Investing in the Next Wave of Fintech: Making Sense of Fintech in a Bear Market

Cowboy Ventures
Cowboy Ventures


By Jillian Williams

The fintech sector has gone from one of the hottest sectors to struggling in the public markets, leading to uneasiness in the broader fintech startup market.

While markets may be rocky, we still see a lot of room for innovation in the fintech landscape across B2B and B2C. Consumer awareness is still in the early innings, financial services for businesses remain antiquated, infrastructure continues to be built to improve and eventually replace legacy rails, and traditional financial institutions continue to invest in innovation.

We’re still excited about founders and businesses building in the fintech space and what’s to come. In fact, many notable fintech startups were founded during/right after the Great Recession of 2007–09: Square, NerdWallet, Betterment, WealthFront, and Venmo.

Everyone knows the public market has had a brutal 2022 so far, particularly tech stocks. Year to date, the NASDAQ is down 29%, the worst performance the overall public tech market has seen since the 2008 financial crisis and the 2000 DotCom crash.

Fintech stocks have had it worse. Examining 19* of the “hottest” fintech IPOs since March 2020, these stocks are down on average 61% YTD and 73% since their respective IPOs. Even fintech (or fintech adjacent companies) that have been public for longer and seemingly more mature businesses have been beaten up by the public markets. Companies such as Block, Paypal, FiServ, Bill.Com, and LendingClub are down on average 49% YTD.

We are seeing a divergence between traditional financial services (FS) stocks and fintech stocks as companies like GS, Wells Fargo, and StateStreet are down only 27%, 20%, and 34%, respectively, and an insurance company like Progressive is up almost 7% YTD. This highlights how public investors view traditional financial institutions (FIs) differently from their technology-enabled counterparts.

Fintech is a massive industry that has implications in almost every sector and on a relative basis. The financial services industry is still rather antiquated from a consumer, business, and infrastructure perspective. This means there is still a lot of room for innovation despite the uphill climb.

Tl:dr growth has slowed for many fintech startups causing their revenue multiples to drop drastically, putting them more in line with older fintech companies. Many fintech companies generate a small fraction (in some cases less than 1%) of the revenue or customer bases of their incumbent competitors. Slowing growth combined with a lack of an existing base has caused multiples to fall by an average of 8x since IPO.

If public investors have fallen out of love with public fintech companies, what does that mean for the early-stage fintech startups and founders?

We think it’s a great time to be building in fintech, especially for founders with more pragmatic valuation and raise and burn rate expectations. Some aspects that will be more crucial than ever for fintech founders in the coming year:

  • The wedge in and distribution are crucial — One thing we’ve learned in fintech is, it is hard to compete with traditional FIs who have built brand and trust and have massive market budgets based on spend. So — a smart distribution strategy has been key for successful fintech companies. You’re not going to outspend Geico. We like companies that find a unique wedge in acquisition (e.g., Affirm’s success via point of sale merchant partnerships vs. D2C acquisition).

Others have used traditional vertical software to address a pain point and then upsell and monetize via financial services (i.e., Shopify and Toast). This distribution model is extremely sticky and enables revenue expansion without massive marketing dollars.

  • Have a plan to build brand & trust — Brand and trust are even more crucial in fintech than in other sectors because you are dealing with a consumer or business’s money. Being recognizable and synonymous with trust can make or break a company. We have seen many companies, startups, and large FIs go through ups and downs because they have eroded that relationship of trust with their customer, ultimately opening the door for competitors.
  • Have a product-led mindset — Building an incredible product in a space that is still so antiquated, like the financial services sector, can be all the marketing a company needs. Customers want exceptional experiences, and when dealing with financial products/services, that still does not exist today. But note, this needs to be done in a way that is 10x better than what exists today (i.e., Robinhood reinventing the retail investing experience) and is not just a feature. Being the first to find that niche in a market is power. Coinbase is a perfect example as an early brand that enables the everyday consumer to access crypto when traditional FIs shunned the market and become the synonymous brand with the space.
  • Be business model-minded from the start — Because acquisition is so hard in fintech, we’ve seen many startups solely focus on customer growth at the outset, assuming they will figure out how to monetize later. We believe that for a business to be successful, customers must spend their own money for the service/platform. Whether it is a per-use fee or subscription fee, it’s great to show that the customer, whether business or consumer, has a willingness to pay for a high-quality and needed product or service.
  • Build technology vs. financial engineering — We’ve seen a few startups focus more on financial engineering than the technological innovation of the company. This can have huge implications on the valuations and scalability of the company. Restructuring a loan product or a financial security and selling it via a website does not necessarily equate to an innovative fintech company, and unfortunately, sometimes those lines can blur.

Finally — some thoughts on fintech multiples

When the most recent batch of fintech startups went public over the last two years, they were valued by sky-high multiples driven by several factors, including excess private capital supply, growth rates, and low-interest rates. Multiples have come down a sobering amount from astronomical IPO highs — e.g., Marqeta went public at a 43x LTM revenue multiple and now trades at 9x.

Where should fintech stocks trade? There are two ways to think about this, which speaks to the indecision of how we categorize fintech companies: are they more tech companies or financial companies? If we think of them as the former, then we should look at the original fintech companies such as Square and Paypal, and even Fiserv (note: BILL, LC, and SHOP are public but unique cases). Q1 2021 saw these companies trade at 7.9x, 12.7x, and 5.5x LTM revenue, respectively, and they currently all trade around 2–4x.

The other comparison is to the financial services stocks. These have traded a lot more evenly throughout the pandemics, staying within a one-point range of their multiple from 3/31/21 to now. They trade at lower multiples with much less volatility.

Fintech still has a lot of growing to do. Companies like traditional insurance companies and banks 10x the customer bases, premiums, and deposit bases than their fintech counterparts. But we see this as an opportunity. For example, Lemonade’s gross written premium (GWP) at IPO was (and remains) less than 1% that of AllState’s P&C (property & casualty) GWP. This shows how much room these tech-enabled solutions have to grow their market share — a lot of which comes with the continued development of brand name and trust as customers get more comfortable trusting them with their financial needs.

COVID was a huge accelerant for many of these brands in terms of recognition and adoption, but there is still a lot of room to grow. As consumers who are more technologically native continue to age and lead businesses, we expect adoption to continue and accelerate.

While it’s been turbulent times for fintech of late, we are excited for what is happening at the early stages of innovation and the founders that are building the next generation of startups!

Note: Data as of the close of markets 6/17/22.*The 19 companies include: Affirm, Blend, Coinbase, Dave, Expensify, Hippo, Lemonade, Marqueta, Metromile, Moneylion, nCinco, Nerdwallet, Remitly, Riskified, Robinhood, Root, Sofi, Toast, and Upstart.



Cowboy Ventures
Cowboy Ventures

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