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  • Shawn Budde

Adapt and Survive in a Changing Economy

A few years ago, I had a conversation with the CEO of a promising credit startup that crashed and sold for parts, just one year after a big raise.


“We raised too much money,” he said. “I thought we could figure out the economics later.”


It turns out the team had pursued an aggressive growth strategy — acquiring lots of customers without focusing on lifetime value and chasing several new opportunities at once.


That decision proved to be fatal for his company. We see a lot of companies that have been doing the same over the last several years. In an environment where the next raise appears to be a given, that strategy can work – for a while.


We’re entering a time when a number of high-growth fintechs are going to experience the sudden impact of a changing economy. Investors are pulling back. Consumers are feeling increasing pain on a number of fronts. The combination means, for some, the runway may be shorter than they expected. Fintechs need to learn how to drive profitability. Now.


My goal today is to help managers assess their position and make the most of the runway they have left. Here are some of the questions managers should be asking themselves, along with some advice based on a few decades of experience in credit, both as a consultant and an operator.


How are we doing?

Don’t look at your P&L. Look at your unit economics.


At Capital One we often talked about “speedboating.” Growing businesses are often outrunning (speedboating) their metrics, especially in the credit industry where lenders have high upfront costs and recoup their investment over long periods of time. Speedboating can make a sustainable business look bad on a P&L statement (e.g. acquisition costs outpace earnings) or a bad business look good (e.g. revenues precede losses). The only way to understand whether your business model is sustainable is to look at the unit economics.


What drives our economics?

Identify your key profit drivers and use them to manage your business. For example, if you have a buy now, pay later (BNPL) business, you probably care a lot about first pay defaults and repeat rates. You may be able sustain a loss on the first loan (due to high upfront costs) if you get enough profitable repeats. If not, you need to bring the economics of the first loan into the black.


How resilient are our economics?

The ability to absorb “hits” is crucial to building a sustainable business. We apply stress scenarios to the key drivers. For example, if repeats stay at the same level, what’s the highest FPD rate that the business can tolerate? Once you understand the bounds, diligently monitoring the performance of those key metrics is key to surviving.


How do we guide the business to profitability?

Credit companies never start out profitable. Acquisition channels take time to figure out. Operating costs improve with scale. Attrition takes work to solve. All of this should improve with time, capital, and lots of hard work.


Lifetime value bridges are a great way to visualize that work, one step at a time.


Figure - Lifetime Value Bridge


To make the bridge work, each step must be realistic and actionable. With some steps, cost savings are relatively easy to assess and realize. For example, you may have contracts that give discounts for scale. Other steps will be much tougher. Reducing attrition, for instance, is typically much easier to imagine than to actualize.


How do we organize the team to deliver results?

Create teams that are focused on delivering results against each step in the bridge. For example, if lowering attrition is one of the steps in the bridge, one team should be assigned to the task of identifying opportunities, executing tests, and delivering results. In this way, each team is focused on a single task and accountable for delivering results.


How do we get buy-in with leadership?

You can’t build a profitable business on the back of unprofitable products. Unit economics provide a great framework for that conversation. The entire team should be able to take in the data and internalize the steps they need to take to drive the business to profitability.


Get started today

The environment has changed. Investors are reigning in investments, valuations are coming down, and a new era is beginning. Like 2009, strong businesses will survive, compelling new businesses will start, and innovation will continue. This environment creates opportunities for managers who can adapt to the new reality.


Focus on unit profitability, manage your economic drivers, understand your resilience, and use a bridge. In the end, a profitable business is a sustainable business. And the easiest raise, is the one you don’t need to do.


You’re not alone. You’re part of a team. You have investors. They all have networks. Ensemblex is a part of those networks and we’re here to help.