Fintech valuations are soaring at the late stage, and one Silicon Valley VC is warning of a bubble

  • Fintech valuations in the US and Europe are soaring as investors pile into digital finance opportunities. 
  • Late-stage fintech startups saw a record year of funding in 2020.
  • Some sub-sectors of fintech may get left behind and it's a bubble waiting to pop, according to Thomvest Ventures managing director Don Butler.
  • Visit Business Insider's homepage for more stories.

Fintech valuations are booming. 

This flourishing sector for startups is a broad church, comprising payments, financial markets, challenger banking, insurance, and lending. Its emergence is down to factors such as consumer willingness to shop and bank online, and distrust and dissatisfaction with traditional financial providers.

The number of fintech mega-deals rose in the US to a decade high last year, with 44 transactions logging $12.2 billion, according to PitchBook data. The median pre-money valuation for VC-backed, late-stage fintech companies in North America and Europe from 2019 was a record $73.8 million. That figure for last year, as of Q3 2020, was $95 million. Despite the coronavirus pandemic, fintech valuations were breaking records. 

Notable examples include stock trading app Robinhood which raised funding at an $11.2 billion valuation last year; buy now, pay later startup Klarna which raised at $10.65 billion; and Chime, a challenger bank, raised at $14.5 billion.

One skeptic says these record valuations are not justifiable.

Businesses are being funded at potentially unrealistic multiples

Don Butler, managing director at Thomvest Ventures and a backer of big fintechs such as SoFi, LendingClub and Kabbage, says some parts of fintech look bubbly.

"From our perspective, we tend to believe that we are in an era of globalization … that is also leading to more convergence, and we tend to believe that there is indeed a sizeable bubble in many areas of fintech these days," he told Insider. 

The outsized bets being taken by investors desperate for returns means that some businesses are being funded at massive multiples, which could be inflated.

That, Butler says, could make it harder for those businesses to raise funding in the future at a similarly high valuation. 

Read more: Digital banking is booming due to Covid but remains unprofitable. Here's why fintech executives and investors believe 'rebundling' is key for fast growing challenger banks in 2021.

Not all highly valued fintechs are indication of a bubble, but some sub-sectors may be at risk

The rush by investors into late-stage fintech can be viewed in two ways. 

It may simply be the case that given a previous dearth of fintechs going public, a push from investors into late-stage businesses reflects a new desire to list consumer financial services companies.

Despite crazy 2020 IPO figures, fintech hasn't been a major sector for listings. Notable recent IPOs include SoFi, Upstart, and Affirm.

Alternatively, investors are simply forced to put their money somewhere, placing outsized bets on late-stage businesses. "I don't think investors are consistently looking enough at the details but are more interested in seeing these hyper dreams take off," Ruth Wandhofer, partner at Gauss Ventures, told Insider.

Affirm, a loan provider founded by PayPal cofounder Max Levchin, soared 110% on its first day of trading. 

"Investing in a company like Affirm even at an inflated valuation feels like it has some meaningful return potential given the alternatives," Butler said. "So for the surge into late-stage companies I think you're seeing investors trying to get in ahead of the IPO pop that we are seeing real-time."

Bubbles in fintech sub-sectors will pop

Despite 2020's record breaking year for tech IPOs overall, public markets will still look for quality. Fintech listings which fail to excite investors could signal the bubble deflating, however, Butler added. The booming public market valuations of recent IPOs, after a record of more than $253 billion in exit value in the US last year, could slow down, causing a disconnect between public and private fintech. 

"I think we'll see some lesser companies go public in certain categories of fintech that could in turn deflate those subsectors," Butler added. "So given the scale in financial services, I think a bubble popping will be specific to certain sub-sectors rather than holistic across fintech."

In particular, Butler cites areas of early fintech, such as marketplace lending, or companies that are focused on one specific product (such as SoFi in student lending), where market leaders in the space have already scaled up, making it harder for new entrants in those categories to catch up.

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