein the focus is on sustainable, profitable growth.
In July 2023, the market capitalization of publicly traded fintechs reached an impressive $550 billion, showing a significant growth of two times compared to 2019. Furthermore, during the same period, there was a significant rise in the number of fintech unicorns, reaching over 272, and their combined valuation skyrocketed to $936 billion. This represents a remarkable sevenfold increase compared to just five years ago when there were only 39 firms valued at $1 billion or more.
Some of the different ways in which fintech companies can scale their business successfully on a global level are mentioned below:
Strategic Alliances
By partnering with local companies, fintech businesses can achieve a major advantage when foraying into new markets. It allows better credibility along with a trusted partner that has a better knowledge of the market. Also, partnership with an established financial institution would allow fintech companies access to valuable consumer data that would enable them to grow their business.
Access to Funding
Creating a fintech business on a global level would require a high level of investment and patience to grow it sustainably. As such, fintech founders need to ensure that they have the right level of funds available to scale up along with constant sustainable source of financing to fund their expansion.
Majority of businesses generally fail due to lack of access to funds. Here, founders can focus on developing connections with VCs, other founders, and financial institutions to have access to better funding.
Automation and scalable solutions
Building a fintech business at a global level means a high level of customer traffic and data involvement. Once the product market fit is found, fintech companies need to ensure that they have a flexible system that is able to manage huge loads of data simultaneously. Here, developing APIs can be a key advantage as they allow different software applications to be integrated into each other and share data, opening revenue sharing partnerships, expanding user base and scaling the business multiple times faster.
Automation is another key aspect that allows fintechs to grow easily reducing manual effort and errors. In the ends, scaling the business becomes easier.
Scaling your fintech business: Saudi Arabia
Fintech companies are in a booming in Saudi Arabia with the number of companies and their role in the growth of the economy growing significantly. In 2021, Fintech companies in Saudi Arabia raised $239 million, capturing 24% of the total funding received by start-ups. VC Funding is also on the rise with Saudi Arabia emerged as the leading country in the MENA region in 2023 setting a new record with an impressive $1.38 billion in VC capital deployed.
As an emerging market for fintechs, the key to successfully scaling up your fintech business is different than at a global level. Some of the key things that founders need to keep in mind while scaling their fintech business in Saudi Arabia are: -
Security of Customer Data
Saudi Arabia has a range of data protection laws aimed at safeguarding the confidential financial and personal information of its citizens. Fintech firms have to adhere to these rules, which involve establishing stringent security measures related to the processing, storage, and transmission of data to avoid unauthorised access or data breaches.
Based on a report by MasterCard, 98% of financial technology start-ups are vulnerable to attacks by hackers and fraudsters. As such, fintech companies in Saudi Arabia need to heavily invest in their security infrastructure to ensure protection of consumer data.
Open Banking
Open Banking is a new concept wherein fintechs can partner with commercial banks in Saudi Arabia and gain access to their data. An example is the Cashin’s partnership with Saudi National Bank to offer an integrated financial platform for SMEs. By making use of such collaborations, fintech startups can easily grow their business in Saudi Arabia.
Revenue Diversification
Many times, VCs are attracted to Fintechs that have diversified revenue streams lowering the overall risk. It also offers better potential for scaling the business.
About Finmal Fintech Fund
Several high-profile investment funds have already stepped up to address the funding gaps in the fintech sector, including Sanabil Investments and Shorooq Partners. Fintech funds launched by Tanmeya Capital also offer exposure to the growing Saudi Arabian fintech sector. Tanmeya is focused on bridging the financing gap in Saudi Arabia’s SME sector along with the support of several government initiatives. In the Vision 2030 scenario, the credit gap in the SME sector will improve dramatically from a shortfall of SAR 372 billion in 2020 to just SAR 94 billion by 2030. To offer investors attractive risk-adjusted returns through exposure to financing solutions for eligible SMEs, Tanmeya has launched the Finmal platform with a rigorous credit scoring of SMEs to evaluate the financing eligibility of SMEs. Leveraging its robust data analytics platform, the Finmal platform is designed to reduce credit repayment risk while partnering with strategic financial partners for disbursing secured loans. Finmal’s edge is its access to a massive pool of robust SME data. Funds will be deployed for various means, including supply chain financing, POS financing, and consumer financing that help SMEs to overcome their operational financial challenges and scale beyond.
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