For investors, late-stage fintech startups are a lucrative bet

@alex / 7:29 am PST • February 25, 2020

Image Credits: Nasir Kachroo / NurPhoto / Getty Images

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Over the past three months, a number of financial events have occurred in the fintech and finservices world that have caught our eye. Between two rounds at $500 million and two exits in the billions of dollars, financial technology and services startups have been on fire.

Today I’d like to rewind and go over the four largest events from the past three months in fintech and finservices (total value: $13.4 billion) and pull in data on other rounds that have happened recently. This will help us get a handle on what’s going on in the two heated startup sectors.

Recall that our last look into fintech’s venture activity wrapped up its Q4 2019 results. Today, thanks to the punishing news cycle that the sector has kept up over the last few weeks, we’re going a bit further. Into the breach!

Four events

We have two rounds ($500 million rounds for Revolut and Chime) and two sales (exits for Plaid and Credit Karma) to wrap up today. Here’s what each of those deals might tell us about the current market for money-focused startups and investment, starting with our two rounds and followed by our two exits:

Chime raises $500 million, boosting its valuation from $1.5 billion (March 2019) to $5.8 billion (December 2019). Chime’s round demonstrated that the neobanking boom, at least in terms venture interest, is far from over. The America-focused financial services company grew its accounts figure to 6.5 million, giving it a valuation of a little under $1,000 per account; how much revenue and margin it can extract from its existing accounts is almost a red herring given its current pace of growth. But even with the growth caveat, investors have bet big that its long-term revenues will help support a valuation of over $10 billion in time. (The company’s most recent investors expect material return on their funds.) This implies confidence in the long-term economics of neobanking and general bullishness on the company’s category — so the existing 6.5 million accounts better churn out good chunks of top line.
Revolut raises $500 million, boosting its valuation from $1.75 billion (April 2018) to $5.5 billion (February 2020). Chime’s investors were given a fist-bump from across the pond when Revolut, another neobank, also raised a half-billion dollars, seeing its valuation level-peg with Chime’s. (Notably, both companies have raised over $800 million, but less than $850 million, according to Crunchbase data.) The round underscored investor confidence in neobanking abroad, giving the category global aspirations. Revolut intends to use its new funds to focus on fundamentals instead of expansion. The company will still try to grow, mind, but likely at a reduced pace so that it can start cleaning up its income statement. Perhaps we should expect the same from Chime in time?
Plaid exits for $5.3 billion in January 2020, a higher price than its final private valuation of $2.65 billion (December 2018). TechCrunch covered the heck out of this transaction. Here’s our coverage of the pricing of the deal and how Visa sold the transaction to its investors, so I won’t belabor the expiring equine. In short, the Plaid deal showed that there is value being created at the consumer level in the fintech and finservices worlds and in guts of the financial machine. Infra-focused investment, shown to be attractive thanks to the huge value creation at Twilio over the years, was shown to be winsome yet again. That’s good news for companies working along similar lines. (Check the upcoming Equity Monday episode for more on this trend.)
Credit Karma exits for $7.1 billion in February 2020, a higher price than its final private valuation of $3.5 billion to $4 billion. Finally, the exit of Credit Karma with its $1 billion in revenue and 20% year-over-year growth showed that finservices companies can create material value outside of strategic worth. Credit Karma has lots of the latter category as well (the firm’s tax prep tool couldn’t make the parasitic Intuit and its law-bending TurboTax software happy), but the firm is a win not only for fear but revenue scale. It’s a good lesson that, if growth slows, sheer bulk can help lead to a hefty exit.

It’s hard to find a bearish lesson in any of our four events. Let’s see if recent venture data has any negative signals.

Data

We’ll start with some back-of-the-envelope Crunchbase data hunting. What follows are round counts and dollars invested in companies tagged fintech or finservices inside the startup’s database:

Jan. 1, 2019 through Feb. 25, 2019: 524 rounds, $8.44 billion.
Jan. 1, 2020 through Feb. 25, 2020: 259 rounds, $6.08 billion invested.

Narrowing to merely fintech-tagged rounds changes the results to:

Jan. 1, 2019 through Feb. 25, 2019: 318 rounds, $3.61 billion
Jan. 1, 2020 through Feb. 25, 2020: 140 rounds, $3.00 billion

Before you worry that venture activity in fintech is in a free fall, recall that there is lag in venture data; more rounds and dollars will be added as more investments become known. So the gaps will tighten. But what is observable and probably not going to change is that while dollars invested between the two years will probably wind up somewhat close in Q1 2020 compared to Q1 2019 for fintech and finservices companies, round counts do look slower.

This matches what we saw in Q4 2019:

[W]hile it appears that there is ample capital available for later-stage fintech companies around the world, early-stage funding looks like it’s losing some ground in deal terms (as we saw before) and dollar terms (in both comparative, and absolute terms). Heck, the last two quarters of 2019 saw early-stage fintech investing drop to its lowest dollars totals since the last two quarters of 2017.

So the rich get richer, and the younger lose ground.

We could be seeing the tail-end of a wave of early-stage investment into fintech and finservices companies. As the wave of companies moves through the startup maturity cycle, the dollars chasing winners in the category (no sin there) have moved to later-stage startups. More data will help paint this picture more clearly, so we’ll circle back when Q1 ends.

Today, however, it seems that there is ample evidence that late-stage fintech and finservices company are attractive as investments and exits while earlier tranches of the market continue to fade some.

For investors, late-stage fintech startups are a lucrative bet

Four events

Data

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