Global fintech and funding innovation ecosystem

How to Value a Fintech Startup

Toptal Finance | Nirvikar Jain

global fintech investment activity - How to Value a Fintech StartupFintech is a popular contemporary buzzword and many of its products touch our lives every day. A fintech simply refers to a company that operates in the financial services sector and leverages the power of technology to simplify, automate, and improve the delivery of financial services to end customers. Further, they can be classified into various sub-sectors including payments, investment management, crowdfunding, lending and borrowing, insurance, cross border remittances, and so on based on the specific segment that they are trying to service.

There were over 12,000 fintechs operating globally as of January 2019  (Crunchbase Dec 2018), who since 2013 have amassed total funding resources of well in excess of US$100 billion. In terms of the number of fintech startups, the US is the most active country, with India and the UK following.  According to KPMG, global investment activity in fintechs exceeded $30 billion across 450 deals that took place in the first half of 2018 alone.


Company Valuation Approaches: Starting at the Top

The area that I would like to focus on with fintech is how its startups are valued. This interests me due to the following points:

  • Why are some of these companies valued so highly, even higher than existing brick and mortar banks, asset management companies, or insurance companies which have been in existence for decades?
  • What makes these startups reach such high valuations in such a short span of time? Are these valuations real or imaginary?
  • Is there an underlying logic or are these just based on sentiment and market hype?

These are some of the issues that I am going to try and address in this article.

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First, let me highlight some of the traditional valuation models that are conventionally used while valuing companies. These methods include:

  1. Discounted cash flow (DCF): Traditional model that discounts future cash at the average cost of capital to arrive at the present value of enterprise/equity.
  2. Multiple of revenue or book value: Such models use a multiple of either revenue or book value to arrive at the value of the company
  3. Replacement cost: If the business being acquired has assets that are hard to replace or will take time and money to build, one can use the replacement value of underlying assets as a benchmark for valuing the company
  4. Price-to-earnings (PE) ratio comparable: PE multiples of future earnings per share (EPS) is another common method of valuing companies.
  5. Strategic/competitive value: A company may bid for another competitor that could potentially become a threat to its existence (i.e. Facebook’s takeover of WhatsApp) and put its business model in danger.

Most valuation exercises use the multiple method to arrive at the valuation of a company and then use different approaches to arrive at ranged estimates, before choosing a number that matches their overall strategic, business, competitive, and return requirements. One thing to note is that the above approaches are typically useful for mature, stable businesses with relatively predictable cash flows and established business models. Whichever approach is used, they are all the same in just trying to estimate an outflow and future expected cash flows with an expected range of IRR.

However, when one looks at the current crop of fintech startups, all of these principles look difficult to apply due to them having completely unpredictable or even negative cash flows, rapidly changing pivoting business models, and in most cases, negligible physical assets.

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Understanding the Components of Fintech Valuation

When we come to valuing fintechs, the key differences between conventional businesses and early businesses are mainly in terms of:

  1. The nature of the problem that it solves (something that wasn’t possible earlier purely due to a breakthrough in technology).
  2. The ability to rapidly scale up across vast geographies without having the need to set up physical presence and infrastructure.
  3. The lower cost due to lean structures that no longer needs vast physical IT infrastructure and manpower required by conventional banks.

All these variables give insights into the kind of TAM available, and the subsequent revenues that the fintech can generate.

Below are some of the key variables that go into qualitatively assessing the potential of a new generation fintech, as compared to the traditional financial sector companies that I described above.  Let’s take a detailed look at some of these variables

1. Problems Solved

The foremost variable is the nature of the problem that is getting solved by the company, whether it’s a disruptive solution to a major problem or just an incremental improvement in an existing solution that may not affect the incumbents in a big way.

Using Fintech as an example, Transferwise has grown to a valuation of $1.6bn, due in part to it changing the paradigms of money transfer. If it had followed the status quo of analog brokering based on FX and payment cost, then it’s most likely that it would not be as successful as it is now.


The nature of some businesses makes them easily scalable across large geographies. For example, in the past, banks or mutual fund companies would need an extensive infrastructure of offices, branches, distributors, and agents to be able to reach and service their customers. With new age mobile-enabled fintechs, they are accessible to a client across the legal geography that they operate in and hence can rapidly scale up business.

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This allows them to cover a very large TAM within a relatively short time frame hence. For example, digital bank fintech Revolut was launched in 2015 and already has over 3 million customers and is available in over 120 countries. This is definitely larger than the number of countries served by most large international banks which have been in existence for over 100 years.

3. New Use Cases

As fintechs innovate there are new use cases that are enabled with the help of technology, which can potentially expand their market. A simple example could be a drastic reduction in cash balances that customers keep, as fintechs enable low-value P2P payments. This, in turn, is likely to increase idle balances kept with the fintech, as compared to traditional bank accounts. A real example in the fintech world is from wallet startups like Paytm using P2P transactions for enabling low-value payments to settle transactions amongst friends, splitting bills and making payments to small businesses.

4. Lower Distribution and Setup Costs

Typically such startups have business models that leverage the power of networks and are themselves very lean, with much lower infrastructure and setup costs. These costs can reduce as the size of the business grows and customers may benefit from this. For example, Uber doesn’t own any cabs or doesn’t need to have a huge setup for owning, servicing or maintaining cars. In the fintech world, companies like Revolut, Transferwise, and Paypal have a wide footprint across the world without having the need to open offices in each location.

5. Lower Operational Costs

In line with lower infrastructure and manpower, these companies have much lower marginal costs, as the business models are tech-enabled, rather than with transaction-linked high variable cost. This also makes these business models profitability increase exponentially after a certain critical mass that absorbs the fixed cost structure. In the fintech space, one can look at companies like Monzo which have less than one tenth the cost of servicing a retail account as compared to a large traditional bank.

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6. Revenue Models

Fintechs work on revenue models that leverage the power of a large number of customers and transactions that network effects enable. It’s important to understand what is the revenue model and how are they going to eventually make money, be it directly from the user or indirectly via advertising or data plays. A model that is just based on generating users without a clear understanding of how it will be monetized may not be successful in the long run.

7. Cross Selling

Due to the typical platform nature of a Fintech offering, it’s also easy to continuously keep adding features and products to the initial MVP.

Cross-selling opportunities become apparent with the benefit of AI-supported insights about consumer behavior and patterns from their use of the tech. This makes it amenable to continuously expand the scope of the offering with relatively small effort. An example of this can be the UK retail bank Monzo which originally started as an online prepaid card service, then a current account and now, lending services.

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NCFA Jan 2018 resize - How to Value a Fintech Startup The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit:

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