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BFD Expert Voices - Private Credit

BFD Expert Voices

The long freeze on the IPO market is showing signs of thawing, raising the question: Who in fintech could successfully go public in this market?

Lucinda sat down with Morgan Stanley's global head of fintech banking Jigar Patel and head of payments and financial infrastructure banking Stephen Gerson to get their insights. 

Why they matter: Morgan Stanley has consistently sat among the top IPO underwriters.

This conversation has been edited for clarity.

What kind of fintech company do you think could potentially seek to go public successfully?

Patel: We've done a lot of data and analytics going back to the dotcom crash and looked at software companies as a proxy for fintech companies.

The data tells you that for tech companies, investors are going to want a company that has, call it, $200 million or $250 million plus of actual revenue — not annual revenue run rate. Compare that to during COVID, when you had companies that were sub-$100 million ARR going public.

Patel: We did a survey among a bunch of institutional investors and asked what matters more: growth or profitability? 

The answer — guess what — is both. The data said that they're OK with a company with slightly positive to negative 10% operating margin, but [which] is growing 30% to 40% on revenue. What they don't want is a company that's negative 50% margin growing at 300%. So the company needs to meet the rule of 40; people want to know this is a business that can hit profitability in a predictable time frame.

The last criterion, according to the survey, is business model. Investors are asking if it's a sustainable model that you can turn into a platform with multiple revenue line items.

We have this saying that a lot of these fintech companies were features, not platforms. Now they're trying to figure out how to become platforms and companies, and not many of them will may be able to make that pivot. 

On that point of sustainability — do you think the public markets will also favor a B2B fintech over a consumer-facing one?

Gerson: Many B2B companies don't have as much scale as some of the consumer companies. But there is a ton of growth there, and it does hit on all those points that Jigar was laying out earlier as to what makes a good IPO candidate. So I think B2B could be a great place place for an IPO candidate to reopen the IPO market with volume.

Will the first one to go public have to have a big brand name?

Patel: I would say yes. It has to be a must-own.

I'll ask the impossible question: What's your best guess on when are we going to see the big tech IPO that reopens the market?

Patel: I'm an optimist — so I'm bullish that you probably see something this year. If somebody had said at the beginning of this year you're going to have a new $1 trillion market cap company, everyone would've said no. Now there's Nvidia.

Gerson: I think it's going to be highly dependent on what happens in the economy. So many fintechs are monetizing consumer spend, so if there's a slowdown, that has an impact. Enterprise and B2B are a little bit more insulated but would still be impacted by the macro environment.

With the two SEC lawsuits against Binance and Coinbase alleging that various cryptocurrencies are securities, do you think a crypto company could debut in this environment?

Patel: I wouldn't hold my breath. You're fighting two things. One: You have to fight to get your prospectus deemed effective by the SEC. Two: You're facing a market that is very skeptical of crypto companies.

Editor's note: This piece has been corrected to show that Jigar Patel was referencing annual revenue run rate (not annual recurring revenue).

Morgan Stanley fintech bankers: Who can IPO in this market?

1 big thing: Who can IPO?

Morgan Stanley global head of fintech banking Jigar Patel and head of payments and financial infrastructure banking Stephen Gerson / Photos courtesy of Morgan Stanley

Banking-as-a-service startups are slimming down or seeking suitors, just a few years after the sector saw a glut in fundraising, Ryan writes.

Why it's the BFD: Startups building turnkey banking infrastructure to help other fintechs launch and scale up are finding new venture funding harder to come by.

Driving the news: Early BaaS pioneer Synapse announced yesterday that it was laying off 18% of its workforce, citing current macroeconomic conditions that “have begun to impact our clients and platforms.”

Last week, publicly traded fintech giant Fidelity National Information Services (NYSE: FIS) confirmed it had acquired BaaS startup Bond.

That follows Fifth Third Bancorp’s (NASDAQ: FITB) acquisition of embedded payments platform Rize Money last month.

U.K.-based embedded finance player Railsr (formerly Railsbank) entered into bankruptcy protection and was recapitalized after failing to secure a buyer.

Of note: This isn’t the first time Synapse has had significant layoffs; in June 2020, it reduced headcount by 63 employees, or about 50% of its staff.

Flashback: It wasn’t long ago that banking-as-a-service was an ultra-hot sector in the fintech ecosystem.

Synapse raised $32.6 million in Series B venture funding in a deal led by Andreessen Horowitz in 2019.

In July 2020, Bond raised $32 million in Series A funding led by Coatue, with backing from Mastercard, Canaan and Goldman Sachs.

Rize raised $11.4 million in Series A funding led by Alpha Edison and Morpheus Ventures in September 2021.

And Railsr raised a total of $185 million in funding over multiple rounds prior to bankruptcy, according to Pitchbook.

Yes, but: It’s not all doom and gloom for the BaaS ecosystem. Just this spring, Treasury Prime raised $40 million in Series C funding, and Synctera raised $15 million in strategic funding.

💭 Ryan's thought bubble: The BaaS players that seem to be winning — or at least those that have continued to raise funding — are the ones that operate as marketplaces and have relationships with multiple potential banking partners.

Treasury Prime, for instance, says it works with 16 banks, while Synctera has 10 bank partners.

Meanwhile, the startups that have struggled seemingly are the BaaS providers who tout turnkey banking infrastructure but work with a limited number of partner banks.

2. The BFD: BaaS sector shakeout

Illustration of a nervous piggy bank with a sweat drop on its face.

Fed sees two more rate hikes in 2023 (CNBC)

The Federal Reserve held rates steady yesterday but is projecting two more quarter-percentage-point moves before year-end.

Zepz touts digital wallet, M&A plans (CNBC)

The owner of money transfer firms WorldRemit and Sendwave says it is on the hunt for mergers and acquisitions after cutting 26% of its workforce last month. 

Molten Ventures writes down Revolut by 40% (Finextra)

The venture capital firm wrote down the value of Revolut from £91.3 million in March last year to £54.5 million at the end of March this year.

Molten Ventures CEO Martin Davis attributed the write-down to the fintech's struggles to win a U.K. license and its path to profitability.

3. Credit score

Illustration of a credit card headed towards a goal post to score a touchdown.

• Brink, a bitcoin nonprofit, raised $5m from Jack Dorsey’s Smart Small funding initiative. https://axios.link/3Pf7G1Q

• Wayflyer, an Irish revenue-based e-commerce financing startup, renewed a $300m debt line with J.P. Morgan. https://axios.link/466VJAY

• Apollo, Sixth Street and Warburg Pincus are among the private equity firms that have submitted initial bids on Greensky, the specialty lender Goldman Sachs acquired for $2b. The bids value the company in the mid-nine figures, per Semafor. https://axios.link/3CpJHoW

• Bain Capital is planning to sell a 0.7% stake in listed Indian lender Axis Bank, which could fetch around $267m, per CNBC-TV18. https://axios.link/43GmZ81

• BCB Group, a London-based payments processor that links crypto firms to the banking system, ended its planned acquisition of Sutor Bank, citing regulatory delays and changing current market conditions. https://axios.link/46i0YhA

4. Deals!

• Amy Wu, former head of FTX Ventures, joined Menlo Ventures to focus on consumer startups. https://axios.link/3NwibMI

• Paul Todd, former EVP and CFO of Global Payments, joined TTV Capital as a venture partner. www.ttvcapital.com

5. It's personnel

Happy Thursday. We're looking forward to the three-day weekend.

👂What say you? Please take Axios Pro's 2023 Deals Industry Survey to help us understand how you're thinking about the market. Respondents will get early access to our forthcoming report, where we'll distill and analyze the results.

@Lucinda is really excited seeing a booming NYC fintech scene.

@Ryan is tired from watching the Phillies play West Coast baseball.

Thanks to George Moriarty and Rob Reinalda for today's edits.

And thanks to you for reading. Please tell your fintech friends about this newsletter. They can sign up here.

June 15, 2023

1 big thing: Who can IPO?