What Fintech exits tell us about the bubble question
During a few days in London last week, there was a disconnect between public bullishness and private bearishness. The hype talk on stage contrasted with behind the scenes talk about bubbles and down rounds and layoffs. We have been trashing the Fintech hype all through 2015, so we are clearly not perma bulls and feel OK about now offering a positive point of view amid all the gloomy talk. TL:DR, there is a new sober realism, neither hype nor gloom.
Trashing the hype during 2015
In December 2014, Daily Fintech pointed out how few real unicorns existed.
In October 2015, Daily Fintech wrote about how it was time for Fintech entrepreneurs to get real and focus on execution. We have reproduced that below as it was one part of a larger post about SIBOS.
In December 2015, Daily Fintech made two Predictions for 2016 that have already come to pass:
- Momentum Capital (short term hype chasing) into Fintech will slow down
- The strange inversion we saw in 2015, when private companies were valued higher (on paper at least) than public companies, will end in 2016.The headlines will refer to Unicorpses.
Fintech is leaving the Yellow Brick Road and going to Kansas.
Reposted from October 2015:
For years Fintech labored in obscurity. A few pioneers preached the message that everything was going to change. In the last 12 months the message was received loud and clear – as was evident at SIBOS this year.
It was a great journey “off to see the Wizard” on the Yellow Brick Road.
Some Fintechers remain stuck in the Yellow Brick Road era, still preaching the message. Investors have already got the message and it is time for Fintechers to stop preaching and start delivering.
This means heading back to Kansas (in the “show me state” of Missouri). This is when Fintech ventures have to show serious financial results. This is when focus shifts from prospects to contracts, from long term forecasts to this quarter, from pre revenue metrics to revenue, from revenue to quality of revenue, from revenue to gross margin, EBITDA & free cash flow, from forecasts to actuals. Many ventures are doing this, but too many of the new entrants seem to believe that hype is enough.
Some Fintech Trade Sale Exits over $500m
$500m is the cut off point. We don’t want to contribute to Unicorn mania by focusing on $1 billion, but we also don’t want to track lots of small deals. Unless you have been overly profligate with capital or done anything silly with preferences, a $500m exit is a good result for both entrepreneurs and investors.
- Skrill fka Money Bookers by PaySafe fka as Optimal Payments. Over $1billion but born in 2001 so another proof that value creation takes time.
- Xoom (Paypal). Post IPO they were acquired by PayPal.
- 360T (Deutsche Borse). Very little publicity for this great Fintech success story out of Frankfurt Germany
Some Fintech PE Exits over $500m
To an entrepreneur, a trade sale or a PE buyout is pretty much the same, particularly if trade sale has an earnout.
– Ironshore (Fosun)
– Fintrax (Eurazeo)
Note: both are cross border deals and both are tech enabled Financial Services (the same as Regulated Fintech after the Great Fintech Convergence).
Fintech Public Exits over $500m
The valuation is calculated in April 2016, so after the market crash. We have only included ventures born after the Internet – so PayPal makes the cut but not Visa or Mastercard for example.
- Worldpay.
- First Data
- Lending Club
- Ondeck
- MYOB
- Square
- PayPal
- Ondeck
Notes. Worldpay is the big IPO success story in London, but it took 20 years. Only Square and Lending Club meet the Momentum Capital requirement of a Unicorn ($1bn in under 10 years).
Expect more Acquire Hire and IP exits
One Fintech exit in 2016 is Holvi to BBVA in March. The terms were not disclosed, which usually means the valuation was low. They had raised less than $6m in VC, so a low exit was probably not a disaster. BBVA looks like repeating what they did with Simple – focusing on the UX layer.
Expect a lot more of these. There are many great ventures (good market, good IP, good team) that simply ran out of time. You can only score a goal before the final whistle blows.
The Unicorn deadline is a big problem
It is always hard to build a hugely valuable business. It is statistically almost impossible to do that within the time constraints put on by Momentum Capital. There are some companies that got to $1 billion realized value within the 5-10 years but they are so few as to be statistical outliers. Even those that did so by getting out the IPO door usually suffered during the market downturn. The attempt to get to $1 billion valuation within the 5-10 years to keep Momentum Capital investors happy drove some entrepreneurs to make these 5 mistakes:
- # 1: Focus too much on the concept story at the expense of execution. You can only sell concept at the first round of funding. Beyond that it is all about execution.
- # 2: Accept egregious preference terms that only work out if that hockey stick projection becomes real. Any downturn in investor sentiment leaves you with a burn rate induced deadline to close funding and then if investors start not returning your calls you will have to accept a down round that wipes out your common stock.
- # 3: Use aggressive sales tactics that cross a regulatory line. Think Zenefits.
- # 4: Believe in your own story that incumbents are asleep at the switch. Some are, there are enough that are not to give you real competition.
- # 4: Go to IPO before you are really ready for quarterly bottom line scrutiny. The effort to do this detracts from execution and that can lead to a vicious spiral ending in a trade sale where you get less than if you had done the trade sale instead of the IPO in the first place.
Big blowups
Lots of little young ventures fail. That is the norm. It is more significant when a venture fails having taken in a lot of cash. The two big ones in Fintech – Powa and Monitise – could leave you with one of two conclusions:
Either: the Fintech revolution is over
Or: these companies made some egregious execution errors and the problem is company specific.
The latter conclusion is more likely. They can both become part of entrepreneur business school “anti case studies” i.e. what not to do.
It is interesting to compare Powa and Monitise with Zenefits. The latter had similar egregious execution errors but took decisive action by replacing the CEO. It is in situations like this that those oft-reviled VCs earn their money.
Advice for entrepreneurs – check out RIP Good Times.
This was the famous presentation given by Sequoia Capital to their portfolio companies in October 2008. Skip the macro stuff unless you enjoy history. The advice to entrepreneurs who took on a lot of capital and ramped up their burn rate is still relevant:
- Get aggressive with public relations communication strategies; cut marketing that doesn’t work
- Offer a product that reduces expenses and drives revenue
- Preserve capital over trying to gain market share
- Begin with zero-based budgeting to help prioritize necessary expenses
- Have at least one year’s worth of cash available
- Reduce expenses around products and boost sales; if product is ready, cut engineers (wow)
- Build essential product features first
- Reward salespeople based on commission, not base salaries
Getting consumer confidence has always been hard and it is harder in Fintech. Getting people to part with money is not the same as getting them to hit a Like or Retweet button.
Now for the good news
- Fintech is no more overvalued than other assets. After years of central bank loose money everything is overvalued. That is not damning with faint praise. Investors work on relative valuation.
- There is still a lot of cash waiting to be invested (“dry powder”). Entrepreneurs will have to accept lower valuations, but deals can get done. Investors of all types are looking for deals – VC, Angels, PE, Strategic Acquirers – but the price has to be right.
- There have been some real exits as we outline above. That is real money where cashed out founders are now becoming angel investors.
- The opportunity is real. Financial Services is 7-10% of GDP in major economies and most of it can be digitized.
- The disruptive tech is real. More than 50% of the 7 billion people on this planet with mobile phones, artificial intelligence, Bitcoin/Blockchain – pick your favorite disruptive tool and have a go at that 7-10% of GDP.
- The best ventures have always been born in down markets. You have a longer runway to exit and the costs are lower as the talent supply/demand equation changes.
- The Q1 funding numbers look good and April has seen some good deals as well. Accel announced a new $500m European Fund.
I would class the current environment as more sober and realistic, avoid the extremes of both hype and gloom.
The exits lists are not exhaustive. Please tell us in comments who we have missed. The aim is to spot common patterns across successful exits.
