LONDON — The founder of a boutique, tech-focused merchant bank says Europe’s fintech market is over-valued and consolidation will be necessary to justify the companies’ price tags.
Victor Basta, cofounder and CEO of London-based Magister Advisors, wrote in a blog post shared with Business Insider ahead of publication: “Many fintech companies are valued too highly in financing rounds, and need years of performance for their ‘cash value’ to catch up to the financing round valuations.
“Whether it’s TransferWise, Zopa, Revolut or a myriad of others, financing valuations have raced ahead of these companies’ value based on revenue and profits.”
TransferWise was reportedly valued at $US1.1 billion in its funding round last year. It said earlier this year that it is on track for revenues of £100 million in 2017 and should make its first ever operating profit. Revolut was reportedly valued at £300 million in a recent $US66 million funding round. Its first year of full accounts show it lost £7.1 million on £2.3 million of revenue.
Basta told Business Insider over email: “TransferWise, Revolut etc. are not bad companies at all, it’s the valuations that are going to force a long time horizon to make a return and that is far better done by strategic investors going forward.”
Basta blames what he sees as the over-valuing of European fintech businesses for a lack of exits in the market: European stock market investors are not as tolerant of loss-making “story” stocks as US counterparts; and banks, who are likely buyers of fintech companies, can’t afford the valuations given the losses.
He predicts that “many fintech companies will fail to raise still-larger rounds, and inevitably consolidation will begin to happen.”
Basta told Business Insider over email: “Consolidation is definitely coming, not because the companies are over-valued, but because to deliver on their valuations they will have to become broader digital financial services companies (it will be hard to be an FX player worth $US10 billion, for example).
“A quick broadening of products is now required again to deliver against the valuation, which inevitably forces many to think how they can do this.”
Basta pointed to TransferWise’s recent launch of a multi-currency business account and plans for a debit card. The company began as simply an international money transfer service.
Basta said over email: “I would not be surprised to see a group of high-valued fintechs merge or combine to broaden quickly to ‘validate’ their valuation.”
But he adds in his blog: “The issue is that much of this exit activity will happen at prices far below what investors are putting on well-known fintechs today.”
Basta says industry consolidation “will be a great next stage for the European fintech industry,” but adds that it could inevitably be “less attractive for investors who have ‘paid up’ so far to get into the best early stage fin-tech firms.”
“Those investors often have paid a big price unrelated to revenue and profits, and are facing many more years to get to a less attractive exit than they expected,” he writes.
Basta writes: “It takes decades not years to build a valuable fintech company — in our view many fintech’s require 10+ years to integrate into the existing financial system, broaden offerings, and build an enduring customer base.
“Working with money requires more trust, and more regulation, than selling little black dresses. It’s just a fact that some VCs have chosen to ignore.”
Magister Advisors has worked on deals worth over $US2.5 billion since 2011, including the sale of several startups to Apple, Amazon’s acquisition of LoveFilm, and fintech company Nutmeg’s fundraising earlier this year.
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