Fintech’s next big down round may have an upside

A US dollar bill is seen in front of the stock graph shown in this illustration taken May 7, 2021. REUTERS/Dado Ruvic/Illustration

LONDON, Aug 24 (Reuters Breakingviews) – Financial technology start-ups are facing lean times. Klarna set the tone last month by raising cash at an 85% discount to its previous funding round. The Swedish buy-now-pay-later group will not be the last to experience an embarrassing cut in value, known as a downgrade. But for some, it may be a reason to embrace the trend.

Fintechs have the same problem as all growth-focused startups: investors are suddenly more interested in short-term profits than skyrocketing revenues. Investors in July cut loss-making Klarna’s valuation to below $7 billion from about $46 billion.

There are many candidates for a repeat. Fintech startups raised $125 billion in 2021, or nearly 3 times 2020s according to Dealroom. Seven of the biggest — Stripe, Checkout.com, Revolut, FTX, Chime, OpenSea and Blockchain.com — increased their valuations by an average of 275% in their most recent funding rounds to a total of $253 billion, based on Breakingviews calculations using PitchBook data.

Founders will be reluctant to dilute their stake by raising money at a lower price. But many fintechs have burned cash to dominate their niche, which means they’ll probably need another infusion at some point. The ARK Fintech Innovation exchange-traded fund, which aims to track the sector, is down 56% this year.

Sometimes rounding down can even be beneficial. First, having an unrealistically high valuation means employee stock options may have less upside. A lower price tag can therefore make it easier to attract and retain talent.

Second, raising capital while others are pulling back can help some fintechs steal a march on the competition. Take cryptocurrency exchange FTX. Founder Sam Bankman-Fried has been on a shopping spree in recent months and has continued to invest as Coinbase Global ( COIN.O ) cuts staff. FTX has overtaken its rival in terms of spot trading volume, according to The Block Research. Raising money could allow Bankman-Fried to double that advantage. A similar logic may apply to Blockchain.com and the digital bank Chime. The latter group can use the money to push in new products such as insurance.

And not all fintechs face a write-down as humiliating as Klarna’s 85%. Shares in Chime, for example, are trading in secondary markets at a 49% discount to January levels, according to data provider ApeVue, compared with an average of 89% for U.S.-listed peers Upstart (UPST.O) and Dave (DAVE.O) . Downstairs are never pleasant. But relatively speaking, they can be a show of strength.

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Cryptocurrency exchange FTX generated more than $1 billion in revenue in 2021, CNBC reported on August 20, citing a leaked investor presentation. This sum was more than 11 times the sum for the previous year. The company’s earnings were $388 million, up from just $17 million in 2020.

CNBC reported that FTX’s revenue was on track to be approximately $1.1 billion by 2022.

On July 11, Klarna raised money from investors to the tune of $6.7 billion, after including the new capital raised. That compared to a price tag of $45.6 billion in the previous fundraising round, in June 2021.

Editing by Liam Proud and Streisand Neto

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