Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Over the past three months, a number of financial events have occurred in the fintech and finservices world that have caught our eye. Between two rounds at $500 million and two exits in the billions of dollars, financial technology and services startups have been on fire.
Today I’d like to rewind and go over the four largest events from the past three months in fintech and finservices (total value: $13.4 billion) and pull in data on other rounds that have happened recently. This will help us get a handle on what’s going on in the two heated startup sectors.
Recall that our last look into fintech’s venture activity wrapped up its Q4 2019 results. Today, thanks to the punishing news cycle that the sector has kept up over the last few weeks, we’re going a bit further. Into the breach!
We have two rounds ($500 million rounds for Revolut and Chime) and two sales (exits for Plaid and Credit Karma) to wrap up today. Here’s what each of those deals might tell us about the current market for money-focused startups and investment, starting with our two rounds and followed by our two exits:
In the wake of the $5.3 billion sale of banking API provider Plaid to Visa — a deal generally lauded as intelligent for the larger company — fintech became an even hotter part of the venture capital and startup landscape.
While companies in the broad fintech and finservices spaces were already attractive bets for private investors, Visa made them all the more attractive — a facet of the market that we presume has a great impact on startups that are working along similar lines to Plaid . Startups like Belvo, a Y Combinator-backed company that is part of the accelerator’s current, Winter 2020 batch.
TechCrunch got in touch with Belvo because its model is interesting, as are the bones of the company’s organization itself. Let’s explore.
To understand what Belvo is building, TechCrunch caught up with the Pablo Viguera, one of the company’s co-founders, to chat about his startup and its goals.
Noting that his company’s aims are “similar to the overarching goal[s] of Plaid,” Viguera told TechCrunch that Belvo is not merely building a banking API business hoping to connect apps to financial accounts. Instead, Belvo wants to build a finance API, which takes in more information than is normally collected by such systems. Why take in more data from more sources? Because, Viguera said, only 50% of individuals at most have a bank account in Latin America, his company’s target market.
But that doesn’t mean the underbanked population isn’t financially active. Indeed, Belvo wants to link all sorts of accounts together. For example, Viguera told TechCrunch that some gig-economy companies in Latin America are issuing their own cards that allow workers to cash out at small local shops. In time, all those transactions are data that could be linked up using Belvo, casting a far wider net than what we’re used to domestically.
The company’s work to connect banks and non-banks together is key to the company’s goal of allowing “any fintech or any developer to access and interpret user financial data,” according to Viguera.
So we might consider Belvo to be similar to Plaid, but tuned for the Latin American market so it can take in a more diverse set of data to better meet the local market’s needs. As far as goals go, providing better financial services to the underbanked is something I can get behind.
Belvo is a fun company in that it has two hubs, or headquarters, today. One of its nexuses is in Mexico City, Mexico, focused on “sales, operations, [and] biz dev,” according to Viguera. Its other home is in Barcelona, Spain, where it has its product and tech teams. Such multi-hub companies are becoming more common, as are, I suspect, smaller companies starting life as effective multinationals.
The startup intends to expand its engineering staff in Mexico in time.
Today Belvo is 15 people, the company told TechCrunch, a figure that it expects to rise to between 20 and 25 people by the end of Q1 2020. (Demo day is in late March, for reference.)
Belvo has a business model that investors can understand. Similar to other players in the API-space, Belvo charges for each API call that its customers use. We can compare the model to Twilio’s, I reckon.
The company is focused on the Mexican market first, something that I was curious about. According to Belvo, Mexico is home to a host of fintech companies it can partner with — 450 to 500 by Viguera’s estimation — with more being founded each quarter. That makes the country fertile ground for Belvo, given the nascency of its product and business.
Regarding growth, Belvo is coy, saying only that traction is “very strong” today, having added “dozens of developers” since it launched its platform about a month ago. Viguera did disclose that his company has “signed contracts with some of the most relevant fintechs in Mexico” and has seen “interest from other countries in Latin America.”
Belvo will move into the Colombian and Brazilian markets this year.
Belvo will present to a crowded room of investors in a little over a month’s time. How much revenue growth it can demonstrate will help price the company, and attract or disinterest capital. But given the mechanics of fundraising at Y Combinator today, who wants to bet that Belvo will close more capital ahead of the big day?
I talked yesterday about how VCs are just tired these days. Too many deals, too little time per deal, and constant hyper-competition with other VCs for the same equity.
One founder friend of mine noted to me last night that he has already received inbound requests from more than 90 investors over the past year about his next round — and he’s not even (presumably) fundraising. “I may have missed a few,” he deadpans, and really, how could one not?
All that frenetic activity though leads us to the paradox at the heart of 2020 venture capital: it’s the largest funds that are writing the earliest, smallest checks.
That’s a paradox because big funds need big rounds to invest in. A billion dollar fund can’t write eight hundred $1 million seed checks with dollars left over for management fees (well, they could, but that would be obnoxious and impossible to track). Instead, the usual pattern is that as a firm’s fund size grows, its managing partners increasingly move to later-stage rounds to be able to efficiently deploy that capital. So the $200 million fund that used to write $8 million series As transforms into a $1 billion fund writing $40 million series Bs and Cs.
That’s logical. Yet, the real logic is a bit more complicated. Namely, that everyone is raising huge funds.
As this week’s big VC report from the National Venture Capital Association made clear, 2019 was in many ways the year of the big fund (and SoftBank didn’t even raise!). 21 “mega-funds” launched last year (defined as raising more than $500 million), and that was actually below the numbers in 2018.
All that late-stage capital is scouring for late-stage deals, but there just aren’t that many deals to do. Sure, there are great companies and potentially great returns lying around, but there are also dozens of funds plotting to get access to that cap table, and valuation is one of the only levers these investors have to stand out from the fray.
This is the story of Plaid in many ways. The fintech data API layer, which Visa announced it is intending to acquire this past week for $5.3 billion, raised a $250 million series C in late 2018 from Index and Kleiner, all according to Crunchbase. Multiple VC sources have told me that “everyone” looked at the deal (everyone being the tired VCs if you will).
But as one VC who said “no” on the C round defended to me this week, the valuation last year was incredibly rich. The company had revenues in 2018 in the upper tens of millions or so I have been told, which coupled with its publicly-reported $2.65 billion series C valuation implies a revenue multiple somewhere in the 30-50x range — extremely pricey given the company’s on-going fight with banks to ensure it can maintain data access to its users’ accounts.
Jeff Kauflin at Forbes reported that the company’s revenues in 2019 are now in the lower three digits of millions, which means that Visa likely paid a similarly expensive multiple to acquire the company. Kleiner and Index doubled their money in a year or so, and no one should complain about that kind of IRR (particularly in growth investing), but if it weren’t for Visa and the beneficial alchemy of exit timing, all might have turned out very differently.
Worse that just expensive valuations, these later-stage rounds can become very proprietary and exclusive. From the sounds of it, Plaid ran a fairly open process for its series C round, which allowed a lot of firms to look at the deal, helping to drive the valuation up while limiting dilution for earlier investors and the founder. But that’s not the only way to handle it.
Increasingly, firms who invested early are also trying to invest later. That series A investor who put in $5 million also wants to put in the $50 million series B and the $250 million series C. After all, they have the capital, already know the company, have a relationship with the CEO, and can avoid a time-consuming fundraise in the process.
So for many deals today, those later-stage cap tables are essentially locking out new investors, because there is already so much capital sitting around the cap table just salivating to double down.
That gets us straight to the paradox. In order to have access to later-stage rounds, you have to already be on the cap table, which means that you have to do the smaller, earlier-stage rounds. Suddenly, growth investors are coming back to early-stage rounds (including seed) just to have optionality on access to these startups and their fundraises.
As one VC explained to me last week (paraphrasing), “What’s weird today is that you have firms like Sequoia who show up for seed rounds, but they don’t really care about … anything. Valuation, terms, etc. It’s all a play for those later-stage rounds.” I think that’s a bit of an exaggeration to be clear, but ultimately, those one million-dollar checks are essentially a rounding error for the largest funds. The real return is in the mega rounds down the road.
Does that mean seed funds will cease to exist? Certainly not, but it’s hard to make money and build a balanced, risk-adjusted portfolio when your competitors literally don’t care and consider the investment a marketing and access expense. As for founders — the times are still really, really good if you can check the right VC boxes.
When Visa bought Plaid this week for $5.3 billion, a figure that was twice its private valuation, it was a clear signal that traditional financial services companies are looking for ways to modernize their approach to business.
With Plaid, Visa picks up a modern set of developer APIs that work behind the scenes to facilitate the movement of money. Those APIs should help Visa create more streamlined experiences (both at home and inside other companies’ offerings), build on its existing strengths and allow it to do more than it could have before, alone.
But don’t take our word for it. To get under the hood of the Visa-Plaid deal and understand it from a number of perspectives, TechCrunch got in touch with analysts focused on the space and investors who had put money into the erstwhile startup.