What is a Fintech Unicorn, you ask? Generally understood, it is a new financial technology firm with a $1B+ plus valuation, typically driven by the potential disruption of the financial services industry. The process goes like this:

1. Step 1: A Venture Capital firm gives initial funding to a founder who pitches a big idea that will disrupt an existing stagnant fintech vertical.
2. Step 2: The Fintech firm builds a prototype or Minimally Viable Product (MVP) and gets an initial client, then either repeats Step 1 with a VC firm or moves to Step 3.
3. Step: 3: The Fintech firm pitches private equity firms to provide additional capital to the firm to burn as they grow sales, R&D, and client support teams while hoping to see “J curve” like growth.
4. Step 4: Likely after a few years or months (depending how fast the Fintech firm is burning through their cash), they will need to recapitalize, again forecasting massive J curve growth potential to the next investors.
5. Step 5: Firm goes public to access further capital to fuel growth or
6. Step 6: Sells to synergistic buyer looking to demonstrate to investors their ability to grow through acquisition.

Unfortunately, what has driven the Fintech Unicorns will ultimately be their downfall.

Pouring massive amounts of capital into firms that have little to no revenue and negative cash flow has been a relatively low risk proposition for the past few years as the possibility of growth and disruption has fueled valuations, but COVID19 and all that it has brought with it will prove to be the upending of the craze.

The problem with the recent approach to Fintech startups is that steps 1 through 6 can require a substantial amount of capital. We have quickly seen capital become much harder to come by and liquidity risk becoming a significant concern for business continuity as a result of the current COVID19 crisis. The result, if the crisis continues, is substantial consolidation, rationalization of capital expenditures, and the drive to become cash flow positive across the board for Fintech firms.

What will emerge? Who will survive? 

A new kind of Fintech Unicorn.  Not one based on a $1B valuation, potential for market disruption, or the biggest team of Silicon Valley developers. Instead they will have some combination of the following:

1. Culture over Strategy. Fintech Unicorns are marked by a big idea that will change the game, disrupt an industry, or bring new possibilities. Don’t get me wrong; a hot strategy is always good. However, the patience of investors and interest in throwing new capital at the hot strategy that isn’t growing will become limited. Instead, firms that have a culture that has ridden multiple technology innovation cycles and adapted through them will be seen as able to survive stronger.
2. Positive Cash Flow. The ability to control your own destiny and not be forced to serve the interests of an outside investor will be focused on long term value through a short-term storm.
3. Experienced Depth Chart. Fast growth is great. New ideas bring innovation. A deep bench enables you to deliver in the fourth quarter. Fintechs with many years of average experience will likely have a vibrant mix of ideas that can synergize. However, during a market downturn, buyers will value the depth and experience of their providers and look for consistency and the ability to deliver. Teams with a deep bench bring just that.

When we look back many years from now, a fraction of the current names in Fintech will be operating, and those that remain will be true Fintech Unicorns.