Fintech’s next big down round may have an upside

Dave

24/08/2022 14:18

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Karen Kwok
    LONDON, Aug 24 (Reuters Breakingviews) - Financial
technology startups are facing lean times. Klarna set the tone
last month by raising cash at an 85% discount to its previous
funding round. The Swedish buy-now-pay-later group won’t be the
last to experience an embarrassing valuation cut  urn:newsml:reuters.com:*:nL5N2XA4HI,
known as a down round. But for some, there may be a reason to
embrace the trend.
    Fintechs have the same problem as all growth-focused
startups: investors are suddenly more interested in short-term
profit than soaring revenue. Investors in July marked
loss-making Klarna’s valuation down to less than $7 billion from
roughly $46 billion.
    There are plenty of candidates for a repeat. Fintech
startups raised $125 billion in 2021, or almost 3 times 2020’s
total according to Dealroom. Seven of the biggest – Stripe,
Checkout.com, Revolut, FTX, Chime, OpenSea and Blockchain.com –
on average boosted their valuations by 275% in their last
funding rounds to hit a total of $253 billion, based on
Breakingviews calculations using PitchBook data.
    Founders will be reluctant to dilute their ownership stakes
by raising money at a lower price. But many fintechs have burnt
through cash to dominate their niche, meaning they’re likely to
need a fresh infusion at some point. The ARK Fintech Innovation
exchanged-traded fund, which aims to track the sector, is down
56% this year.
    Sometimes down rounds can even bring benefits. First, having
an unrealistically high valuation means employee stock options
may have less upside. A lower price tag can therefore make it
easier to attract and retain talent.
    Second, raising capital while others are retrenching could
help some fintechs steal a march on the competition. Take
cryptocurrency exchange FTX. Founder Sam Bankman-Fried has been
on a shopping spree in the past few months and has kept
investing while Coinbase Global  COIN.O  is slashing staff
 urn:newsml:reuters.com:*:nL8N2Y94P9. FTX has overtaken its rival in terms of spot
trading volume, according to The Block Research https://www.theblockresearch.com/july-by-the-numbers-2-160420.
 Raising money could allow Bankman-Fried to double down on that
advantage. A similar logic could apply to Blockchain.com and
digital bank Chime. The latter group could use the money to push
into new products like insurance.
    And not all fintechs face a writedown as humiliating as
Klarna’s 85%. Shares in Chime, for example, are being quoted in
secondary-market trades at a 49% discount to January’s level,
according to data provider ApeVue, compared with an 89% fall on
average for U.S.-listed peers Upstart  UPST.O  and Dave
 DAVE.O . Down rounds are never pleasant. But in relative terms,
they can be a show of strength.
    Follow @karenkkwok https://twitter.com/karenkkwok on Twitter
 
    
    CONTEXT NEWS
Cryptocurrency exchange FTX generated more than $1 billion of
revenue in 2021, CNBC reported https://www.cnbc.com/2022/08/20/ftx-grew-revenue-1000percent-during-the-crypto-craze-leaked-financials.html
 on Aug. 20 citing a leaked investor presentation. That sum was
more than 11 times its total for the previous year. The
company’s earnings were $388 million, up from just $17 million
in 2020.
    CNBC reported that FTX’s revenue was on track to be roughly
$1.1 billion in 2022.
    Klarna on July 11 raised money from investors at a valuation
of $6.7 billion, after including the new capital raised. That
compared with a $45.6 billion price tag in its previous
fundraising round, in June 2021.

 (Editing by Liam Proud and Streisand Neto)
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