Daily Fintech

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 August 2015, Daily Fintech sounded a warning bell about the coming downturn and the crash of the “faux unicorns”

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:

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.

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.

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:

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:

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

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.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.


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