While the banking world watches American lender First Republic publicly convulse after its earnings report detailed a widespread evaporation of its deposit base, the startup world of neobanks is taking blows as well.
Earlier this week, Revolut, a highly valued, U.K.-based neobank saw its valuation decline by some 46% in the eyes of one of its backers.
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Given that Revolut last raised $800 million at a $33 billion valuation in mid-2021, it stands to reason that it was likely overvalued at the time — show us a nine-figure startup round from those times that fits neatly against today’s valuation marks and we’ll buy you a smoothie.
But Revolut getting such a sharp valuation cut nearly two years after it was last priced made us sit up and take notice.
There was a time when the “neobank for X” market was amongst the most popular startup models, after all. Mountains of capital were invested into dozens of global startups looking to reinvent or at least revamp consumer and SMB banking. It even led to some liquidity, including the massive Nubank IPO and its resulting 11-figure valuation.
Revolut’s revaluation raises a few questions: How much trimming is there left to do in the fintech world? And, are we likely to see something similar more generally in the neobanking startup sector?
A Revolut spokesperson said:
We do not engage in speculation on our valuation. Since our last funding round, in which we were valued at $33 billion, Revolut has continued to perform strongly in all its markets, has continued to hire and expand, and reported its first full year of profitability.
This morning, we’re parsing what happened in venture in Q1 2023 as well as a handful of data points from F-Prime’s fintech index and resulting reports. Then, we’ll cover the most recent neobank financial results we have and come to a conclusion on how much pain — or how little — neobanks can expect in the months ahead. To work!
Money in, money out
We have fintech funding data from CB Insights for Q1 2023, but it comes with a huge asterisk. Without additional context, funding to fintech startups increased 55% from the fourth quarter of 2022, making for a global tally of $15 billion.
The caveat, though, is that Stripe’s latest $6.5 billion raise alone accounted for more than a third of that sum. If you exclude that round, the tally comes down to $8.5 billion, which represents a 12% quarter-on-quarter decline.
That’s the big picture. Looking at the fintech cohort more closely, we are curious about which categories outperformed others. Data of that kind on private companies is hard to come by, but we have some interesting insights on public companies.
According to F-Prime, all fintech verticals saw their average market cap decline post-IPO, but B2B SaaS and payments resisted the downward trend better than others. Banking fell somewhat in the middle, declining more than the average fintech index but still outperformed subcategories such as insurance and proptech.
However, banking is also the sector with the steepest market cap decline for a single company. The company in question is Dave: At the time of F-Prime’s report, its share price had plummeted 96% since it went public via a SPAC in January 2022. You could argue that its business overlaps with the lending category and not just banking, but even so, it fell more sharply than the average lending fintech.
The bad news does not just involve lending, SPACs or Dave. Public fintech companies as a group, in F-Prime’s words, “enjoyed historically high valuations in 2021 but have fallen below historic mean valuation multiples.” While two-digit multiples weren’t unheard of back in 2021, they were very much a thing of the past in 2022.
Narrowing our focus, it appears the average EV/LTM revenue multiple for banking firms fell to 4.6x in Q4 2022 from 12.6x in Q4 2021, per F-Prime.
These public companies’ struggles are dripping down to private valuations, especially at later stages. This has translated into several high-profile down rounds and valuation cuts.
That’s not to say that up rounds are not happening. The difference may lie in each company’s ability to adjust to investor preferences, which have shifted from growth-at-all-costs to profitability, and that mandates investors value each company on its own merits.
Still, we can draw a few conclusions from this trend of outperformers getting their valuations slashed.
Neobank results
Let’s examine the most recent data from Starling, N26, Monzo and Revolut. You may note that we have data on U.K. and European neobanks and not American players, but that’s a quirk of how certain fintech startups in different markets share data. Naturally, we’d prefer for Chime to drop a brick of numbers as well, but American startups seem to think that sharing operational data is akin to blasphemy, so we have to work with what we have.
The most recent data we have on Revolut is from 2021. When those figures dropped, TechCrunch+ noted that the company was profitable. In that digest, Revolut shared that its retail customer base had expanded by 46% to 16.4 million individuals in 2021 from 11.3 million in 2020.
The company’s revenue expanded even more quickly, rising 190% to £636 million in 2021 from £220 million in 2020. That was coupled with a simply massive improvement in its gross margin profile (33% in 2020 and “almost” 70% in 2021), and a resulting operating profit of £59.1 million along with £19.7 million in “total comprehensive income” in 2021.
Those figures help us understand how Revolut managed that $33 billion valuation: Its revenues were climbing fast while also improving in quality. That led to strong operating leverage and profits, and investors wanted a big slice of that pie.
N26, which is based in Berlin, has released its own data through 2021, which shows that while its top line rose by 50% to €182.4 million, its operating costs climbed 30.8%, resulting in a massive net loss of €172.4 million.
We have more recent data from Monzo and Starling, competing neobanks in the United Kingdom.
The most recent year-end data for Monzo comes from February 28, 2022. In that period, the company reported net operating income (revenue minus “expected credit losses”) of £114 million, 81% more than what it recorded a year earlier. Unlike Revolut, however, the most recent data we have from Monzo shows continued losses: Yearly losses at the neobank have exceeded £100 million for the past three years.
As for Starling, the most recent year-end information we have on the bank is from March 2022. Revenue at the company rose a staggering 114% to £188.1 million from £87.8 million, which pushed it into the black for a profit of £32.1 million.
If you’ve read this far, you can probably tell that not every neobank is the same. The cohort differs widely in terms of profitability (which we’ve touched on before), but it does share one quality: rapid growth.
We will naturally write more about this when we get the newest data from each neobank. For now, however, let’s derive a conclusion or two.
To quickly recap:
- Neobanks grew fast, at least in the U.K. and EU, through the mid-2022 period, and that was the key result investors coveted at the time.
- Profitability at these firms was improving at the same time, but some players were lagging by quite a bit when it came to operating costs and net incomes.
- Fintech funding and valuations generally followed the ascent and descent of the larger venture market (see above). This lets us infer that fintech startups have been under similar duress ever since investors started preferring profitability over just growth.
- This implies that profitable neobanks, or at least the subgroup that is near to breakeven, are likely enjoying an implied valuation premium compared to their unprofitable peers.
- Revolut’s valuation being cut down by 46%, despite its last report showing its profitability, indicates that historical profitability is not enough to protect 2021-era valuations.
- Thus, less profitable neobanks could be under even greater pressure than Revolut.
A few caveats: Growth at Revolut could have slowed since 2021 and its profitability could have slipped; conversely, profitability amongst its previously less-profitable peers could have improved.
But given what we can see from venture interest (generally low), fintech valuations more generally (also low) and what we know about investor demands, Revolut’s situation seems like awful news for other neobanks. How much more room do less profitable neobanks have to fall? More than 46%?