Fintech valuations seriously challenged after a booming 2021
- Private and public markets are taking a more cautious approach towards valuing fintechs, as the recent market sell-off coupled with macro headwinds are raising concerns.
- This comes in contrast with the optimism displayed last year, which saw record numbers of capital pouring in the fintech sector, and wave of fintechs going public.
Private investors have switched gears on fintech companies, pressured by the recent market sell-off to start scrutinizing valuations - a 180 degree switch from the enthusiasm displayed just a year ago.
Fintechs in need of capital might hit a wall of skepticism from both private and public markets, which are eyeing more economic discipline given financial performances in the sector and wider macroeconomic conditions.
This comes in contrast with last year’s investment arena, when fintech was one of the best funded startup sectors. Reports suggested that one in five VC dollars went to fintech startups in 2021 - a year which also saw record numbers of venture capital money.
2021 was the largest and most active year ever for private fintech company financing activity with $141.6 billion in total dollar volume raised across 3,573 funding rounds, according to FT Partners. This was fuelled by 400 funding rounds north of $100 million and 36 rounds of more than $500 million - unprecedented levels in the sector.
However, stock performances of most fintechs that went public last year have been pretty discouraging. Of those that IPOed in 2021, the majority started the year in the red, with their valuations brought down compared to their public launch levels.
Plus, rising inflation in the US and hiking interest rates are generally considered headwinds for growth stocks. And many fintechs have placed their bets on growing aggressively, which makes them vulnerable to swings in equity markets.
Having already placed some big bets on the fintech sector, fuelled by positive market signs such as rising demand for digital financial products during the pandemic, private and public markets are now taking a more cautious approach.
To IPO or not to IPO?
As fintechs stocks took a tumble, big investors such as TigerGlobal have started to demand lower valuations from startups. This could signal that last year brought some inflated and unsustainable valuations from private markets, which then reflected in the big downfalls we saw in public markets.
And this general lack of market confidence is also having a cooling effect on more mature fintechs, acting as a deterrent from pursuing a public listing. Given current market conditions, this might not be the best time to sell for late stage private investors.
After a generous 2021, many private funds are willing to put money into their portfolio companies and stay private longer, according to Matt Kennedy, a senior strategist at IPO research firm Renaissance Capital.
“Many companies don’t want an IPO down round as we’ve seen in the past and they want to give them some time to focus on improving their profitability, which will be important,” Kennedy said.
For example, mobile savings and investing neobank Acorns closed a $300 million Series F round earlier this month, a capital injection that CEO Noah Kerner viewed as effectively as a “pre-IPO round”. The round valued the company at $1.9 billion.
Acorns wanted to go public last year and planned a SPAC merger in May 2021 at a $2.2 billion valuation, when the appetite for such deals was peaking. But the neobank then scrapped the plan earlier this year due to mounting concerns that opting for a SPAC would result in the company being “lumped into a group of companies that perhaps were valuing themselves in inflated ways,” according to Kerner.
"One of the things that I witnessed was that the number of groups forming to launch SPACs, combined with the number of companies that were planning to go out that way or did go out that way, created a very different relationship and perception around the vehicle," Kerner said in an interview.
Acorns had to pay a $17.5 million break-up fee after the canceled IPO, but this might be a smaller price to pay than losing hundreds of millions in enterprise value.
“Private investors are taking a long, hard look at the companies they invest in. They’re taking a long, hard look at valuations. I’ve had conversations where private market investors were cutting valuations in half,” Kerner said.
Meanwhile, Chime was also a big candidate to go public at the beginning of this year. But Forbes reported that the company’s IPO has been pushed back to late 2022, after initially targeting a March 2022 offering at a $35-$45 billion valuation. The neobank raised $750 million in its latest funding round last August, setting a pre-money valuation of $24.3 billion, with Sequoia Capital as lead investors.
However, Forbes’ source said the recent market selloff was not the cause for the delay, as the decision was made before stocks started to tumble – instead, it was because Chime wants to focus on rolling out new products.
Grow at all costs?
Despite the recent mishaps, neobanks like Chime and Acorns are currently flush with capital. Since the beginning of 2020, Chime raised $1.7 billion, and Acorns $600 million to fuel their growth. But the biggest bets were placed on Robinhood, which took in $8.1 billion over the past two years.
Private investors were eager to bet on the opportunity presented by the pandemic, when consumers were increasingly open to banking with a digital-only bank, providing a fertile ground for growing customer bases.
Moreover, neobanks have the competitive advantage of lower operating costs due to a lack of branch infrastructure, plus the flexibility of designing systems to be easily integrated with third-party APIs and drive better customer insights.
However, profitability remains an issue for most neobanks, and valuations will also depend on how these companies perform as businesses. Their strategy was to pursue growth to capture as much market share as possible, hoping that it will translate into profits later on.
“The reason we are so consumer growth and coverage obsessed isn't for some sort of a vanity number, but the fact that ultimately, we intend to come to market and say, we are the largest network. We are the most active network. We would like you to pay for that appropriately. And so this growth is a direct tie to the path to profitability,” said Affirm’s CEO Max Levchin in a recent conference call.
But an aggressive growth strategy coupled with towering valuations exerts pressure for delivering consistent expansion, visible in the rising sales and marketing costs at some neobanks. For example, MoneyLion’s marketing expense relative to revenues nearly tripled in a year from 13% in Q3 2020 to 31% a year later, according to S&P Global Data, most of it going towards digital advertising.
And if you add intensifying competition to the mix, the marathon to profitability might turn into a sprint.