LFP104 – A Deep Dive into UK Fintech Financing, Performance and Valuation w/Michael Pearson Clarus Investments

Michael is the author of “The Fintech Financing and Performance Report” and expert on strategy and innovation in financial services. In this show we dive into the third edition of his report and dive into the critical and fascinating topics of how UK Fintechs have funded themselves, what their valuations have done over time and attempting to measure their performance.

We are all used to seeing big picture, top-down reports saying a gazillion dollars has flowed into Fintech since a week ago Tuesday and hence taking it all with a pinch of salt.

However Michael’s “Fintech Financing and Performance” report [available via Clarus Investments] is hardcore stuff being based on data held at UK Companies House (where in passing its essentially illegal to knowingly file incorrect data).

Topics discussed on the show include:

  • the many reasons behind the media reporting obsession over financing as opposed to tech/FS components
  • Liverpool FC as a conversation piece in Egyptian business circles
  • strategy and corporate venturing at Lloyds TSB
  • the origins of Michael’s research into Fintech
  • the current version covers 39 Fintechs, mainly B2C with four or five in each Fintech subsector
  • statistical accuracy vs measuring different phenomena
  • data extraction and costs of accessing data at UK Companies House
  • timeliness – report and accounts are up to 9mts behind whilst financing has to be much more currently posted
  • the average 1st round (Seed) raise is £688k for an average of 26% of the company
  • the trend over time is that more recently formed Fintechs raise more money for less percentage of the equity (ie higher valuations); early Fintechs raised comparatively small amounts of money
  • the sample has had between 4 and 5 raises each and typically 300 days between financings – ie the average Fintech is fund raising more than once a year
  • performance – the average loss in Fintechs after 3yrs is £1.6m
  • only one company, Transferwise, has broken even (inc companies reporting in Yr 5, 6, 7)
  • pressure on management teams to get nearer break even or float increase over time
  • Ratesetter as a case study – for the first five years it was conservatively managed and even broke even in one year; this changed after a big fund raising in 2015 with consequent credit losses further down the track
  • the 39 companies in the sample have raised a total of £1.35bn as of end Q1 2018
  • based on their last round of funding their total valuation is £4.3bn
  • all of the companies in the sample have increased their value per share and the average increase in value is 19x, the median is 6x
  • Transferwise on paper has increased 193x, Funding Circle 127x
  • the median IRR is 92% – ie the median is that Fintechs in this sample have doubled every year in valuation
  • scepticism/caveats around the concept of “valuation”  – it’s not (you’ll have to listen) “the value of a company” but the price a deal was done at
  • comparisons with options rather than BigCo valuations; VCs after the ones that go mega and expecting some blowouts – so in practice it is more like a lottery ticket which ends up as zero or a substantive amount
  • 87% of the companies had Angel investors in their Seed round
  • you can’t really do valuation at this stage – how Angels do price them in those circs
  • crowdfunding tends to produce slightly higher valuations
  • quantum physics distributions and valuing small companies
  • the challenge of managing VCs who enter at different rounds as the valuations are rising
  • terms around raises and how this qualitative aspect changes the picture
  • most of the sample have simple share structures – one share class
  • Square (in the US) “ratchet” – the last round of investors were guaranteed more shares if it floated at less than the price they paid; not uncommon for the last round of investors pre-IPO
  • benchmarking UK Fintechs versus Square as a benchmark; nine companies in the sample have >5yrs and report revenues; what the comparison of these with Square at the same stage is
  • none of the nine companies stack up against Square
  • new phenomena are exits (not in the sample) – eg ClearScore (trade sale to Experian) and iZettle (sold to Paypal)
  • VCs are starting to look for exits – how this relates to fund life, timings, and rounds
  • ICOs en passant as a mechanism

And much much more 🙂

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