Start-ups are grabbing headlines with their eye-watering valuations, but there seems to be something illusory about the numbers, writes Chris Skinner.
There’s a regular itch that I feel at the back of my neck. I scratch it, but it won’t go away. The itch is a wake-up call really, and it is asking whether all this fintech investment is worth it.
In 2018, $111.8bn was invested in more than 12,000 fintech start-ups worldwide, according to KPMG. Of these, a number have broken out to be unicorns. A unicorn is a technology start-up that has reached a valuation of more than $1bn, and includes such names as Uber, Airbnb and Ant Financial. In Europe, we have several – including Revolut, Monzo and TransferWise – and, in July, the largest European unicorn broke free of the pack with a $3.5bn valuation: N26.
Now, you may not know N26. Founded as a digital first retail bank in Germany in 2013 by Maximilian Tayenthal and Valentin Stalf, the firm has just whizzed through its seventh funding round and now leads the pack. It is a full-service digital retail bank, operating across 24 European markets: in addition to the eurozone, N26 is currently available in the UK, Denmark, Norway, Poland, Sweden, Liechtenstein and Iceland. In these markets, it has reached 3.5 million customers, up from just 2 million back in November 2018, and is now launching in more distant markets, specifically the US and Brazil.
Sharp rise
Monzo, with 2 million customers, is now valued at $2.5bn as of a June funding round, which is double its value of October 2018; and Revolut, with 5 million customers, was valued at $1.7bn back in April. The reason for Revolut’s lower valuation is that it has yet to roll out a full-service retail bank.
Even so, these are impressive numbers when you think that Deutsche Bank was valued at just under $15bn back in June. How can new firms that have yet to gain customers’ main bank accounts – most of these new players are being used as secondary or even tertiary accounts by many – be worth half of a Deutsche Bank, when their current valuations are combined?
It is a good question, and one that many are asking. In fact, going back to my itchy neck, I have a feeling that some of these firms are more like leprechauns than unicorns. A leprechaun is also mythical and magical but, rather than delivering riches, it just promises riches at the end of a rainbow that is never reached. In other words, most unicorns are offering riches that are as mythical as the beast it shares its name with.
This was the underlying message in N26’s announcement of its latest funding round, in fact. Mr Tayenthal told the Financial Times: “In all honesty, profitability is not one of our core metrics. We want to build a global financial services company... in the years to come we won’t see profitability, we’re not aiming to reach profitability. The good news is we have a lot of investors that have very deep pockets and that share our deep vision and that are willing to support the company over many years to come.”
Profitability is not a core metric? Then what is? Oh, investability. The more people that invest, the better. Forget return on assets, return on equity, return on anything. It’s just getting to the next funding round with a bigger pay cheque.
The real story
This struck me as representative of so many technology dreamers, such as the Ubers and WeWorks of this world. Uber just had an initial public offering in May valuing the firm at $70bn. This is a firm that is not profitable and, in fact, subsidises every ride taken with investors’ money. When will it be profitable? Who knows.
WeWork is even more incredible. It achieved a $47bn valuation this year, but it is just a real estate firm that is cool and trendy for office space because it has free beer and neon signs. When it has only 425 locations, revenues of about $2bn and losses of more than $2bn (as of 2018 data), how can it be worth 12 times more than IWG, formerly known as Regus, which has 3306 locations, $3.5bn in revenues and $200m profit (as of 2018)?
I’ve heard of smoke and mirrors, but this is glaring pixie dust and sleight of hand. Whether the same is true of our fintech brethren remains to be seen, but when valuations are based on app downloads and future models of income, I have yet to be convinced. Am I the only one, or do I need to change my shower soap to stop that itch once and for all?
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
