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Varo Raising $50m In Significant Downround, Term Sheet Reveals
Goldman Ends Checking Beta, Seven Key Takeaways from Block Earnings, EU BaaS Has Regulatory Issues Too, NY Fintech Week Announcement
Hey all, Jason here.
Big congrats to Morten and Elena Kriek on the success of their Banking Renaissance event last week here in Amsterdam! Really enjoyed the chance to hear some thought-provoking sessions, include Brett King’s keynote on what sci-fi can teach us on the future of payments.
For those attending Fintech Meetup in Vegas next month — which is somehow just three-ish weeks away! — hope to see you there.
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Fintech Meetup: It’s Not Too Late To Get A Ticket!
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Varo Is Raising $50 Million At A $1.8 Billion Valuation — (Only) A 28% Drop From Its Last Round, Term Sheet Reveals
Less than a year ago, Varo CEO Colin Walsh was insisting the company — the first US neobank to obtain a de novo charter — had enough runway to reach profitability without raising additional equity.
While the company has made some progress, it still reported net losses totaling $236.5 million last year.
Now, the struggling neobank is seeking to raise up to $50 million in equity — at a significantly reduced valuation, per a term sheet for the deal signed in late January reviewed exclusively by Fintech Business Weekly.
According to the term sheet, private equity firm Warburg Pincus has committed to put in $25 million of the $50 million round at a $1.8 billion valuation. Varo’s last fundraising round, $510 million in September of 2021, valued the company at $2.5 billion at the time.
In addition to the headline anchor commitment of $25 million at a $1.8 billion valuation, Warburg Pincus will receive $3.125 million of shares in connection with the deal, even if its anchor commitment is cut back.
Further, Warbug Pincus will also receive “penny warrants” with a coverage ratio that scales with its investment size; eg, if the firm invests the full $25 million, it will receive warrants with a 25% coverage ratio on its investment. The warrants include anti-dilution protection for stock splits, dividends, and similar stock recapitalization transactions.
Even At A Discount, Varo Looks Wildly Overvalued
But even at a significant discount to its last valuation, Varo is still richly valued — especially when compared to available public market comps.
Varo’s prior $2.5 billion valuation was arguably during the peak of the fintech market. Since then, both public and private fintech companies have seen huge write downs.
Even perennial darling Stripe is taking a haircut — reportedly seeking to raise $2.5 billion at a $55-60 billion valuation, or a 37-42% drop from its 2021 valuation of $95 billion.
Looking at companies with business models that more closely resemble Varo’s paints an even worse picture.
Dave and MoneyLion, which cater to a similar customer segment as Varo (though neither are banks) have both seen 90%+ of their market cap evaporate since completing SPAC processes and beginning to trade.
SoFI, which, like Varo, is a bank, has seen its valuation drop by half in the time since Varo’s last fundraise — despite a significantly more diversified, lending-focused business that caters to upper-income consumers.
Varo’s 28% drop in valuation, by comparison, looks downright generous:
Evaluating Varo’s valuation on a multiple basis presents an even starker contrast.
At its 2021 valuation of $2.5 billion, Varo was worth approximately 33x the revenue it earned in 2021 (based on its 12/31/2021 call report) and had a price-to-book multiple of about 37.4x.
A $1.8 billion valuation for the current fundraise brings those multiples down significantly to 18x revenue and 12x price-to-book — but, compared to public comps like SoFI, MoneyLion, or Dave, Varo is arguably grossly overvalued at $1.8 billion:
The valuation multiples are all the more confounding, given that Varo’s assets are shrinking — it shed about $173 million in assets in 2022 — growth is slowing, and its path to profitability remains unclear.
Representatives for Varo didn’t respond to multiple requests for comment on this story.
Want To Know “What’s Next For BaaS”? Find Out At This (free!) NY Fintech Week Event
Fintech Business Weekly is excited to announce our first happy hour/live podcast recording event — taking place this April during NY Fintech Week.
Join us at Rise, created by Barclays, for happy hour drinks and hors d’oeuvres accompanied by lively conversation.
The event will feature a panel discussion with perspective from across the fintech ecosystem addressing the question, What’s Next for BaaS?
Hear from experts from across the industry including:
Wednesday, April 26th from 6:00pm - 8:00pm
Barclays Rise, 43 West 23rd Street, New York, NY 10010
Cost — Free (but please RSVP!)
Special thanks to Rise, created by Barclays, for hosting us and to Valley Bank and Unit for making this event possible!
Banking-as-a-Service in the EU Has Regulatory Issues, Too
Increased scrutiny of banking-as-a-service business models and practices isn’t only an American phenomenon, as a couple of recent regulatory actions in the European Union demonstrate.
BaFin, the German banking regulator that oversees Solaris, which is a licensed bank in the country, expressed concerns about the viability of company’s business and the adequacy of its risk control processes, per reporting in Handelsblatt and other publications.
Last January, BaFin ordered a special auditor from PWC to Solaris, stemming from a supervisory audit from 2020.
Now, Solaris will be required to seek BaFin’s permission before onboarding new clients (companies), though existing fintech clients reportedly won’t be impacted.
Meanwhile, UK-based Railsr (formerly known as Railsbank) has also run into regulatory problems in the EU.
Railsr’s PayRNet entity, which holds emoney licenses in the UK and Lithuania, has been ordered by the Lithuanian central bank to cease onboarding new clients over anti-money laundering concerns.
Regarding the action, the Bank of Lithuania said in a statement, “There is reason to suspect that the institution is grossly and systematically violating the Law on the Prevention of Money Laundering and Terrorist Financing.”
Per a Fintech Futures story on the matter, a Railsr spokesperson said the company has offboarded clients that did not meet the required standards and is appealing the Lithuanian regulator’s notice.
For a deeper dive on the banking-as-a-service landscape in the US, make sure to check out Fintech Business Weekly’s newly published 2023 BaaS market overview.
Block Earnings: Seven Key Takeaways
Block, parent company to Square, Cash App, and Afterpay, released its Q4’22 earnings last week. While I haven’t had time to fully digest the shareholder letter and 10-K, here are seven quick takeaways.
1. Despite Economic Headwinds, Block Notches Steady Growth
In a challenging operating environment, Block has continued to execute and drive incremental gross profit across its ecosystem.
While, at $29 billion, Block arguably significantly overpaid for BNPL provider Afterpay, the acquisition is helping to boost both Square and Cash App’s gross profit:
2. Afterpay Enabling Block’s International Growth
Afterpay, which operates in Australia, Canada, France, New Zealand, Spain, the United Kingdom, and the United States, also has given Block a foothold in key global markets — helping drive a jump in ex-US gross profit from $62 million in Q4’21 to $139 million in Q4’22.
Some 17% of Square’s gross profit now comes from markets outside the US, including Afterpay’s contribution:
3. Cash App Slowly But Surely Driving Card Adoption
Per the earnings call, Cash App’s cost of customer acquisition remains significantly lower than neobanks at just $10. Cash App hit 51 million monthly transacting users in December 2022, and the company is making progress in driving adoption of Cash App’s associated debit card.
Cash App Card now drives 26% of Cash App’s overall gross profit:
4. Fund Flows Into Cash App Continue to Grow
Funds flowing into Cash App accounts have continued to climb and totaled $54 billion in Q4 — despite the end of most all pandemic-era stimulus programs:
5. Though More Recently Acquired Users Have Lower ROI
More recent customer cohorts — those joining Cash App in 2022 or 2021 — are generating lower ROI than cohorts that joined in 2020, 2019, and 2018:
6. Difficult To Glean Much About Cash App Borrow
I was hoping for a more meaningful update on Cash App Borrow, the company’s small-dollar lending product, which we covered in-depth previously.
The shareholder letter makes no mention of Cash App Borrow.
And while Cash App Borrow pops up in a couple places in the 10-K, the total amounts outstanding, revenue, and loan losses associated with the product aren’t broken out separately in Block’s balance sheet and income statement, making it difficult to glean much about the product’s performance.
7. Cash App Wants To Be Users’ Primary Bank Account
In case it wasn’t already obvious from the introduction of Cash App’s debit card back in 2017 or the recent addition of a savings feature, Cash App’s goal is to become users’ primary financial app — and Block CEO Jack Dorsey said as much in response to a customer question on the earnings call (emphasis added):
“Hi. Yes, my name is Austin. I use Cash App as my primary bank account. I get my paycheck direct deposited.
I use my Cash App Card every day. And I love the app, but I still have a legacy bank account for no other reason than auto bill pay. And for me, personally, this problem could be solved if I had the ability to schedule recurring payments just to other Cash App customers. But yes, So, I guess the question is, are there any plans to enable scheduling recurring payments within the Cash App?
Jack Dorsey — Chief Executive Officer and Chairman:
Austin, first of all, thank you for using Cash App and seeing us as your primary banking tool. That’s exactly what — it’s exactly the relationship we want to have with all of our customers. We’re seeing more and more of that. We’re always going to be looking at things that people are trying to do with Cash App that we didn’t build.”
Goldman Ends Marcus Checking Beta
Goldman Sachs, which had built its own checking offering and was beta testing it with employees at the firm, informed users last week the beta was ending and their accounts would be closed.
Beta testers have until April 24th, 2023, to update any direct deposits and auto debits and to transfer any remaining funds to another account, otherwise, a check will be mailed for any final balance.
The shutdown of the beta test isn’t a surprise, given Goldman’s strategy shift from focusing on a general market, direct-to-consumer offering to emphasizing distribution through its wealth management channels and “platform solutions” partnerships.
Goldman Sachs CEO David Solomon touched on this briefly during the firm’s recent earnings call, saying (emphasis added) “In addition, we have postponed the launch of our checking product. At the right time in the future, we intend to offer checking to our wealth management clients.”
Still, it’s a big come down, given the amount of time and money invested in building the checking offering. Goldman has been developing the product since 2019, and it was supposed to launch in 2021, before encountering numerous delays and, presumably, cost overruns.
It’s not immediately clear how Goldman would deploy the checking offering to its wealth management customers.
Goldman has expanded the range of wealth management clients it serves, both through Ayco, its employer-distributed service, and its acquisition of United Capital Financial Advisors, which is now known as Goldman Sachs Personal Financial Management.
But these clients are already very well banked — whether they’re ultra-wealthy, or merely garden-variety rich. They have existing everyday banking relationships.
A checking offering built for the mass market is poorly positioned to be competitive for an already well-banked high-net and ultra-high-net worth audience.
If Goldman does pursue this strategy, the product will need a rethink to displace existing banking relationships and win these customers to a Goldman checking offering.
What would be interesting and might make more sense? If Goldman repurposed what it has developed for its Marcus checking account with an existing partner like, for instance, Apple…
Other Good Reads
ChatGPT Learns Fintech (Chaos Engineering)
How the Government Cancelled Betty Ann’s Debts (The New Yorker)
The Bank Account Multiverse (Fintech Takes)
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