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My updated research on fintech financing and performance shows that valuation growth for most of the start-ups in the sector is still very strong (on paper) but that revenue growth and profitability continue to be a challenge, even for the companies which have been operating for more than 5 years.
The analysis is based on a sample of 39 privately-held fintech companies, all based in the UK. As of the end of March 2018, they had raised a total of £1.35bn in equity financing, had a total valuation of £4.31bn (as of their last round of funding), and had incurred cumulative losses of £469m.
The average increase in value per share from first round to latest round is 19x (median 5.9x). The IRR for first round investors, which takes into account the different time periods the companies have been fund-raising, is on average 145% (median 92%). There are 3 big winners in valuation terms so far: TransferWise, Funding Circle and Revolut (the latter based on an announced financing in April 2018).
However, only one of the companies in the sample is reporting operating break-even (Transferwise). Furthermore, benchmarking the performance of the longest established companies in the sample on a number of metrics against a successful fintech IPO case suggests that valuations are not entirely justified. I was able to do this for 9 companies which have been operating at least 5 years and are reporting revenues. One of the measures I looked at was the revenue in Year 5 relative to the cumulative losses up to that point. For example, Nutmeg’s revenue was only at a level of 8% of the cumulative losses of the company in Year 5 (revenues of £1.7m and cumulative losses of £20.4m).
Valuations on paper may be good but investors will ultimately only be happy when they have a successful exit. In the wider fintech sector beyond my sample, the sale of ClearScore (credit scoring) to Experian for £275m illustrates that young and loss-making companies can be attractive targets for established companies. There are other success stories. In recent months, Adyen has had a successful IPO and iZettle has been acquired by Paypal. These are B2B payments companies, a fintech sub-sector which appears to have been relatively attractive. In contrast, in the digital banking sub-sector, the large investment needed to become established and achieve scale is affecting performance and valuation negatively when compared to other sub-sectors (although you should note that some of the digital banks are now forecasting profitability in 2020).
The research also shows that angel investors have played an important role in the development of the fintech sector. Over 85% of the companies in the sample received angel investment in their first rounds. The average amount raised at first round was £688k (median £350k) and the average shareholding given to first round investors was 26% (median 22%). The number of angel investors varies widely. In the case of Habito in 2015, there were just 3 angels at first round, all of them experienced fintech entrepreneurs. In the case of Atom Bank (digital banking) in 2014, there were around 20. Another observation is that many of the angels participating in fintech are not professional investors or sector experts, and are often family, friends and former colleagues.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Andrew Ducker Payments Consulting at Icon Solutions
19 December
Jamel Derdour CMO at Transact365 / Nucleus365
17 December
Andrii Shevchuk CTO & Co-Partner at Concryt
16 December
Alex Kreger Founder & CEO at UXDA
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