Long Take: What do SPACs and IPOs say about Coinbase, Robinhood, Lemonade, SoFi, and other fintech darlings?
Hi Fintech futurists --
This week, we cover the following:
Thesis: We look in detail at the state of marking recently-private-fintechs to the public market in mid-2021. Multiple industry segments have seen IPOs, direct listings, and SPACs transition fintech darlings into traditional stocks. How is performance doing? Is everything as magnificent and rich as we expected? Have multiples and valuations fallen or held steady? The analysis explores the answers and provides an explanatory framework.
Topics: Venture capital, private equity, public capital markets, digital lending, digital investing, insurtech, crypto brokerage, neobanks
Tags: LendingClub, GreenSky, Funding Circle, OnDeck, Affirm, Lemonade, Root, Metromile, Clover, Oscar, SoFi, Dave, Pioneer, Wise, MoneyLion, Robinhood, eToro, Acorns, Bullish, Bakkt, Circle, Coinbase, Voyager, Monzo, Revolut
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No big philosophical blah blah this week. Let’s start to mark to market.
Here’s the problem statement. Venture capital, or rather, private equity, generates very expensive valuations for growing companies in the private markets. Then those companies go public, and there is a bridge to cross in terms of valuation multiple, meaning that valuation can collapse spectacularly.
We often spend time in the weeds on these fintech valuations (e.g., 20-50x revenues, $500-2,000 per customer). But all that is logic and hope. The real information comes when private companies enter public markets under far more scrutiny than before, and get their financials marked to market. For example, digital lenders like LendingClub, GreenSky, Funding Circle, OnDeck, and similar others to melt when interacting with financials investors.
This is because venture world treats revenue from underwriting as if it were SaaS revenue, and puts a recurring multiple on it. Professional FIG investors do not — they see it as an upfront liability with a credit risk materializing in a couple of years.
The best case in point is the self-implosion of OnDeck, which had to sell at $122MM due to its small business portfolio blowing up during Covid, 90%+ down from its $1.3B IPO price. Fair warning — all the BNPL companies that are having a grand time of funding from interchange and lending to consumers are likely to experience a similar story. You can already see this happening with the Affirm price.
A similar story can be told of insurtech IPOs. See below:
Forgive us for mixing up life, health, personal, and property lines. While Lemonade, the renters’ insurance app, has managed to hold on to a 50%+ valuation increase, its fancy new peers have not. Give or take, Root is down 70%, Oscar 50%, Metromile 30%, and Clover 20%. We think this has to do with a similar underwriting phenomenon as the lenders. Venture-backed insurance companies present premiums as if they were revenue, and they are not. The core financial alchemy takes place in the loss ratios and asset management, which looks very little like a software sale. Public markets investors know this, and punish the companies appropriately.
Onwards to the neobanks. There have now enough SPAC announcements, fintech direct listings, and IPOs that we can try and benchmark price performance. Notably, several of the planned combinations have not yet gone through. But it is as close as we can get to seeing the future ahead of time.
SoFi, the student lender with fintech bundling aspirations, has had a pretty strong SPAC launch with YTD performance at 25%+. Despite struggling over the last several months, falling from being up 100%, this level is still good relative to the initial transaction. SoFi runs at about $1B in annual revenue, which implies a 12x for the $12B marketcap. Wise, the cross border remittance company with a cash account, has been successful in its direct listing so far — 11% increase YTD. Its revenues are around $650MM in ARR, which yields a more expensive 20x marketcap ratio, but Wise is a steadier and faster growing payments business without any credit risk relative to SoFi.
Payoneer, one of our favored targets, is down 10% since starting to trade. Dave (VPC Impact Acquisition) and MoneyLion (Fusion Acquisition) have not launched yet, but the SPAC entities are flat or down. So we see mixed results in banking and payments.
Let’s look at brokerages. On the more traditional digital investing side, Robinhood just did an IPO, eToro is merging into FinTech Acquisition Corp. V, and Acorns (the microinvesting app) is merging into Pioneer Merger Corp. Performance is about flat and a bit down; while Goldman and Schwab are 20-40% up on the year. Not a fantastic outcome in the public market, despite some fantastic value creation for shareholders.
Consider the crypto brokerages. Coinbase went the direct listing route, Voyager is trading in Canada, Bullish is merging with Far Peak Acquisition, Circle into Concord Acquisition Corp, and Bakkt into another VPC Impact Acquisition.
Voyager has had a pretty intense run up this year, while Coinbase saw a 30% fall since IPO. In part, this is a marketcap size differential, where Voyager is worth only a few $ billion while Coinbase is in the $50 billion range. But regardless, we see revenue multiples on both coming down as public investors get acquainted with the volatile nature of crypto brokerage revenues. Coinbase may be running at a $5B ARR, which implies a 10x revenue multiple. Voyager is seeing a $400MM ARR and a $2B marketcap, or a 5x on revenues.
As for Bullish, Circle, and Bakkt, the transactions have not yet closed and there is no meaningful market information in the price.
Our rule of thumb is as follows.
Payments companies will have no problem moving from the private to the public market. Their revenues are sticky, and secular trends are strong. There’s not enough data on neobanks, but likely the ones that live off (ethical) subscriptions and interchange will do fine, while those engaged in lending will get a haircut like the digital lender and insurtech segments have seen before. Same for BNPL (riskier) vs. embedded-finance base payments (more stable). Brokerages and crypto brokerages are going to be either sideways or flat, in large part correlated to the underlying markets that they serve. If crypto assets slide 40%, Coinbase and Robinhood will suffer.
There is a secret to keep in the back of your mind. A public company, generally, prices all of its shares pretty much the same. Some executive may hold super-controlling voting shares, but generally the classes are equally exposed to operating risk financially — corporate law makes sure there is no funny business and profiteering. A private company, on the other hand, is at the mercy of financial instrumentation in its legal documents. Investors always, always, always get paid first in the case of private companies, wiping out common stock — i.e., founders and employees — if things go south.
Since private investors have roughly a 25% IRR target and an 8% hurdle rate, they are ecstatic with a 10x exit, tolerant of a 2-5x exit, and unhappy with anything below. That means if you raise $1B at a $50B private valuation, your preferred round investors are going to support the company selling at $5B. Mechanically, they will get $1B back, then likely some built-in 20% rate of return, and then the rest will be split pro-rata. They might even be fine with a $1B sale, because they get their capital in a down market, while having earned management fees.
All this to say, for private investors the correct contractual protection can severely limit downside risk.
This is why Monzo can burn EUR 130 million per year and still expect a unicorn valuation to keep funding its 5 million user footprint. Check out this Sifted write-up, which points again to Revolut’s $33B valuation, and from which we highlight a comparison visualization below.
End of the day, this is technical arbitrage between different pools of capital and investors / operators with different skill-sets. It is an arbitrage that takes years of entrepreneurial hustle and fronting to pull off. But an arbitrage regardless. Time your trades well!
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For more analysis parsing 12 frontier technology developments every week, a podcast conversation on fintechs, and food-for-thought essays, become a Blueprint member.