The Profitability Challenge for Fintech Startups

The evidence from a sample of 20 fintech startups in the UK is that there are substantial profitability challenges that still need to be overcome. As of June 2017, the total equity investment in the sample companies I have looked at has been £852m. The total valuation of the sample at the last valuation round for each company was £2.6bn, but none are profitable and cumulative losses have been £211m.

The sample includes some well-known cases like Funding Circle and TransferWise, and lesser-known companies like Osper and Squirrel. Only one company in the whole sample has reported a single year of profitability, but this has since fallen back into loss. The companies that have reported at least 4 years of financial performance are still losing money as of their last reporting date.

Funding Circle has reported 6 years of financial performance and TransferWise has reported 5 years. These companies are now both saying that they are breaking even on a quarterly basis so perhaps they have reached the turning point. This suggests at least 5 or 6 years are needed before profitability is reached when building a platform, but bear in mind that they have received £267m and £70m of equity financing respectively to get to this point.

Most of the companies in the sample are much smaller than Funding Circle and TransferWise, and the sample size means that we must be careful with general conclusions. However, the median losses are: £0.3m in year 1, £1.3m in year 2 and £2.0m in year 3. One company, Atom Bank, is already losing £22.5m in the third year of operation, substantially more than any of the others.

In none of these cases has there been a valuation down round when raising additional financing so investors appear to be happy to live with these losses (although the valuations of some of the companies have plateaued for the moment). Of course, valuation should depend on projected future performance and not past performance but the lack of profitability of any of the business models which are aiming to disrupt the financial services market must be a concern for investors.

Most of the fintech startup business plans I have seen in the past 10 years project rapidly growing revenues, and profitability, in years 3 or 4. However, this data shows that entrepreneurs and investors need to be realistic in their expectations of profitability and need to plan accordingly so that sufficient funds can be raised to reach break-even. For the founders, it is crucial to understand this in order not to be diluted more than is necessary. Corporate investors will be particularly challenged given the usual requirements for a quick return on investment within large financial services companies.