Revolut and Atom Bank this week saw their valuations marked down by investors. But fintech’s long-term potential value is still sky-high. Prices need a breather.
Pexels/Olia Danilevich
One of the shallower reasons fintech became such a headline-grabbing trend in the past five years or so was the sheer amount of money - apparently - being made in a short space of time.
Investors spotted a gold rush and more and more wanted picks and shovels.
This was epitomised not by surging annual profits, but rather by ever-growing racy valuations on offer for the leading companies in the space.
Companies were creating ‘value’ faster than anyone could remember since the Dot.com boom two decades before.
Of course, much of this value creation was tied up in illiquid private markets with investors' willingness to buy longer-dated assets (where returns are pushed far into the future).
Unicorn hunting, where venture capital investors looked for future $1bn+ companies, became the norm and axiomatic to VCs’ ability to make decent enough returns to attract cash from their limited partners ( the places where they get money from),.
Rising demand for deals pushed up valuations as venture capital volumes also increased.
This was largely and ultimately driven by low-interest rates.
In the past 18 months in many instances, this value has been reduced, as interest rates have reversed direction, sometimes by as much as 90 per cent in both public and private markets.
Unicorn creation too has ground to a halt. In the first three months of 2023, just three new fintech unicorns were created vs 40 in the same period last year.
This week, Revolut and Atom Bank saw their valuations thrust into the spotlight.
Most dramatically, Revolut saw $15bn apparently knocked off its $33bn price tag, implied by its last round of funding in 2021. This markdown represents a 46 per cent cut.
Durham-based lender Atom Bank, which last raised funds in 2022 at a £460m valuation, meanwhile, saw a markdown of 31 per cent.
The investor was Schroders Capital Global Innovation Trust, a UK-listed investment trust with stakes in dozens of private companies. As a listed entity it is required to constantly change how it values its companies to reflect the market.
The news follows a similar report last week regarding N26 investor Allianz, which according to reports, is offloading its 5 per cent stake in the neobank at 66 per cent discount.
How are startups valued?
Valuing startups is hard. And subjective. And often inconsistent.
When a startup is first created, typically it doesn't have much in the way of tangible assets or revenue or assets. But investors are still interested in putting money into the company because they believe it has the potential to be successful in the future.
To determine the startup's value, investors will consider several factors, including the quality of its team, the size of its addressable market, the stage of its business and product development as well as patents, trademarks, and other intellectual property.
Once investors have considered these factors, they will make a valuation offer to the startup.
This offer will be based on the amount of money the investors are willing to put into the company and the percentage of ownership they will receive in return.
For example, if investors offer to put $1minto a startup in exchange for a 20 per centstake in the company, they are valuing the startup at $5m($1mdivided by 20 per cent).
Over time revenue growth, the likelihood of capturing a market and perhaps even profit outlooks change and are reflected in company valuations.
In many instances, this success can result in a financial return many times an original investment. People talk often of achieving a 10x return, but the reality can be much, much higher.
Revolut for example has seen its valuation from its first crowdfunding round swell more than 600 times, at least until this week.
As a result, the forces of demand and supply have also been a major cause of startups’ ever-growing valuations with hot areas such as fintech and the most exciting companies seeing their valuations pushed up sharply as they go through new funding rounds.
There is some suggestion VC volumes are back to a moderately bullish spirit, with 2023 set to outpace all but the last two years, according to FT Partners.
This should be expected before long. Fintech's ambitions, potential and, yes, long-term financial rewards,are still staggeringly huge.
Whether this materialises or not though, fintech’s valuations obsession isbestconsigned to history.
