Highs and lows of Fintech IPOs

The buzz is that once bullish fintech startups hoping to go public may face some serious trouble getting investors to take notice. It’s not just bad news! The market for new listings is finally starting to thaw after being frozen for over a year, thanks to the US Federal Reserve’s strict monetary tightening policy. But even with these positive developments, these startups will still have their work cut out for them to attract investors’ attention. It’s a challenge that will require some serious finesse, and we’ll be watching to see how they manage.

The cautious market sentiment has meant that only the bravest of startups, backed by solid fundamentals and steady revenue streams, have dared to go public this year. In fact, only about 24 companies have listed their shares, with another 140 applying for IPOs. But fear not, as the tide is turning and investor confidence is on the rise, prompting more companies to resume their IPO plans for the coming year.

However, there is a twist to this story! Our fintech friends may not join the race as they face a host of concerns, including rising cash-burn rates, mounting losses and poor stock performance from some of their listed peers. But keep your eyes peeled, because some digital banking pioneers still shine brightly as top IPO candidates. Chime and Stripe lead the pack, along with investment app Acorns and buy-now-pay-later company Klarna. Will they take the plunge and become the talk of the town? We’ll just have to wait and see!

The pandemic caused fintech apps to grow in popularity, as stay-at-home consumers sought easy credit in a near-zero interest rate environment. Digital payment giants like PayPal and Square expanded their buy now pay later services to attract millennial and Gen Z customers.

But now, with interest rates rising to their highest levels since the global financial crisis, startups with heavy exposure to subprime borrowers are finding it hard to justify their lofty valuations under investor scrutiny. Rachel Gerring, EY Americas IPO head, and Mark Schwartz, IPO and SPAC Capital Markets Advisory head, said it’s not a one-size-fits-all situation in the fintech sector.

While some companies have the scale and cash flow to push forward with their IPO plans, others may need to adopt a wait-and-see approach. In the 2021 IPO boom, 20 fintech companies raised a whopping $10.93 billion, eclipsing the meager $144 million raised in a single offering the following year.

But don’t despair yet, as the IPO market isn’t closed, it’s just more focused on valuation and profitability. According to David Ethridge, US co-IPO leader at PwC, companies looking to go public will need to bolster investor confidence in their cost-cutting plans and be transparent about their efforts to reduce cash spending. It’s a tough road ahead, but the winners in this race will be those who can weather the storm and come out on top!

It’s time to talk about the elephant in the room: fintech companies that go public and fail to meet shareholder expectations. It’s been a bumpy ride for the likes of Coinbase, Robinhood and Affirm Holdings, with their shares taking a beating as they continue to post losses.

Take Coinbase for example, which boasted a whopping $86 billion valuation in its Nasdaq debut back in April 2021. Fast forward to today, and its market cap has dropped to just $15 billion! Similarly, Robinhood and BNPL lender Affirm Holdings have both lost a staggering $20 billion in valuations since going public.

So what’s the deal? These high-growth fintechs were previously valued as technology companies, with valuations determined as a multiple of sales. But with the tech boom slowing, they are now being evaluated using the playbook investors use for financial firms, where earnings play a crucial role.

As Renaissance’s Kennedy puts it, it’s a whole new ball game out there. These fintech companies must prove they can make money if they want to win over investors and avoid being relegated to the losers’ corner. The stakes are high, the competition is fierce, and only the fittest will survive. Are you ready for the trip?