The valuation of fintech startups remains relatively high even though financial performance for most is very weak. Investors are currently supporting the higher valuations because of expectations of future performance, but the lack of profitability and in some cases very low revenues (given the investments made) cannot continue indefinitely. There are a few exceptional cases and some relatively strong performers are emerging (e.g. TransferWise), but the majority of companies are far from showing they can survive independently in the long term.

I have recently completed an analysis of 66 fintech startups in the UK which represent, in value terms, nearly two thirds of the 2017 and 2018 venture investment in UK fintech. These companies have raised a total of £3.0 billion, are valued at £10.1 billion, and have cumulative losses of £0.9 billion. A few highlights are:

• Financial performance is weak – losses increased in the latest financial year for 74% of companies and only 11% are breaking-even or profitable.
• Valuation growth is strong – the median increase in value per share from first round to latest round is 6.1x and the median IRR for first round investors is 86%.
• Funding rounds in the first 9 months of 2018 were at a median increase in value per share of 45%. The variance is high, and some companies are raising new funds with little or no uplift in value.

There are examples from other markets where investors are prepared to tolerate losses over a long period of time e.g. Spotify (music streaming). This is in the belief the companies are building a platform which in the long term will be hard to replicate and will generate significant profits. However, few if any of the companies in my sample have the characteristics of a true platform businesses.

Of course, investors do not expect all the businesses in their portfolios to be successful so the fact that some of these startups might fail is not necessarily a disaster. Nevertheless, a profitable exit is needed for at least some of the portfolio and this can be either by a trade sale or by an IPO. The recent IPO of Funding Circle illustrates this is possible, even for loss making businesses (although the later stage private investors in Funding Circle have achieved only modest returns and the share prices is currently well below the IPO price).

I expect that pressure is starting to build on some of the longer established fintech startups (i.e. those operating for at least 5 or 6 years) to improve their performance and/or find a profitable exit. Future challenges will also be significant. This wave of fintech companies is yet to go through a downturn. Monoline businesses can be more at risk in a recession and most of these startups do not have diversified revenue streams.