There are fintechs, and then there are fintechs. Cheerleaders point to payment startups like Jack Dorsey’s Square Inc., whose shares have climbed 242% in one year, as evidence of an ongoing Silicon Valley-style revolution. But there are also bloody stories: LendingClub Corp. and On Deck Capital Inc. are still trading well below their IPO prices. The promises of meteoric expansion often collide with the reality of regulated finance.
Funding Circle Ltd., the UK’s largest online loan provider, hopes to break the curse of its US peers. The company said on Monday it was preparing an IPO that could value it up to 1.7 billion pounds ($ 2.1 billion) – the highest valuation that Danish billionaire Anders Holch Povlsen is willing to accept in exchange for the purchase of a 10% stake in the IPO. .
The company’s impressive past growth is the attraction: Revenue jumped 59% in 2016 and nearly doubled in 2017. The IPO would raise around £ 300million to maintain that growth. Profits, or rather losses, would take a back seat.
To justify the price tag, investors must believe in a story of future growth. Reaching that £ 1.7 billion figure requires a lot of optimism about additional marketing and overseas expansion. Funding Circle’s revenue last year was just under £ 100million. A multiple of 17 times the trailing revenue seems huge next to LendingClub’s 1.3, On Deck’s 1.7, and even Square’s 13.
It is difficult to maintain rapid growth rates before the IPO in a mature industry. LendingClub and On Deck’s adjusted revenue growth has slowed from triple-digit rates in 2013 to mid-teens in 2017. These aren’t perfect comparisons in terms of risk and growth, to be clear. Funding Circle does not offer consumer loans, and its focus on small businesses in Europe means it is exposed to a still young and rapidly growing market. But the competitive environment is getting tougher and mainland Europe – an area growing faster than the UK – will be a battleground for many platforms.
There are many known risks in the lending industry in the market, including the fact that platforms like Funding Circle have never experienced a real downturn before. Talking about how algorithms make better risk managers than experienced humans or institutions still doesn’t make sense given how benign the current cycle has been. Yet the wide range of institutional investors and asset managers throwing money on this type of platform, and the actual withdrawal of banks from lending, suggests that few believe these platforms will be wiped out.
Rather, the unknown here is what the real growth rate is for a sector that has experienced both high euphoria and overwhelming disappointment in the financial markets. There is still a lot of optimism among investors and Funding Circle will be of scarcity in Europe. But the virtuous circles of the past – burning money to grow fast – can still turn vicious.
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