Fintechs love to yell about blockbuster valuations. Their press releases are full of statements about soaring valuations, fintech’s surge into new realms of success.
Revolute It has become “Europe’s Most Valuable Fintech”. Klarna has become “her fourth most valuable fintech in the world”. Zilch is now the ‘fastest company’ to reach unicorn status in Europe.
Funding rounds and their estimated valuations have taken a hit lately, but generally speaking, funding rounds are the lifeblood of fintech (and some argue it’s also the lifeblood of fintech publications. some).
However, it has long been debated whether valuation alone is a good measure of a fintech company’s success.
In 2001, Guardian Newspapers questioned Revolut’s £24 billion valuation, which was then six years old. Lloyds Bank Group stock market value.
Revolut posted a loss of £168m in 2020, while Lloyds, which accounts for 19% of the mortgage market and 25% of credit card balances, posted a pre-tax profit of £1.22bn, it notes.
Damon Chappleco-founder and CEO of Fintech Lender sonovate, “Obviously, valuation is a very important factor, especially for early-stage fintechs that are looking to expand rapidly, but it is not the only factor that investors and businesses should rely on as a measure of success.”
VC considerations when pricing fintech
It is worth remembering that VCs consider different factors when pricing fintechs, depending on the age of the fintech.
As a general rule of thumb, VCs set prices for early stage fintechs (pre-seed and Series A). Fintech can be earnings before earnings, with few financial metrics based on the growth potential of fintech and the hype and excitement around it.
At this stage, the VC will scrutinize the fintech market opportunity, USP and quality of the team. In later stages (Series A+), VCs take into account financial metrics such as revenue, daily active users, and customer acquisition cost (CAC).
Despite varying pricing metrics, it said valuations “always matter.” Olly Purdue Partner, VC fund Antler.
Valuation always matters
Purdue said: If the valuation isn’t growing rapidly, is the company really successful?”
But a rapid fall from grace Klarna and total, Two of Europe’s most highly valued fintech companies saw their valuations plummet by 85% and 60% in recent selloffs, which may have highlighted the shortcomings of valuation alone as a solid measure of performance.
Jinesh Vohra, Founder and CEO of Digital Mortgage Assistant splive, said: Valuations allow for potential growth that could be misjudged. Metrics such as revenue, profit, customer satisfaction, growth rate, and customer acquisition cost help to better understand Fintech performance.
“Furthermore, it is important to look at the company’s finances and management team and the execution of their business strategy and performance.”
Chapple says fintechs can improve performance by explaining to investors and staff how founders and bosses define success, such as market share and employee retention. investment), he said.
Second, factors investors should consider go beyond hard numbers, including environmental impact, employee culture, and the ethics of how a company operates.
Fintech ESG performance is now in the spotlight of VCs.
Arica Bank CEO Richard Davis said it had discussed diversity with investors during the bank’s investment round. [Allica Bank] Think about it ”.
Arika Bank has increased the number of women on its leadership team from about 11% to 35% since Davis joined the bank’s fintech in 2020.
There is no ‘playbook’ for success
Despite the wealth of metrics available to investors, one VC said there is no “strategy” investors should follow when considering fintech investments.
speak above 11FS podcast, Katie Palensker Managing Director and Venture Studio Global Head, anthemis, tFintech investor said: But in reality it happens in so many different orders in different kinds of businesses. ”
She added that it wasn’t “slam dunk” that high-value fintech companies grew out of necessity.
“I also think VCs can look at their entire portfolio. I think some of their most valuable asset companies are probably the ones that keep them up at night,” she added.
Importance of metrics for different fintech sectors
A further consideration for VCs is to weigh the importance of certain metrics regardless of the fintech category they are investing in.
Is profitability more important for a neo-bank acquiring customers at a loss, or for a profitable BaS business struggling to acquire new customers?
lucas timberlake general partner, Fintech Ventures FundEarly-stage VC fund points out that metrics like ARR (average annual return) are important for SaaS companies. His GMV (Total Merchandise Value) for marketplaces; more financial management tools, or AUM (Assets Under Management) for originating loans for lending companies.
Market share is ‘not very important’
“Most areas of financial services are highly fragmented and highly competitive, so market share is not and likely will be less important,” adds Timberlake.
Mr Vohra said:
“But metrics like revenue, active users, profit, market share, retention, efficiency and burn rates are definitely good metrics.
Who is the rating most important to?
Then there’s the question of whether valuation matters most to VCs or founders.
Fintech valuations will be important for investors considering exiting the business. Because it will be important for founders who are seeing their equity holdings diluted by a funding round.
Timberlake said: Founders see valuation as a proxy for their net worth and as a tool to attract quality talent through their stock options.
“Investors are typically looking for specific holding targets with specific check sizes, so they are sensitive to valuations.”