How $12 Billion in Fintech SPAC capital is teaching us about the economics of target unicorns
Tick-tock, it’s SPAC o’clock.
We are barely into 2021, and 144 SPACs have already IPOed this year, compared to 248 of last year. The average size is about $300 million, and quite a few are focusing on Fintech and financial services. Here, for comparison, is similar data on venture capital funds — printing about 500 entities per year, with a median of around $100 million.
We can interpret this simply to mean that the start-up ecosystem wants to exit. Private companies have been blocked in their path to liquidity by the “going public process”, and SPACs are a replacement, easier path to monetization — despite creating the same outcome of a regulated public company.
Should we be interpreting the desire of lots of private sub-scale companies to *sell* as a signal about the market environment and the quality of these companies? We’ll leave that to you for deduction. Here’s our prior entry on the topic and a podcast on the same.
Let’s narrow down the story to Fintech, using data from Spactrack. With a bit of Excel wizardry, we can see that the first quarter in 2021 has seen 12 Fintech vehicles, while the last quarter for 2020 was at about 8. Further, the expected IPO proceeds are rising as well, from $1.8 billion in 2020 Q2, to $3.6 billion in 2021 Q1. That is a 100% increase in capital looking for quality fintech assets.
As an aside, this has always been a conundrum for us. In the public markets, financial companies don’t trade on revenue, but on % of assets under management, or multiple of book value, or return on equity. In the private markets, especially in VC land, most things are “software”, even if they are not software, and trade on a multiple of revenue. The below figure using earnings for banks by Mercer Capital is a close-ish apples-to-oranges translation mechanism we can use for the discussion.
Banks are floating around 10–20x on earnings. A fintech deal in the private markets, gets priced at 20–100x on revenue. That is a meaningful disconnect. Assuming a 10% margin (which is a bad assumption, but who’s got the time), we are looking at 15x vs. 500x on profitability — a difference of 30 times. We always though that private fintechs would have a *rude awakening* when hitting the public markets. You know, the way that OnDeck ended up having a rude awakening.
But No.
Things are actually happening upside-down, topsy-turvy. The public markets are being inflated their way up, up, and away by multiple expansion and monetary policy. This accommodates fintech multiples, and allows $4 billion of capital into the system to search for exits. We think this phenomenon is still in the early stages, and we will upwards to $20 billion in search capital this year. Let us remind you of the pot.
Look at the Targets, not the Money
It is sort of interesting to list out the SPAC vehicles raising money — Figure Acquisition I, EJF Acquisition, FinTech Evolution Acquisition, Evo Acquisition, and so on, at $200 million or so each. We give a hat tip to Nik Milanovic’s This Week in Fintech newsletter for tracking the fund raises with diligence and detail.
What’s even more interesting is to focus in on the acquisition targets. We already know that SoFi is going public, and the customer and economic footprint of the entity — about 2 million members, $600 million in (mostly lending) revenue, and a $9 billion valuation. A little bit over 10x on a last-12-months (LTM) revenue, and about 7x on a next-12-months basis.
We want to reinforce the story that SoFi is trying to weave together is diversification out of lending into investing, wealth management, embedded finance, and cash management services.
This is the same story everyone is weaving together. Take for example, PayPal, and its pivot into offering crypto purchase, in addition to re-positioning its payments services as a “digital wallet”.
Why? Because of this deck from Ark Invest (p.28 section on digital wallets). Because there is no difference between money movement, cash accounts, investing accounts, and crypto assets. The only difference is in the collective consciousness of financial regulators. And when you bundle all these things together, you get something that consumers are actually using and finding useful.
We will just spell out the arbitrage. The cost of acquiring a payments customer is $20. At the full cross-sell utopia of a financial super app, the LTV a customer is $20,000. Thus Square is now more valuable than Goldman Sachs. Thus Klarna, the buy-now-pay-later giant, has launched savings accounts and is worth $30 billion. Thus Affirm is trading at $30 billion in the public markets.
Everyone financial is fighting for everything financial.
Who else is SPACed out? Payoneer, the cross-border payments app is looking at $3.3 billion on its $300–400 million in revenue, and 4 million customers. This is a 80% or so haircut per customer relative to SoFi, but the “customers” are slightly less profitable. They merely receive money, rather than use Payoneer as a core bank account replacment. But the valuation is still in line with our rule of thumb where each user is valued at about $1,000 or GBP 500 for a neobank. Reminder that Payoneer is also adjacent / can compete with the embedded finance payments firms like Checkout and Rapyd, which are seeing 50–100x revenue multiples, while Payoneer is putting up a more modest 10x.
Another B2B2C gem is Apex Clearing — rumored to be hitting the SPAC market at a $5 billion enterprise value. Dun & Bradstreet estimates Apex generated a $100 million in revenue, but we expect the number to be higher (maybe $200MM), leading to a 20–50x multiple. Apex entered the brokerage custodian field to compete with TD Ameritrade, Schwab, Fidelity, and BNY Mellon Pershing in 2012, and has since led the API-first brokerage space. It was the perfect chassis for fintechs that wanted to be deeper than a Registered Investment Advisor and perform brokerage activities, thereby availing themselves to delicious payment-for-order-flow, but not be self-clearing. Apex out-maneuvered Interactive Brokers and essentially everyone else out there with a combination of good product, marketing timing, and a change in pricing in the market structure. Now it is a key property in the embedded-finance space.
Not All That Glitters
All this takes us to MoneyLion.
MoneyLion is sort of the alternate-universe Chime, targeting a retail financial user, on the financial edge (in debt one day, investing another day). They call it America’s middle class.
Chime gets you paid faster, helping people avoid payday lending, and makes money largely on interchange fees from payments ($200MM? $500MM?).
MoneyLion, well, you’ll see just what it does. Like all the previous fintechs mentioned, MoneyLion is making its way towards a fully integrated financial roadmap. But like the SoFi projections, this isn’t super helpful information. We know the playbook for this game from many different sources. Putting it into a presentation doesn’t differentiate the roadmap or the vectors of competition.
So what does the company really do? What’s really working? MoneyLion is running at $100 million in ARR ($70 million in 2020YE revenue), has 1.5 million users, and the SPAC is targeting a $3 billion equity value. We are looking at $2,000 per user and a 35x multiple on revenues. Already feels a bit heavy, no?
That $100 million in revenue largely comes from “Fees”, and only in small parts from payments and advice. So unlike Chime, which is driven by the “Payments” bucket, or Acorns, which is driven by the “Advice” bucket, MoneyLion is all about fees.
What are these fees? We refer you to Jason Mikula’s thread on Twitter.
Here is the Credit Builder small print.
The service MoneyLion provides is “building credit”. It underwrites $1,000 to their users, without fully allowing them to access the full $1,000. It then charges them $20 per month in membership to do so, on top of the loan payments, which we assume also accrue interest.The average MoneyLion user is paying $40 per year ($60MM rev/1.4MM users) — or two months of membership.
This reads like some sort of performative financial theater, where people have to take out debt they can’t afford to improve their credit scores. We assume that credit scores need improvement, because these folks are in bad financial health. Do you think this is a revenue pool that should power growth from $70 million to $300 million?
Key Takeaway
The point of Fintech was supposed to be to break the bad habits of the financial industry. No overdraft fees. No exorbitant credit. No excessive commissions. No payday lending.
We can’t help shake the feeling that Fintech is still that very-same financial industry. Amped up on venture blitz. Or at least, a lot of it is.
And as $4 billion of quarterly SPAC capital rolls in to take public anything with a unicorn valuation, we advise you — dear reader — to read the fine print. You don’t have to invest in things you don’t like. You can choose your values. You are here with us for a reason. Don’t compromise it away.
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