M&A Exits Dim for FinTechs as IPOs Fall 38%
In business, and especially for smaller companies, there are a number of exit strategies depending on the macro environment they have to face.
When markets are booming, management teams may pursue an IPO, attempting to tap the stock market to raise working capital. In many cases, these entrepreneurs can also make money from their own existing holdings in the company. In tougher times, liquidation or bankruptcy are options.
There usually exists the possibility of pursuing a different path, where a merger or acquisition can help a struggling company shore up cash, yes, but also a strategic roadmap where the combined entity’s proverbial whole will be greater than the sum of the parts.
The window for an M&A exit may be closing for at least part of the FinTech sector – especially for the smaller companies that have seen share prices plummet and cash burn accelerate.
As reported earlier this month, it has become tougher for potential suitors in any industry to raise the capital necessary to fund any deal in the first place. Expected deals totaling more than $150 billion have either been postponed or canceled as funding becomes tight.
The FinTech IPO Tracker, as formulated by PYMNTS, shows that sentiment in the sector – at least the prospect of any digital-only upstart – has been anything but positive. As shown below, the index has fallen 38% for the year, far worse than any benchmark.
Drilling down a bit more into detail, the average return for the more than 40 names in the index shows an average loss of 46% since the companies’ IPOs—a figure that is significantly skewed (to the upside) by Bill.com’s more than 380% return .
None of this is meant to signal any particular name – but given the fact that only a handful of firms tracked are expected to deliver any earnings over the longer term, the pressure is a little apparent.
The average market capitalization of the FinTech IPO member is around $3 billion, indicating that the financial “hurdle” of buying one of these companies is not insignificant, even with the recent downturn. Of course, there are names like Katapult and OppFi whose market values are around $100 million and $300 million, respectively. In just one example, as mentioned in this space recently, Katapult has seen gross production decline by double-digit percentage points and has cited macro turbulence affecting consumer confidence and Elsewhere, companies that are in the midst of expanding their operations (such as Paysafe to Argentina, in a recent announcement) punished by the markets.
And as share prices continue to be volatile, it should be noted that using shares as currency is becoming less attractive (and less feasible) to get deals done. And in the meantime, at least for some companies, the cash burn continues, as evidenced by, for example, Katapult’s negative $1.7 million in operating cash flow through the first six months of 2022.
Now, innovation is a long-term game, and in FinTech it takes time (and money) to innovate financial services away from paper-filled and manual processes. But in the current environment, with deal-making increasingly on the back burner, the pressure is on to make more money in less time.
NEW PYMNTS SURVEY FINDS 3 IN 4 CONSUMERS WITH STRONG DEMAND FOR SUPER APPS
About: The findings of PYMNTS’ new study, “The Super App Shift: How Consumers Want To Save, Shop And Spend In The Connected Economy”, a collaboration with PayPal, analyzed the responses of 9,904 consumers in Australia, Germany, the UK and the US and showed strong demand for a single multi-functional super app instead of using dozens of individuals.
