Fintech, the home of the fabled unicorn, is hot. There are now 36 fintech unicorns in the wild, which is up 25 from 11 over the last year. This staggering growth is a reflection of the hype around fintech, where a plethora of startups are using technology to compete against or collaborate with established financial players. The result is a dramatic increase in company valuations as investors look to get in on the ground floor of the next big thing.
However, there is an enormous difference between being valued at $1 billion-plus and realising that exit. Vast potential seems to be sacrificed too early. Young unicorns are culled. Why is that?
In Europe the fintech scene isn’t set to create a wave of financial technology giants hell bent on world domination. Too many are built to exit, rather than to compete.
Built To Exit, Not Compete
The most likely end-game for a successful startup in the fintech sector is being acquired by a major technology firm such as Apple and Google or a trade sale to a larger firm (this is particularly common with payment companies).
During the first three quarters of 2014 the value of fintech-related mergers and acquisitions hit $10 billion, nearly doubling from $5.3 billion in the previous three quarters. Importantly, the average revenue multiple increased from 2.3x to 3.2x, while the average EBITDA multiple rose from 12.0x to 16.2x.
With such impressive multiples, it’s not surprising that entrepreneurs and investors are being drawn to the sector. The danger of skyrocketing valuations in a fiercely acquisitive market is that fintech startups are founded with the express aim of an exit, rather than to establish the next fintech powerhouse.
An E&Y review of company exits from 2009 to 2013 revealed there were no IPOs of UK-registered, venture-backed tech companies in that period. This has since changed with the Just Eat and King IPOs but the implication remains the same. Despite the availability of funds, fintech startups aren’t growing into the mid market and beyond.
Join our London Fintech Startups #TMUFintech @ Thursday, 24 September 2015 from 18:00 to 21:00 (BST)