It turns out fintech is worth as much as SaaS

Lessons from the Remitly, Toast IPOs

Fintech startups are having one hell of a week.

On the heels of Boston-based software-and-payments company Toast’s strong IPO pricing, Remitly priced shares in its own debut above its proposed range yesterday evening. The Seattle-based fintech company sold 12,162,777 shares (7,000,000 primary) at $43 apiece. The company had previously targeted a $42 per-share max price for its IPO equity.

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At $43 per share, Remitly is valued less like a fintech company with gross margins in the 50% to 60% range and more like a middle-tier public SaaS firm, flush with recurring revenues and net-dollar retention north of 100%.

Toast, after seeing its shares rise sharply after starting to trade yesterday, sports a similar revenue multiple despite far weaker blended gross margins.

The lesson from today’s public markets appears to be that revenue growth matters more than near-term margins for fintech companies, allowing them to secure valuations that far surpass their final private marks. It’s an incredibly bullish set of results for fintech startups; they are worth more than they might have thought, or than their investors previously were willing to pay.

All the above is part and parcel of The Exchange’s recent contention that the IPO window is more than open for venture-backed companies. It’s just perhaps even better than that for fintech upstarts.

Let’s do the math, and then ask when the hell Chime and Klarna are going to get off their duffs and go public.

Fintech is the new SaaS?

In the second quarter of 2021, Toast reported revenues of $424.7 million and revenue costs of $336.3 million, giving the company a blended gross margin of just under 21%. Toast has high-margin SaaS revenues, low-margin fintech revenues and then smaller business lines that float around breakeven. It shakes out to a somewhat modest figure.

And worth $30.856 billion this morning, according to Yahoo Finance data, Toast has a run-rate multiple of 18.2x. Per Bessemer data, that’s roughly on par with the median revenue multiple for public SaaS companies.

Our read of the Toast revenue multiple is that public markets are valuing it far more on growth than margins, which means that fintech startups can accrete SaaS multiples no matter their gross margins, provided sufficient near-term revenue upside. Notable.

Remitly is a related if slightly different case. The company has far-stronger gross margins of 55% and 58% in quarters one and two of this year, for example. And the company is growing like a weed (emphasis: TechCrunch):

For the fiscal years ended December 31, 2019 and 2020, we generated revenue of $126.6 million and $257.0 million, respectively, representing year-over-year growth of approximately 103%. We incurred net losses of $51.4 million and $32.6 million, respectively, for those same years. For the six months ended June 30, 2020 and 2021, we generated revenue of $105.1 million and $202.1 million, respectively, representing year-over-year growth of approximately 92%.

For reference, Toast’s H1 2021 growth rate when compared to the same period of 2020 was 105%. Both companies are growing at around the 100% mark, with Remitly sporting far-better gross margins. So, it’s worth more per dollar of revenue, right? Er, no:

  • Remitly Q2 2021 revenue: $111.1 million.
  • Remitly Q2 2021 annualized run rate: $444.2 million.
  • Remitly run rate multiple at IPO valuation: 18.2x.

For the final calculation, we needed an IPO valuation for Remitly. Renaissance Capital calculated that Remitly’s fully diluted valuation at $40 per share was $7.5 billion, a figure that scales to just over $8.0 billion at $43 per share. We used that figure in our multiples calculation.

Regardless, despite having a similar growth rate and better margins by far, Remitly is also valued at around 18x its run rate. Now, Remitly could enjoy a kick-ass first day of trading — as Toast did — and see its revenue multiple scale nicely. But the company value is a neat little puzzle in the wake of Toast’s debut.

A few thoughts on the weird situation the market is presenting us with:

  • Toast’s strong multiple despite its slim margins could be investor belief that its software business has lots of room to run, perhaps improving the company’s blended gross margins over time; for software-and-payments companies more broadly, that optimism would be good news.
  • Or, Toast is overvalued.
  • Or, Remitly is undervalued.
  • Or, both are overvalued, and Toast more so.

No matter which explanation you prefer, it’s clear that public markets are valuing fintech companies with great gusto. That’s something that private-market investors should take note of.

Toast was valued at $4.9 billion in early 2020, per Crunchbase data. Now it’s worth more than $30 billion. Whoops!  Remitly was itself valued at around $1.5 billion in mid-2020. Now it’s worth more than $8 billion. Whoops!

Forget an IPO pop; it appears that venture investors are the real gods of undervaluing private companies.

We’ll know a bit more when Remitly starts to trade, but the core lesson of our work this morning is that fintech revenues are not taking the sort of valuation hit you would expect from their reality of lower-margin, non-recurring incomes. Investors hungry for growth are more than willing to overpay for such top line provided that growth looks good and there may be a chance for margin accretion.


Maybe all the unicorns out there should, you know, go public now while value investors are still losing the argument.