What about the frequency of their funding rounds? We take a look…
Plenty of funding and a strong, consistent valuation are often seen to be two sides to the same coin, however this list of the 10 highest valued FinTech companies shows that this is not always the case.
When it comes to valuation, it seems that for some, the less funding the better, with the exception of Ant Financial. For example, Adyen, Coinbase and Square (Block) have received far less from investors but remain in the Top 5 highest valued FinTechs.
Adyen and Square also wait an average of 1 and 2 years between each funding round, suggesting little funding and carefully timed rounds are the keys to success. But let’s not get too carried away, as there may be another explanation for the correlation between low funding and high valuations.
Note: Companies are listed in descending order of valuation
It is speculated that Square (Block Inc.) and Stripe are also grossly overvalued due to market ‘hype’ and the fact that their companies’ fundamental performance has been ignored. Block Inc.’s share value dropped almost 57% between November 2021 and February 2022, despite plans to integrate Bitcoin within its payment services, which could eventually lead to a down round. As for Stripe, it may be the payments pioneer, but it has so many competitors now that its success won’t last unless it continues to innovate at an unprecedented rate.
The desire for a strong and sustainable valuation, which partly manifests from the perceived future success of the company, puts pressure on companies to constantly evolve and innovate. Klarna, although profitable over its first 14 years of life, has been making a loss for the last 2 years due to its rapid expansion across new regions such as the US. Revolut’s revenues are also increasing steadily despite the pandemic and could have accelerated its road to profitability if it weren’t for the $60m increase in net loss between 2019 and 2020, due to spending on staff and compliance. Klarna and Revolut are taking 2 steps back to take 4 steps forward, and although risky, nowadays growth is a big priority for FinTechs whilst profitability just isn’t a norm.
Despite this, companies like Ant Financial and Adyen have proven that profitability and growth can be achieved simultaneously. In 2017, the two companies even struck a deal to integrate Alipay into the Adyen services for retailers in order to cater for the 450 million AliPay users in China (at the time). Over the 2017 financial year, Adyen’s transactions grew to 3.7 billion. Even if each transaction was worth just $1, Adyen makes 42c a pop, or over $1.5 billion in processing fees based on pricing for Asia Pacific.
When it comes to the companies that raised the most in funding, Ant Financial, Klarna and Robinhood take the cake. Klarna and Robinhood are also the two companies of the list which receive funding most often, every 5-6 months on average.
Frequency of Klarna’s funding rounds increased from January 2019, whereby rounds began to occur every 3-4 months. The trigger may have been H&M’s $20m investment, and the roll-out of Klarna services in all physical and online H&M stores in Sweden, before arriving in the rest of Europe. Robinhood underwent a similar growth spurt from July 2019. After the $323m Series E round led by DST Global, funding rounds began to occur about every 3 months, whereas previously the average had been much higher at over 11 months.
This could be a lesson to companies to focus their energy on what investors can contribute beyond the money; a network, a services partnership, or a large customer base, as some investor profiles will have more impact than others. FinTechs that can satisfy investors through pre-IPO profitability will also avoid pressure to go public too soon from firms that are impatient to cash out. These startups will also attract firms that believe in long-term growth and prosperity, rather than an ephemeral “buzz” which results in a valuation bubble.
More and more, we see companies like Paytm and Robinhood make their debut on the stock market and lose millions of their value in a matter of hours. The lesson is that a high valuation does not always mean huge amounts of funding, nor do these two factors necessarily mean market success or company profitability. In order to avoid the smoke and mirrors of the trade, startups should start to prioritize profitability over the rest if they want to attract “better” shareholders, particularly as inflation rises.
Remember, the average time the FANG companies took to reach profitability is only 5 years.