Q2 Software Update: Looking at consumer FinTech with a grain of salt

Dear Colleagues and Friends,

In lieu of a newsletter for this quarter, we thought we would provide our perspective on some of what we see happening around us in the Software & Tech-enabled Services Sector with a primer on consumer FinTech and SPACs. 

From SoFi to Acorns, the FinTech sector has arguably become one of the most prolific (if not the most prolific) recipients of SPAC interest and money. On the back of at least two dozen of already announced and completed FinTech SPAC transactions in the past 12 months, another dozen SPACs are on the block, actively looking for more FinTech acquisitions (arguably, a lot more FinTechs might be hoping for an overpriced SPAC takeover).

We have already been looking at the FinTech (and, in particular, consumer FinTech) industry with a grain of salt when it comes to valuations. Considering Revolut as one of many examples. Revolut provides a current banking account, P2P payments, fx services, and some other financial services. It is today one of FinTech’s largest unicorns, expanding rapidly and globally to the tune of 13 million retail customers and another half million business customers, with close to $1B in funding and a valuation that was around $5.5B at its latest funding about a year ago. The firm announced breaking even last November (the second such announcement, it did the same back in December 2018, just to re-dip in the red) and after tripling both revenues and losses in 2019 (actually revenues grew 180% while losses increased 220% to $140M). That’s a staggering $400+ per customer valuation while each customer cost the company $10+ a year. And Revolut is not alone: Monzo raised doubts as a going concern in its 2020 annual report, N26, Starling Bank and others less prominent could be put in the same boat (so long as there is enough room in that boat).

Match cash-hungry B2C FinTech companies with cash-rich SPACs and you get the foundations for the next perfect storm, or at least that’s what you would think. Is this a zero-sum game, or is this a mutually beneficial situation? Who is winning and who is losing? On the de-SPAC’ing, that is when the SPAC makes its acquisition and allows the target to become a listed company, the FinTech gets funding and liquidity, while the SPAC gets a hopefully valuable asset before its clock runs out and it has to return the money to its investors who get the bump on the stock price. We are left with the retail investor – but how is this different than prior crowdfunding models? Isn’t it what it is? When the SPAC de-SPACs and the stock investors buy (sometimes because of the brand rather than a sound financial analysis), aren’t they crowdfunding? Not really – their investment doesn’t go to the FinTech. The FinTech will get the cash from the SPAC with or without the support of stock investors, and, whether the valuation by the SPAC was over-hyped or not, it only matters for when and whether the FinTech firm will come back to the markets for a follow-on offering. It’s the story of greedy entrepreneurs finding greedy investors… pigs get slaughtered. If you can get more money for the same price (hear equity) why should you not? But what is the right valuation for your FinTech firm (hint: we can help with that too).

We have seen that dance all too often: new financial products get created (or a new twist on financial products comes out), financial whiz, nerds and sophisticated investors figure out a way to make a quick buck, word is out, my cab driver’s grand-mother asks whether she should invest her 401(k) into the magic instrument and more cab drivers need to drive more hours to support their grandmothers who have lost all their savings investing in a product they did not understand.

And what do a number of these B2C FinTech do? They bring financial tools to the mass. Take them as such, educational tools: you want to learn about stock trading, use Robinhood, you want to learn about fx-trading, go for eToro, direct lending, LendingTree, interest compounding, Acorns, etc. Unfortunately, there isn’t (to my knowledge) a FinTech that helps invest in SPACs (yet) but try to apply two basic principles: there is no reward without risk (said otherwise, there is no free lunch), and diversify (or don’t put all your eggs in the same basket).

On our end, we have built a sound practice by advising B2B financial technology companies rather than trying our chance at B2C FinTech. We look at business models that are less cash-intensive and more predictable. We understand the business needs they solve for and the markets trends they deal with. We often even draw a semantic line between FinTech (a term used for B2C models) and financial technology firms (B2B) but that’s just us. 

If you'd like to discuss the market further, contact the Equiteq Software and Tech-enabled Services sector leads directly:

Jeff Becker
Managing Director, Head of M&A - North America
Email - LinkedIn

Sam Levy
Managing Director
Email - LinkedIn

We hope you enjoyed our Q1 software and tech-enabled services (SWTES) newsletter. This is a work in progress and as such, we appreciate your feedback and continue to incorporate some into the subsequent editions.