When it comes to fintech deals, less might be more
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Fintech-focused venture capital firms shouldn't sleep on $300- to $400 million acquisitions if they want to maximize returns, Restive Ventures says in a new data report.
Why it matters: The conventional narrative in VC is often focused on headline-grabbing, multi-billion dollar IPOs.
What they're saying: "There's this archetypal VC fund — 'we're only gunning for blockbuster IPOs or bust' — and I think this archetype struggles if they only allow for that," Restive Ventures partner Cameron Peake tells Axios.
- For funds of the right size and structure, merger and acquisition deals of a few hundred million can unlock a lot of returns.
By the numbers: The fintech sector has 10 times as many large M&A deals ($50 million+) as IPOs, according to Restive's findings.
- Since 2018, large fintech M&A transactions have averaged $403 million. Without counting 2020 given its unusual activity, the average is about $339 million.
- The median acquisition price was $193 million.
- One-third of the top 100 software acquisitions over the same period were of fintech companies, as were 20% of the top 10 acquisitions.
Zoom in: "We're at the pre-seed and seed stage, and even there, the discipline needs to be there," says Peake.
- "I'll often see founders try to optimize for the highest valuation that they can and I don't think that's always in their best interest," she adds.
- Raising too much capital at an overly high valuation could put these acquisition opportunities out of reach.
- She points to portfolio company Power Finance, which sold last year to Marqeta for $275 million but had only raised about $16 million in total funding. That's one example of great investment returns in a deal of this size.
Between the lines: Peake points to the diversity and breadth of acquirers as one explanation for the robust fintech M&A activity.
- It's creating a marketplace for these acquisitions, she says.
Yes, but: Getting $1 billion+ exits is still what Sheel Mohnot, Better Tomorrow Ventures' general partner, needs to make the math work, even as a seed investor with a $150 million fund.
- That's partly because liquidation preferences impact the cash that early investors like him get from exits.
- Still, he adds that these acquisitions are great because they typically happen sooner in a company's life. And in turn, this means getting capital back to limited partners sooner.
What we're watching: Mohnot predicts there will be more fintech IPOs (or PE exits) as the regulatory environment prevents or discourages some acquisitions.
