Exits in Fintech - a league of their own

One trait that both investors and founders share is a tendency to focus on the immediate milestones: Can we hit our revenue target? Will we grow fast enough this month? Will I achieve the next funding round? It’s easy to lose sight of the big metric for company success, namely: Will we achieve a big exit? And, perhaps more specifically: What is a big exit?

We believe it’s never too early to think about the long term. Within fintech, (our area of expertise) it matters even more. Fintech is defined by a disproportionate number of large M&A transactions compared to IPOs (on the order of 10-1).  The prices paid for those companies are a relatively consistent average of just over $400M year-over-year, with exit paths often available very early in a company's lifecycle. As an example, Power, a Restive portfolio company, sold last year to Marqeta for $300m in cash, without ever raising a Series A. 

To achieve big outcomes, founders and investors need to consider these exit numbers as they think about taking on new capital and valuing companies. While we’d never encourage a founder to dampen their ambition (and our fund strategy absolutely requires $1B+ exits to hit our performance goals), both founders and investors should follow valuation discipline in order to avoid unintentionally getting “priced out” of one exit path too early in the company’s lifecycle and miss out on potential upside. The downside for overshooting terminal value is often far more destructive to both the founder’s and the early-stage investors' equity value.

While M&A as a path to liquidity doesn’t always follow the prevailing venture narrative of the last number of years, it is a uniquely attractive and undervalued aspect of the fintech market. Fintech firms dominate IT software acquisitions, and M&A within the sector is consistent and active across market cycles. We believe that fintech founders and investors should incorporate this strategy into their portfolio management, and incorporate a level of discipline around pricing and pacing to take advantage of this exit path. 

We’ll dive into some of those numbers, consider the dynamics behind them, and conclude with implications for operations and investors in fintech. 

The Exit Landscape in Fintech

Fintech as an industry is defined by a relatively steady IPO market with about two per year (aside from 2020-2021) and an active M&A market. 

^{Data as of March 2024}

This data is a snapshot for the class of venture investments prior to this current era. We look at companies that started within the past 20 years (2004 or later) and that have realized a large exit from 2018 onwards. “Large” is defined as anything publicly disclosed over $50M. We also examined these investments through the lens of Restive Ventures’ investment screening (which likely mirrors that of many tech investors). That means we excluded banks and traditional financial institutions and focused on tech companies that either enable transactions or serve the financial services sector. Finally, these companies are those that are either listed on US exchanges or had a US acquirer. More information about the companies is included in the annex. 

M&A - Consistent and Robust

Since 2018, Large M&A transactions have had an average acquisition price of $403M. If we discount the large scale of acquisitions in 2020 (and the single data point for 2024) the average is closer to $339M with a standard deviation of just $55,187 (in other words, the band in prices is very tight). These companies had raised an average of just $93M prior. 

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Fintech M&A activity is significant in proportion to the larger tech industry. We looked at the Top 100 IT software acquisitions over the same period, and ⅓ (33%) of them were fintech companies. 20% of the top 10 acquisitions were fintechs. 

The makeup of these acquirers is diverse. Although one might assume that banks and insurance companies would be driving acquisitions, in reality, banks and traditional financial institutions acquired just a small portion of these companies. Acquirers ranged from large tech companies (Intuit, PayPal, Adobe) to payment companies (Lightspeed POS, Global Payments) to newly minted public fintechs (Blend, Affirm, Coinbase). This broader range highlights the big market of acquirers and perhaps helps to explain why the volume of deals has been so consistent year-over-year. 

IPOs - A story of outliers

The market performance of recent IPOs shows that the power law that characterizes venture also applies in public markets. As of March 2024, the average market cap of “large” listed companies is $5.1B. However, this average is being skewed by Nubank and Coinbase, which combined represent 50% of the enterprise value of the 47 stocks we’ve included. The distribution of IPOs per year listed at their current market caps also shows the most extreme valuations centered in 2021 (the same year that Nubank and Coinbase went public). 

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Within our IPO index, we should not look at $5B as a “terminal” market cap. This is always a moving target. Beyond just considering cyclicality in the stock market, we should see value accrue to these companies over time. For example, both Intuit and Fiserv (two examples of “godfather” companies in fintech) took years of slow, steady growth before becoming the behemoths they are today. While the market caps of these companies we index (those that have gone public in the last six years) are relatively small today, we expect many of these companies beyond just Nubank and Coinbase will continue to grow to become much bigger companies in the years to come. In fact, fintech companies in the S&P 500 make up more enterprise value than marketplaces and biotech combined. 

Zooming out, we do expect that new IPO activity will pick up in the years to come. A record number of fintech companies were seeded in the past five years. Despite the private market excess of 2021, there is now a robust pipeline of strong, healthy, innovative companies on an indisputable path to go public in the next decade. This will likely reset the average annual fintech IPOs at a higher level than seen previously. 

Implications

Armed with this data, what are the implications for founders and investors? 

‍M&A is the highest-probability path to a large exit. At a ratio of nearly 10:1, M&A represents a large and relatively frequent path to liquidity compared to IPOs. Don’t discount this strategy, and invest early in relationships with potential acquirers. In recent years, we’ve seen examples of large M&A transactions before companies even reach the Series A round. Looking forward, with AI enabling operations to become more efficient and founders becoming more dilution sensitive, we may even see this ratio increase. 

‍Make sure the valuation math works. The math has to work for any exit to be considered a success, but M&A outcomes are far more favorable early in the company’s capitalization journey. As later-stage funding rounds push up into the hundreds of millions - and especially as they cross into the $300-$400M range - recognize that these valuations are likely dramatically narrowing the options for a successful M&A path. In short: ensure that the math and financial incentives line up, being realistic about the most likely path to exit. 

‍Valuations over $2B should be reserved for truly exceptional companies. If we remove Nubank and Coinbase from our sample, the average market cap of the remaining fintech companies is about 2.5B. Obviously the stock market experiences cyclical swings, but we should nonetheless be cautious about assigning private company valuations beyond this level without the corresponding fundamentals to back it up. Just like for M&A math, it is wise to avoid the temptation to raise private capital at valuations in the billions that put the company out of reach of market caps for some of the newer public fintech companies. Counterintuitively, this may mean that many fintech companies should go public earlier. Given that many fintech firms are already operating in an industry (financial services) that requires greater compliance and financial reporting than is typical in other technology categories, many fintech firms may be better candidates to go public than is commonly perceived.

‍Fintech funds should not rely on IPOs alone to drive returns. As fintech specialist funds think about portfolio construction, they should not rely on multiple billion-dollar outcomes alone to drive returns. While funds and founders should be ambitious and shoot for big outcomes, fintech uniquely has a large M&A market. Funds should take advantage of that market to create liquidity earlier in their fund cycle. This strategy favors smaller and earlier funds.

‍Discipline is all the more important. It’s no wonder that the market is down on fintech after the hype of 2021. Investors were seeking multiple blockbuster IPO returns in a market more defined by steady M&A than 11 figure IPOs. Ballooning valuations of these companies did everyone a disservice. With the right valuations, the right amount of deployed capital, and the right vision toward an exit path, both founders and investors can be wildly successful. 

Fintech is an incredible market in which to invest and build a company. We’re undergoing a number of massive economic, regulatory, generational, and technological shifts that are opening up new opportunities for everyone in the market. But for founders and investors steeped in fintech, the strategy should not be a standard “cut and paste” from traditional, generalist tech funds. With a relatively narrow IPO market and a high-frequency M&A market, founders and investors have the opportunity to take advantage of both strategies. This should be reflected in honest discussions about the path to exit, discipline in maintaining valuations, and prudence about how much money companies are raising. By incorporating these strategies, the near-term milestones - will I get enough users to hit the next funding milestone? Am I in line to raise the right amount of capital - should line up with the bigger picture as well. 

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Annex: companies included in this analysis

All private data and company lists sourced from Pitchbook

Public market caps sourced from Yahoo Finance in March 2024

Publicly listed:

Abacus Life (NAS: ABL)

Affirm (NAS: AFRM)

Alkami (NAS: ALKT)

authID.ai (NAS: AUID)

Bakkt Holdings

Better (NAS: BETR)

BigCommerce (NAS: BIGC)

Bill.com (NYS: BILL)

Blend (Financial Software) (NYS: BLND)

Bright Health Group, Inc. (BHG)

Clover Health Investments, Corp. (CLOV)

Coinbase (NAS: COIN)

CONX Corp (NAS: CONX)

Dave (NAS: DAVE)

DLocal Limited (DLO)

EngageSmart (NYS: ESMT)

EverCommerce (NAS: EVCM)

EverQuote, Inc.

Expensify (NAS: EXFY)

Flywire (NAS: FLYW)

Freshworks (NAS: FRSH)

Hippo Enterprises (NYS: HIPO)

Lemonade (NYS: LMND)

LoanDepot (NYS: LDI)

Marqeta (NAS: MQ)

MoneyLion (NYS: ML)

nCino (NAS: NCNO)

NerdWallet (NAS: NRDS)

Nubank (NYS: NU)

Olo Inc. (OLO)

Oportun (NAS: OPRT)

Oscar Health, Inc. (OSCR)

PagSeguro (NYS: PAGS)

Paymentus (NYS: PAY)

Payoneer (NAS: PAYO)

Realtime Electronic Payments (NAS: RPAY)

Remitly (NAS: RELY)

Riskified (NYS: RSKD)

Robinhood (Brokerage) (NAS: HOOD)

Root Insurance (NAS: ROOT)

SoFi (Consumer Finance) (NAS: SOFI)

StoneCo Ltd. (STNE)

Toast (NYS: TOST)

Upstart Holdings, Inc. (UPST)

Velocity Financial (NYS: VEL)

Weave (NYS: WEAV)

Zuora

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M&A: 

Accrualify

Accu-Trade

Acima Credit

American First Finance

Appetize

Assurance IQ

Bay Equity

Beanworks

Berbix

Bison Trails

Blockfolio

Blue Marble Payroll

Bread

Bridg (Business/Productivity Software)

Bridge2 Solutions

Buildium

BuyerQuest

CARWAVE

Chargeback

CICO Digital Solutions

Clarity Insights

Clarity Money

ClickPay

ClickSWITCH

Cloud Lending Solutions

CloudCraze

Cobalt Software

Community Tax

CoreVest Finance

CoverWallet

Credible Insurance

Credit Karma

CreditIQ

Credly

Curv

D3 Banking

DAVO Technologies

Digit

Divvy

Earnifi

Ecwid

EQT Exeter

ErisX

EVEN Financial

Fair Square Financial

FairX

Finxact

Flexible Architecture and Simplified Technology

Floify

FolioDynamix

FourQ

Gabi

GammaRey

GradFin

Greenbacker Group

Hipercept

Honey Science

Hubdoc

HubTran

Inflection Risk Solutions

Inlet (New York)

InstaMed ( Financial Software)

interLINK

JetPay

Kensho Technologies

Kount

LevelCredit

Levelset

LevelUp

LibertyX

LifeWorks (Acquired)

Limelight Health

LiquidityEdge

Magento Commerce

Mazooma

Mercatus

Metrio

Metromile

MineralTree

Mobeewave

mPower Trading Systems

Nearside

NetCHB

Nexosis

North Avenue Capital

Novus (Financial Software)

Nvoicepay

ObserveIT

On the Barrelhead

Ondot

OnFido

Palm NFT Studio

Pango USA

Paya

PayBright

Payix

Payment Alliance International

Payrailz

Payrix Solutions

Paystone

PayVeris

Payzer

Personal Capital, an Empower Company

Pineapple Payments

Pocket Your Dollars

Power

Poynt

PrecisionLender

Profitero

ProfitWell

Pronto Money Transfer

PropStream

Pry Financials

Punchh

QuadPay

QuoteWizard

Quovo

Rapid Financial Solutions

Redline Trading Solutions

RetailMeNot

Returnly

SafetyPay

Sagent Lending Technologies

Salty Dot

Say

Scalefast

Sendwave

Sentieo

Service Finance Company

SharesPost

ShopKeep

Simility

Simplee

SimpleNexus

StreetShares

Student Loan Hero

Syntellis Performance Solutions

Tapjoy

The Giving Block

The Penny Hoarder

Tipser

Title365

Tora Trading

Torrid (NYS: CURV)

Transport Financial Solutions

TriSource Solutions

Truebill

UpLift

ValuePenguin

Velocicast

VendEngine

Venmo

Verikai

ViaBill

Viewgol

Visible Equity

Vocado

Voyant

X1 Card

YouCaring

Zimit

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