After decades of hypergrowth investment, payment and financial technology companies have entered a new era. Super-sized valuations, irrational business models, and free flowing investment funnels are in the rear-view mirror and not all organizations are ready to pick up the pieces and build sustainable, profitable, growing businesses. In fact, some businesses may not have a real shot at success given their business models, management, or capitalization structures.
The past two years have been devastating for valuations in the payments and financial technology market. Even the fastest growing, highly-coveted, disruptive organizations have seen their valuations drop 50% from their highs in the early part of this decade (Adyen: $1500, high $2500; Affirm: $50, high $150; Shopify: $80, high $150). Scaled incumbent payments businesses are experiencing valuations at multiple lows not seen since 2009: EV/EBITDA: FISV – 12.0x, FOUR – 11.5x, GPN – 10.5x, Nuvei – 8.5x, RePay – 7.5x (multiples and valuations based on early 2024 reporting).
Payments and fintech businesses are following general market trends that began a correction when interest rates started to rise in early 2022. Looking ahead to 2024, most experts believe we will not see further increases in interest rates. However, we may never return to the low interest rates of Q4 2021, and there is increased regulatory scrutiny on mergers (Adobe walking away from its $20 billion acquisition of startup Figma Inc. after clashing with regulators in Europe and the UK) and general investment sentiment in financial technology has soured. This means public multiples are unlikely to revert to 2021 levels anytime soon. What many don’t understand is that private investors benchmark from public multiples, and market dynamics (interest rates, growth, access to credit, etc.) don’t just affect public markets; they affect private markets as well.
Private equity and venture funds have had massive fundraising challenges. According to the Wall Street Journal, private-equity firms are preparing for an extended period of lean fundraising, with little indication that 2024 will be better for raising money than in the past year. Private equity fundraising was down 57.4% during the first half of 2023 at the top publicly traded firms, according to PitchBook. The toughest period for private equity fundraising since at least the 2007-09 financial crisis is likely to continue, as investors remain hesitant to invest more in the asset class. Those with capital are being very selective in their allocations. Venture equity isn’t any better. According to Ernst & Young, venture capital fund formation is off significantly from a record year in 2022, dropping 62% in 2023. Furthermore, EY reports the 2023 venture capital market saw a 35% year-over-year decrease in investment dollars from 2022, the lowest level in four years. Venture capital backed startups raised just over $140 billion last year, and if not for several mega-deals fueled by artificial intelligence (AI), the venture capital market would have struggled to top $100 billion. This year may record a sub $100 billion year and deal with an overhang of more than 50,000 existing venture capital backed startups, which need to sort out high valuations and low liquidity.
So what’s next?
Just like the days, months and years after a hurricane – it’s time for the great restoration period. The weaker homes and businesses are wiped away, structures with solid foundations clean their yards and mend their fences, and go forward with a renewed respect for their infrastructure. Replacement homes are built to new and updated codes, and fortified to withstand the demands of the new world.
We have seen scaled incumbents shut down or shed non-core assets. In the payments world, Chase has all but shut down WePay as reported by The Information on January 10 (“JPMorgan’s WePay Abruptly Dumps Business Customers “). Similarly, FIS divested WorldPay at a valuation of $17.5 billion, a far cry from the $35 billion it was valued at just four years earlier. We have seen venture growth-backed future-stars literally dissolve, as TILL, once valued at $350M, sold to Nuvei for $30.5M after they were unable to keep the doors open. Similarly, Plastiq, after a failed attempt to go public via SPAC, filed bankruptcy and was picked up by Priority Payments. Many of the high-flying SPAC companies have reversed course and gone private at reduced valuations from their post-SPAC highs (e.g., BillTrust goes private at $9.50 per share; all time high of $19; Engage Smart goes private at $23 per share; all time high of $38). Even Stripe, after seeing their value drop by 50% (Stripe slashes valuation to $50 billion in new $6.5 billion funding round in 2023; Stripe had raised capital at $95B two years earlier), has changed its business and pricing models to expedite it’s path to profitability (November 2022, manually entered transaction fees were increased by 50 basis points; October 2023, currency conversion fees are no longer reversed for refunds); and according to Alternative Payments Baxter Lanius’ January LinkedIn post highlighting Stripe’s business changes of: ‘price increases, renegotiation of terms and a move upmarket’.
Similarly, on the back of higher costs of capital and increased regulatory scrutiny, San Francisco-based Affirm adjusted its own go-to-market plans, doing more interest-bearing, longer-term installment loan volume than shorter-term, fee-free lending. And its interest rate on the former could be as high as 36%. Pay-in-4 loans made up 19% of Affirm’s gross merchandise volume for the fiscal year that ended June 30, according to the company’s annual filing with the Securities and Exchange Commission.
We are only in the first period of this Great Restructuring, so what is in store for the next 12 – 18 months:
- More Cash Struggles – Thousands of cash-burning businesses will need capital, and there will be a huge board and investor push on companies for profitability. These companies will be forced to be prudent when managing their operating expense base while also looking for ways to squeeze more margin out of existing customers.
- More Divestitures – Organizations will focus on their core business lines and, with limited equity or cash available, will be forced to divest non-core assets.
- More Mergers and Acquisitions – As businesses are forced to make strategic changes, this opens the door to softer valuations and “relative value” discussions, and will open a window for mergers and acquisitions among strategics and sponsors alike.
- More Failures – Organizations that don’t have a buyer or an investor once they are at the end of their cash reserves (and there will be many), will result in a shutdown of business operations. There can be only so many lifelines.
- More Rational Business Models – The “growth at all costs” or “grab some users to get the next funding round” models will no longer be tolerated by boards and investors. Companies will need to launch business lines with a hard look at break-even and ROI.
- More Focus – Payments and fintech businesses will focus on their core competencies and drive profitable models from core business operations before opening or acquiring new lines of business. Gone are the days of driving multiple sub-scale new lines of business simultaneously vying for capital and resources.
While the year ahead may sound ominous, it will lead to a “better” payments and fintech environment. Many of the organizations that were not built on solid foundations lacked the compliance and financial disciplines required for the long haul. There will also be huge opportunities for incumbents and new organizations to assemble assets in the right way, for not only long-term growth and stability, but for outsized returns.
Regardless, the Great Restoration is going to be fun to watch.
