Is debt financing the new big equity round in fintech?

After months of reading about hefty equity rounds, financing trends in fintech may be changing. Klarna, a leading European payments upstart, said on Monday that it had raised 300 million crowns (it’s based in Sweden). The firm is, after all, a major player in Europe, handling about 10 percent of all online transactions, according to Reuters. But, perhaps a sign of the changing tide in startup land, instead of a big splashy equity financing, this one was done as debt.

“Klarna is picking up speed in year-on-year revenue growth because of success of recent product launches and markets expansion,” said Jesper Wigardt, Klarna’s PR manager, in an email to Tradestreaming. “We issued the inaugural capital market loan in order to diversify funding sources and to strengthen the capital base to support continued accelerated global growth.”

Why use debt when you can use equity?

This was Klarna’s first time dipping into debt markets, but other top private technology firms have turned away from equity to finance their operations. Earlier in June, Airbnb announced it had raised $1 billion in debt financing. Though the hospitality marketplace still has $2 billion banked, it turned to straight debt financing to add to its coffers.

For fintech firms, using straight debt is generally a new phenomenon. Up and coming financial technology firms have a variety of financing options and straight debt may prove to be a smart financial move.

“If a company is growing rapidly, and has sufficient cash flow, debt can be a more cost effective financing tool than giving up large percentages of equity,” remarked Kyle Zasky, a partner in fintech merchant bank, SenaHill Partners.

Private fintech firms don’t normally turn to debt markets

Private technology firms are accustomed to using various forms of debt to scale up. The most common, convertible debt, enables a young, upwardly mobile firm to raise money quickly without having to quibble over early-stage valuations. Using convertible debt, which turns into equity at a later financing round, startups and their investors can kick the valuation can down the road to a later-stage investor to set after the company has matured somewhat.

Transportation-on-demand leader, Uber, used convertible debt earlier this year when it closed a $1.6 billion investment round. According to Bloomberg, Uber’s bond, which was sold to Goldman Sachs clients, is a six-year bond and converts into equity at a 20 percent to 30 percent discount to Uber’s valuation at the time of an initial public offering. Convertible debt typically pays a coupon but the intention for all involved is that the debt eventually converts into equity. Facebook raised billions of dollars in convertible debt shortly before its IPO. Big banks frequently use access to late-stage, pre-IPO convertible debt as a way to let favored clients into hot companies at preferential terms when the stock hits public markets.

Online lenders do use debt, but differently

Online lenders have also been using debt to capitalize their businesses. Firms like Affirm, Avant, and Payoff, all which provide online consumer loans and recently closed large investments, use debt facilities to replenish their inventory of cash to loan out to borrowers instead of lending out their own equity. But unlike convertible debt, which is dilutive, these types of fintech investment rounds don’t impact cap tables. Firms like Victory Park Capital, a Chicago-based alternative lender, and other big banks lead large debt rounds for the online lending industry.

“In fintech, there are certain business that lend themselves well to debt, such as lending businesses or companies that just need capital on their balance sheet for regulatory purposes,” said SenaHill’s Zasky.

Using straight debt to finance growing startups isn’t as common, though. Reuters reports that Klarna’s debt comes in the form of 10-year notes with a floating rate based on three-month Swedish interest rate plus 4.5 percent per year, or an initial coupon of about 4 percent.

Klarna claims it’s profitable and Swedish media has reported that the firm fetched a $2.25 billion valuation after Swedish insurer Skandia invested.

So far, Klarna is the first headliner to diversify its funding sources in this way. Time will tell if tapping the debt markets becomes more common and whether it makes its way over to domestic markets, too.

 

Photo credit: markus spiske via Visualhunt / CC BY

Startup Roundup: Goldman Sachs, American Express placing further fintech bets

fintech companies making news this week

[x_alert type=”success”]Every week, we write about fintech startups raising money, making partnerships, and generally disrupting finance[/x_alert]

This week, finance’s who’s who soiréed at the Economist’s Buttonwood Gathering. The one question that seemed to underly all the discussions and break out sessions:

  • what about banks?
  • What’s the banking sector’s role going forward when fintech is disrupting from above, below, and laterally?

The Startups: Who’s shaking things up

Inside Monese, the mobile banking app for migrants (Tradestreaming)
The app lets people sign up with just a picture of a passport and a selfie in as little as 3 minutes.

LendKey Enhances Lending-as-a-Service for Local Banks & Credit Unions (Finovate)
Tradestreaming Tearsheet: Even in this newsletter there’s lots of talk about the competition hitting banks. New platforms like LendKey don’t disintermediate them as lenders; instead, they help them create digital offerings and compete. It will be interesting to see how many banks adopt platforms like LendKey or instead partner with the larger online lenders.

Indiegogo Launches Generosity To Compete In Personal Crowdfunding (About.com)
Tradestreaming Tearsheet: After GoFundMe’s (crowdfunding platform for personal campaigns like paying medical bills or tuition) success and raising massive amounts of capital, Indiegogo wants more of the market and relaunches (and rebrands) its own offering, Generosity.

Digital currency is poised to reinvent how startups are funded, led by Chroma Fund (TechRepublic)
Chroma Fund is a crowdfunding site powered by the blockchain, the same underlying technology that powers Bitcoin. Learn how it’s preparing to disrupt startup investing.

From start-up to incumbent: the innovation cycle (The Finanser)
Tradestreaming Tearsheet: Interesting framework to think about growth in the fintech industry and how that maturation unfurls for startups on their way to becoming larger, incumbent players. Useful for startup founders and those investing/partnering with fintech startups.

RushCard Breakdown Affects Thousands of Prepaid Debit Card Users (NYT)
The troubles, lasting much of the past week, illustrate the potential perils for those without access to the banking system.

Co-Founder of Capital One, Nigel Morris, Joins Zopa Board (Crowdfund Insider)
Morris, currently the Managing Partner at QED Investors, is the co-founder of Capital One. QED has invested in well known Fintech companies, including, Credit Karma, Avant Credit, GreenSky and SoFi.

OnDeck Adds New Small Business Lending Options (Finovate)
“The expanded product suite includes broader loan terms, increasing the maximum loan amount from $250,000 to $500,000 and granting borrowers up to 36 months to repay (from 24 months). Lines of credit will be available up to $100,000 (from $20,000) for a monthly fee of $20 and no “draw fees.” And repeat customers will be eligible for annual rates as low as 5.99%, as well as loyalty pricing benefits.”

Early Read on Square’s S-1 Filing (First Annapolis)
Good initial read of the payment firm’s IPO filing – what questions it answers and which ones remain unanswered.

Startups raising money this week

Goldman Sachs leads investment in cloud-based POS startup Financeit (Finextra)
FinanceIt enables businesses to offer payment plans to their customers and Goldman Sachs wants a piece of the online lending fintech firm.

American Express Invests In Bitcoin Venture, Abra, Which Announces U.S., Philippines Launch (Forbes)
Bitcoin startup Abra will soon launch in the US and Philippines, and is rolling out a merchant services API. It also received investment from American Express and Ratan Tata.

Citrus Payments Raises $25M (Let’s Talk Payments)
PE firm Ascent Capital and early investor Sequoia are investing $25M in Citrus’s C round. Citrus “makes digital payments and online checkout processes simpler, faster, safer and easier for an 800 million strong electronically connected user base”.

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Top financial startups

With BillGuard headlining the top startups launching at TechCrunch Disrupt this year,  we’re seeing a big pickup in the quality and number of startups attacking the financial/investment field. Whether it’s just a bull market for startups in general or there’s a renewed interest in tackling the financial sector, there’s a ton of innovation out there.

Here’s a list of some of the top startups in the field.  Vote, add your own.  Let us know what you think.

It’s not meant as an exhaustive list — just to get the party started. Continue reading “Top financial startups”

Output volume and velocity trending up at top investment sites

From Mick:

High volume biz publishers: @businessinsider is averaging 1015 posts/week and @seekingalpha 1033 (Google Reader stats for last 30 days)

That’s amazing — not only in sheer volume but in breadth.  Admittedly, a lot of what’s going up is crap and some of it has nothing to do with business/investing (I’m thinking BusinessInsider’s gratuitous slideshows).  It’s a deluge of content.

There is definitely something in the long tail of financial content for everyone.  There is absolutely no excuse anymore for investors not to better themselves or pick better investment/financial advisors to represent them.

Crowdsourcing investments: it’s all about chosing the ‘right crowd’

We’ve spoken a lot about piggyback investing (mimicking the moves of top fund managers) and crowdsourcing ideas (using crowd sentiment to generate trading ideas) as two ‘new ways’ investors can devise profitable strategies.  The Internet is producing tons of information – the tradestream – that investors can plug into to get at this type of data.

But investors keep asking me, “Well, who do we follow?”  And they’re right – the Web continues to provide more and more insight into the daily trading activities of some of the brightest performers but with this onslaught of informational smog, we’re still left with the decision of who to track, who to follow, which crowd to source.  In Surowiecki’s book, in fact, he delves into the difference between smart crowds and not-so-smart crowds. 

TrimTab is one of the leading providers of capital flow information around which it creates trading strategies.  Last week the firm published a whitepaper (.pdf) outlining a contrarian ETF strategy that makes use of this aggregate data and actually bets against the dumb-money — in this case, the average retail investor.

In “Using Equity ETF Flows as a Contrary Leading Indicator” (.pdf), TrimTabs found the following:

  • Monthly  equity  ETF  flows  (as  a  percentage  of  assets)  and  the  returns  of  the  S&P  500  one  month  later  are negatively correlated to the tune of 21.4%. 
  • The  negative  correlation  rises  to  45.6%  for  a  two-month  period,  and  to  52.4%  for  a  three-month  period.  

With this in hand, the research firm created a system that goes long the S&P when money is flowing out of ETFs and sells it when money is moving in.  The results are amazing:

trimtabsperformance

The researchers suspect 2 reasons behind this performance:

  1. they believe that ETFs are typically really liquid and used primarily by retail investors whom TrimTabs believes are the least-well informed investors out there. Or better put, the ETF liquidity “allows investors to make poor decisions any time of day.” Or, as MarketWatch put it, “Simply put, ETF investors are impressively wrong in both directions.”
  2. hedge funds trade ETFs when liquidity dries up in individual stocks. 

Whether this works or not or is just backtested data (it works until it doesn’t), I don’t  know.  But it does drive home the importance of following the ‘right’ crowd or the right guru.  Otherwise, we are just part of the investing noise, not rising above it.

Investment newsletters REALLY bearish — time to buy?

Wow! Expectations that U.S. stocks will drop at least 10% has risen to the highest levels since April 1984.

In a recent survey of investment newsletters by Investors Intelligence, Bloomberg reports that:

The following are results from Investors Intelligence’s
analysis of investment newsletters for Jan. 27 through
yesterday. The company determines the proportion of writers who
are bullish and bearish on U.S. stocks, as well as the
percentage who anticipate a correction, or 10 percent decline,
in the market.

           This Week   Prior Week    Comments
Bullish      38.9%        40.0%      Lowest since July 21
Bearish      22.2%        23.3%      Lowest in two weeks
Correction   38.9%        36.7%      Highest since April 1984

Time to buy?