Rockets: Fintech’s valuations need a reassessment, not its ambitions

Revolut and Atom Bank this week saw their valuations affected by investors. But fintech’s long-term potential value is still sky-high. Prices need a breather.

Image source: Pexels/Olia Danilevich

One of the shallower reasons why fintech became such a headline-grabbing trend over the last five years or so was the sheer amount of money – seemingly – being made in a short amount of time.

Investors discovered a gold rush and more and more wanted picks and shovels.

This was not illustrated by rising annual profits, but rather by ever-increasing rapid valuations offered for the leading companies in the area.

Businesses were creating “value” faster than anyone could remember since the Dot.com boom two decades before.

Much of this value creation was of course tied up in illiquid private markets with investors’ willingness to buy assets with a longer term (where returns are pushed far into the future).

Unicorn hunting, where venture capitalists looked for future companies over $1 billion, became the norm and axiomatic for VCs’ ability to earn decent enough returns to attract money from their limited partners (the places they get their 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, this value has in many cases been reduced, as interest rates have reversed direction, sometimes by as much as 90 percent in both public and private markets.

The unicorn has also stopped. During the first three months of 2023, only three new fintech unicorns were created compared to 40 in the same period last year.

This week Revolut and Atom Bank saw their valuations put under the spotlight.

Most dramatically, Revolut saw $15 billion apparently knocked off the $33 billion price tag hinted at by its latest funding round in 2021. This drop represents a 46 percent cut.

Durham-based lender Atom Bank, which last raised funds in 2022 at a valuation of £460m, saw a 31 per cent drop.

The investor was Schroders Capital Global Innovation Trust, a British listed investment fund with stakes in dozens of private companies. As a listed company, 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 is reportedly offloading its 5 percent stake in the neobank at a 66 percent discount.

How are startups valued?

Valuing startups is difficult. And subjective. And often inconsistent.

When a startup is first created, it usually 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 succeed in the future.

To determine the startup’s value, investors will consider several factors, including the quality of the team, the size of the addressable market, the stage of the 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 how much 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 $1 million into a startup in exchange for a 20 percent stake in the company, they value the startup at $5 million ($1 million divided by 20 percent).

Over time, revenue growth, the likelihood of capturing a market and perhaps even earnings prospects change and are reflected in company valuations.

In many cases, this success can result in a financial return many times the original investment. People often talk about achieving 10x returns, but the reality can be much, much higher.

Revolut, for example, has seen its valuation from its first round of crowdfunding rise more than 600 times, at least until this week.

As a result, supply and demand forces have also been a major factor in startups’ ever-growing valuations with hot areas such as fintech and the most exciting companies seeing their valuations push up sharply as they go through new funding rounds.

There are indications that VC volumes are returning to a moderately bullish spirit, with 2023 expected to surpass 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 remain staggeringly vast.

Whether this materializes or not, fintech’s valuation obsession is best consigned to history.