business valuations
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Are Fintech Valuations a Good Measure of Success?

Fintechs love shouting about a blockbuster valuation. Their press releases burst with pronouncements about ballooning valuations, rocketing fintechs into new spheres of success.

Revolut has become the “most valuable fintech in Europe”; Klarna has become the “fourth highest-valued fintech in the world”; Zilch is now the “fastest company” in Europe to reach unicorn status.

While funding rounds and the valuations extrapolated from them have taken a knock recently, funding rounds are, generally speaking, the lifeblood of fintechs (and, some might argue, the lifeblood of fintech publications too).

But whether valuations in a vacuum are a good gauge of a fintech’s success has been a long-running debate, a debate that has heated up amid recent downrounds and job cuts across the sector.

In 2001, the Guardian newspaper questioned the then six-year-old Revolut’s £24billion valuation, which was then 70 per cent higher than Lloyds Banking Group stock market value.

It pointed out that Revolut made a £168million loss in 2020 while Lloyds, which accounts for 19 per cent of the mortgage market and 25 per cent of credit card balances, made a pre-tax profit of £1.22billion.

Damon Chapple, co-founder and CEO of fintech lender Sonovate, said: “Obviously valuation is a hugely important factor, particularly for an early-stage fintech looking to rapidly scale, but it’s not the only factor that investors – or the business – should be relying on as a measure of success.”

VC considerations when pricing fintechs

It is worth remembering that VCs consider a range of factors when pricing fintechs, depending on the fintech’s age.

As a general rule of thumb, VCs price early stage fintechs (pre seed and series A)- where the fintech could be pre-revenue earning and there are few financial metrics- based on the fintech’s growth potential and hype and excitement around it.

At this stage, VCs will scrutinise the fintech’s market opportunity, its USP, and the quality of its team. In later stages (Series A+), VCs factor in financial metrics such as revenue, daily active users, customer acquisition cost (CAC).

Despite the different pricing metrics, valuations are “always important”, says Ollie Purdue, partner, VC fund Antler.

Valuation always important

Purdue said: “Valuation is always important because it’s the underlying worth of a company. If valuation is not growing fast, is the company really succeeding?”

But the swift fall from grace of Klarna and SumUp, two of Europe’s most highly valued fintechs, which saw their valuations take 85 and 60 per cent plunges in recent downrounds, perhaps highlighted the shortcomings of valuation alone as a solid measure of performance.

Jinesh Vohra, founder and CEO of digital mortgage assistant Sprive, said: “You need to look at metrics on how it’s currently performing. Valuations factor in growth potential which can be misjudged. Metrics such as revenue, profits, customer satisfaction, growth rate, and customer acquisition cost etc can give you a better idea of how a fintech is performing.

“Additionally, it is important to look at the company’s financials and management team as well as their execution of their business strategy and track record.”

Chapple says the performance of fintechs can be helped (leading to fresh investment) by founders and bosses laying out to investors and staff how they define success, be it market share or employee retention, so everybody is working towards the same goals.

Then there are factors beyond hard numbers, such as environmental impact, employee culture, and the ethics of how a company is being run, for investors to weigh up.

ESG performance of fintechs is now firmly on the radar of VCs.

Allica Bank CEO Richard Davies said that during the bank’s investment rounds, there had been discussions with investors about the diversity of its leadership team and “how do we [Allica Bank] think about that”.

Allica Bank has increased the number of women in its leadership team from around 11 per cent to 35 per cent since Davies joined the bank the fintech in 2020.

No ‘playbook’ for success

Despite the wealth of metrics available to investors, one VC said there was no “playbook” for investors to follow when weighing up fintech investments.

Speaking on the 11FS podcast, Katie Palenscar, managing director & global head of venture studio, Anthemis, the fintech investor, said: “I think the tricky part is that we expect some type of playbook where first you have so many daily active users, then you try and get that CAC down. But it actually happens in so many different orders for different types of businesses.”

She added it was not a “slam dunk” that highly valued fintechs were necessarily seeing growth.

“I would also say VCs can look across their portfolio and I would say some of their highest valued asset companies are probably ones that also keep them up at night,” she added.

Importance of metrics to different fintech sectors

A further consideration for VCs is weighing up the importance of particular metrics to whichever fintech category they are investing in.

Is profitability more important to a loss-making neobank which is hoovering up customers or to a profit-making BasS business which is struggling to attract new clients?

Lucas Timberlake, general partner, Fintech Ventures Fund, an early stage VC fund, points out that metrics such as ARR (average annual return) are important for SaaS firms; GMV (gross merchandise value) for marketplaces; and AUM (assets under management) for more financial management tools, or loan origination for lending companies.

Market share ‘less important’

“Market share is less important of a factor, as most areas of financial services are highly fragmented and competitive, and will likely remain so,” adds Timberlake.

Vohra says: “It really depends on the stage of the fintech and different metrics will be more relevant depending on whether it’s a B2B or a B2C business.

“However, I would say metrics such as revenue, active user numbers, profits, market share, retention rate, efficiency ratio and burn rate are definitely good indicators.

Who are valuations most important to?

Then there is the question as to whether valuations are most important to VCs or founders?

A fintech’s valuation will be important to investors who are looking to exit the business, as it will be to a founder, who sees their shareholding diluted through funding rounds.

Timberlake says: “Valuation is equally important for both founders and investors, but in different ways. Founders look at valuation as a proxy for their own net worths and as a tool to attract high-quality talent through stock options.

“Investors are sensitive to valuations, as they are typically looking for specific ownership targets for certain check sizes.”



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