By Henrik Grim, MD of Europe for Capchase, discusses why fintech startups might want to think twice before reducing their headcount in this period of economic uncertainty

If you’ve been paying any attention to tech commentators recently, it will have been difficult to miss the coverage on the number of startups making layoffs or introducing hiring freezes at the moment. After explosive growth and the sky-high valuations of recent times, the current trend is a less positive one, and it is widely recognised that the fintech bubble of the past few years is beginning to burst. While money is still available, the market is becoming more risk-averse, with funding less easy to access and rounds less frequent. This means that founders are looking at how to control costs and manage their capital effectively to extend their runway for as long as possible. Many of these startups are looking to reduce their headcount, often following a period of rapid expansion as businesses benefited from the investment boom, as an obvious place to start to achieve this. However, while it can seem tempting to take quick action now and ensure a streamlined operation, making layoffs as part of an instant response to the changing economic environment may, in many cases, be counterproductive in this downturn.

Whilst it is natural to look back at previous bubble bursts to see lessons learnt and likely scenarios for how it will play out this time, I’d argue that the tech recession of 2008 will not be very useful in guiding founders on the best course of action to take for a number of reasons. Firstly, European tech is in a very different place to fourteen years ago, with development in areas like fintech making it almost unrecognisable. In terms of scale, the industry is many multiples bigger, and it now impacts every part of how businesses and consumers across every vertical operate and use money, not just focusing on payments and transfers. The same is true for other tech categories, from SaaS to ecommerce, through to cybersecurity and martech. We aren’t going to see a recession that uniformly knocks back every type of startup, as is perhaps the perceived wisdom. The European tech industry is simply too broad and deep for that to practically happen. Fintech itself is likely to experience more of a mixed bag. Pure tech startups that have higher margins and good capital efficiency are going to fare a lot better than their ‘tech-enabled’ counterparts.

Another key difference is that the startup scene is not solely reliant on VC capital to fuel growth these days. In 2008 the collapse in traditional sources of funding meant that new startups struggled, failures were exacerbated and growth severely curtailed. Crucially, viable startups were caught up in the storm, requiring them to make deep cuts which damaged their businesses and made recovery difficult – and in some cases – impossible. Not only did this prolong the recession it helped cause a domino effect which impacted much every tech vertical. Today founders have the ability to access a large and rapidly growing alternative financing scene. There are scores of companies offering numerous ways for viable startups to continue to get capital and allow them to weather the storm. Traditional finance is also very different. Previously, getting a loan from a bank was essentially out of the question for many startups, now it’s a real option. Although many alt finance startups get their capital from VCs, most have built up huge war chests of credit over the past few years. For example, Capchase has raised hundreds of millions with our last round earlier this month. The sector is more than capable of picking up a lot of the slack as VCs retreat.

Fintech founders need to think about positioning themselves for the bounceback, and making sure they are well placed to benefit when the economy rebounds, but by reducing the size of their team they could well find themselves clipping their startup’s wings. Making layoffs to protect the bottom line can actually become a self fulfilling prophecy. This is because the first team members that are let go are often in functions such as communications, sales and customer service. Inevitably this impacts the customer experience and the ability of a startup to continue to grow. It also reduces team morale, as they have to take up the slack and perceive that the promising startup they joined is now struggling. Furthermore, investors will be looking for signs that startups have what it takes to weather the storm, and when they see a company shedding talent, they may take the view that it doesn’t have the ability to innovate and grow.

If the recession is, as I suspect, going to be shallower and focused on overheated parts of the tech industry, startups that have quickly cut their headcount may find it is a lot harder, and more expensive, to hire than it was to fire.Their competitors who haven’t made the same layoffs will be better placed to take advantage of any post-recession boom. In some cases, founders may find their former team members have created their own ventures that represent a direct challenge, or, with the tech talent shortage, that other startups have capitalised on bringing in the great talent that has become available as a result of companies laying off teams.

It is obviously vital to make prudent financial decisions at this time, and to keep a very close eye on your runway, when potentially the future viability of your business is at stake. But I would urge that making cuts in haste as a reaction to the wider market uncertainty may mean that you may repent at leisure, and instead to focus entirely on your own circumstances, carefully considering the options available to you. Talk to your existing customers and team to get a detailed understanding on what is practically happening, rather than basing decisions on information from those outside your business. Use this an opportunity to look at where you can streamline operations, after a boom period where potentially decisions were taken with a different financial perspective. For example, consider making temporary reductions in expenditure such as freezing peripheral activities such as team parties and business travel. Focus on serving your existing customers and think about how you can pursue a more aggressive sales or marketing strategy to ensure growth continues. Bear in mind that there may be alternative finance options available should you require more of a buffer. As the old saying goes, when times get tough, the tough get going, and founders might do well to remember that.