Explaining ~100x revenue multiples for fintech companies using systems theory

Stocks, Flows, and the Motion of Rents

In investment management, we used to call it transactional and fee-based revenue. Transactional revenue is what you would earn from trading as commissions. Fee-based revenue is what you would earn as a percentage from holding assets under management. Most financial advisors are switching to AUM based fees.

  • If you monetize against flow, then you want growth (positively said) or churn / overspending (negatively said). Schwab, Coinbase, and Robinhood are happy for you to trade 100 times a day, eroding capital gains to generate rents for the toll booth.
  • If you monetize against assets, then you want to calcify and lock-in those asset forever, and trap your customers in an endless subscription cycle. BlackRock, Vanguard, KKR, and your monolithic 401-k providers want you to never check your account and put everything into a passive asset allocation. Set it and forget it, like a Netflix subscription.
  • If you monetize against liabilities, then you want to take the transactional fee and pass on the underlying risk of non-payment or pre-payment to a capital provider. Ant Financial and SoFi don’t actually want to have you owe them anything, but they do enjoy some good debt origination. Lemonade is also in this bucket in re-financing most of its risks while collecting premia.

Transactional Models are Working

Venture investors, and public market investors attempting to mirror the narratives of venture investors, love revenue. Their love of revenue is matched only by their love of revenue growth. Traditional equity research analysts don’t love revenue nearly as much, knowing that it can be bought or grown unprofitably, without any return on equity. But if you are trying to land a big fintech exit, nothing says “winning” like a 30–100x revenue multiple.

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Lex Sokolin

Lex Sokolin

Entrepreneur building next-gen financial services @Consensys @Autonofintech @Advisorengine, JD/MBA @columbia_biz, editor and artist @inkbrick