Financial technology startups emerged as serious challengers to financial services in 2017


All the attention in financial services this year has gone to the newest kids on the block: cryptocurrencies. With Bitcoin now eclipsing $15,000 and Coinbase adding more than 300,000 users in one week alone, it’s easy to see why.

While cryptocurrencies stole the spotlight, a clutch of companies were quietly working behind the scenes to slowly bring the financial services establishment to its knees. It may turn out that these startup entrants of the last several years will prove to be the more relevant disruptors.

Earlier this year the “FinTechs” hit a massive milestone, one that very few people noticed but which must certainly be keeping senior execs at banks, credit card companies, and other institutions up at night. In June of 2017, for the first time in history, the top 10 publicly traded U.S. FinTechs surpassed $100 billion in total market capitalization.

Now that number is over $130 billion, and there are another dozen privately held FinTechs in the U.S. collectively valued at almost $35 billion. Together this is nearly $175 billion of value that didn’t exist 20 years ago. Other recent artifacts that must surely be unsettling for the incumbent financial institutions include: Paypal’s market cap surging past that of Amex and Robinhood quickly closing in on E*Trade in terms of total number of accounts opened — in just three years.

Definition: Matrix considers “FinTechs” to be (a) technology-first companies that leverage software to compete with traditional financial services institutions (e.g. banks, credit card networks, insurers, etc.) in the delivery of traditional financial services (e.g. lending, payments, investing, etc.) or (b) software tools that better enable traditional finance functions (e.g. accounting, point-of-sales systems, payments, etc.)

Introducing the Matrix U.S. FinTech Index

With an eye towards tracking the progress of disruption in the financial services space, we’re excited to release the Matrix U.S. FinTech Index. This index is a market-cap weighted index that tracks the progress of a portfolio of the 10 leading public FinTech companies listed above over the course of the last year (beginning in December of 2016). For comparison, we have also included another portfolio of the 10 largest financial services incumbents (companies like JP Morgan, Visa and American Express) as well as the S&P 500 index.

As seen below, the Matrix FinTech Index shows a clear win for the FinTechs. To their credit, after a rough year in 2016, the incumbents rallied in 2017 to perform slightly better than the S&P 500 Index — yielding 29{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237} returns over the one year period (compared to the 20{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237} returns by the S&P 500 Index).

The FinTechs, however, have blown by this, delivering 89{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237} returns and handily beating the incumbents by 60 percentage points. If you had invested in the Matrix FinTech Index a year ago, you would have almost doubled your money in just one year.

This Is Just the Beginning

Unfortunately for the incumbents, the outlook only worsens from here. The “old-guard” has long been suffering from inflexible back-end systems, antiquated ways of serving customers, and human intensive processes. They’re also increasingly at risk of losing trust with consumers as a result of very public failures like the Wells Fargo scandal and the Equifax data breach.

In the next 10 years, we predict that the incumbent’s portfolio returns (shown above in red) will drop well below the S&P 500 as they continue to disappoint end consumers and cede ground to the FinTechs.

Meanwhile, the FinTech takeover has just begun—financial services in recent years has been 7-9{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237} of U.S. GDP (i.e. trillions of dollars). In the decade to come, we will see the Matrix FinTech Index continue to climb to new heights as the existing FinTechs surge in value and as we add many more FinTechs to the Index. In fact, the nearly 100{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237} growth we’ve seen in the last year is the bottom end of the hockey-stick, just hitting the inflection point. By 2027, as we accelerate up the hockey stick, every aspect of financial services, from payments to lending to investing will be dominated by FinTechs.

Move over financial services – the FinTechs are here and they aren’t going anywhere anytime soon.

Featured Image: Thomas Trutschel/Getty Images

Broadband business Casa Systems up 11{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237}, following downsized IPO


Andover, Massachusetts-based Casa Systems had a tough time pulling off its IPO this week.

The broadband solutions company initially wanted to debut Thursday, but pushed its launch back to Friday, likely due to weak initial demand. Casa had planned to sell 8.4 million shares, but reduced it to 6 million, following the investor roadshow, where companies pitch institutional investors and other IPO buyers.

The IPO was slated to price between $15 to $17 per share, but it priced at $13, raising $78 million versus the $134.4 million it would have raised at the midpoint of the range at the original deal size.  But on a better note, the stock bounced up almost 11{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237} from its $13 IPO price, closing the day at $14.40.

Here’s how Casa describes its business in its IPO filing: “We provide a suite of software-centric infrastructure solutions that allow cable service providers to deliver voice, video and data services over a single platform at multi-gigabit speeds. In addition, we offer solutions for next-generation distributed and virtualized architectures in cable operator, fixed telecom and wireless networks.”

The company brought in $316.1 million in revenue for 2016. This compares to $272.5 million for 2015. Casa posted a profit last year of $88.9 million, up from $67.9 million in 2015.

In the “risk factors” section of the prospectus, Casa warned that it is heavily reliant on clients like Time Warner Cable and Liberty Global.

Founded in 2003, the company had received a disclosed $100 million in venture capital, primarily from Summit Partners, which owned a sizeable 52.1{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237} of Casa Systems prior to the IPO. Liberty Global Ventures owned 6{36b96a1f853ebc4400789db5a6750c1e4fd7f7ac668ceaf8c757e025080de237}.

N26 partners with Younited Credit to launch credit offering in France


German startup N26 is now live in 17 European countries, but many features first launched in Germany and never made their way to other markets. The startup is slowly expanding core features to other key markets. That’s why the company is partnering with Younited Credit to launch consumer credit in France.

It works pretty much like the existing credit feature in Germany. In the app, you swipe to the credit tab and answer a few questions about yourself. You’ll tell how much money you need, if you’re single or married, if you’re a homeowner, etc.

A bit later, the app will give you a clear quote telling you how much money you’re borrowing, how much you’ll end up paying in total, the effective or nominal interest rate and your monthly payments.

You can also adjust your credit line by adjusting the length of the repayment process or the amount you’re willing to pay back every month. N26 doesn’t try to hide anything from you.

If you’re not familiar with Younited Credit, the company is a leading crowdlending platform in Europe. The startup has recently raised nearly $50 million in its latest founding round.

On Younited Credit’s website, consumers can borrow anything between €1,000 and €40,000 for 24 to 72 months without talking to an actual bank. N26 users access the same product without any restriction.

The platform matches those credit lines with other users willing to lend money, as well as companies, pension funds, insurance companies, etc. And Younited Credit thinks it can build an efficient credit rating system from scratch.

N26 users won’t have to sign up to Younited Credit to borrow some money. Everything happens in the N26 app using Younited Credit’s API. And I’m sure N26 also takes a small cut on each transaction.

N26 recently partnered with Auxmoney in Germany to offer credit to more customers. It’s another credit marketplace, and it shows that N26 is willing to partner with multiple companies in the same space if it makes sense. N26 wants to build a thorough financial hub so that you’ll end up buying new all sorts of financial products through the N26 app.

Featured Image: Dennis Skley/Flickr UNDER A CC BY-ND 2.0 LICENSE

Do VC woes extend to portfolio companies? For Rothenberg, probably not


As VC brands go, Rothenberg Ventures has seen better days.

The firm built up a reputation as an up-and-coming early-stage investor a few years ago, based on bold bets on virtual reality, a flashy marketing strategy and its well-connected namesake and founder, Mike Rothenberg. Between 2012 and 2016, the San Francisco firm participated in funding rounds for more than 100 early-stage companies, commonly investing alongside top-tier VCs.

But Silicon Valley soured on Rothenberg Ventures last year, amid charges that its founder spent beyond his means, failed to pay staff and misappropriated investor funds for a side project. Lawsuits ensued, along with a name change (since changed back), an SEC investigation and a lot of unflattering profiles casting the now 33-year-old Rothenberg as a sort of modern-day Gatsby.

So it hasn’t been a good year for Mike Rothenberg. But what about the Rothenberg Ventures portfolio?

In an effort to see how firm- and investor-specific scandals might affect portfolio companies, Crunchbase News took a look at the performance of Rothenberg Ventures-backed startups. We looked at exits and up rounds, as well as closures and apparent down rounds.

Overall, the Rothenberg portfolio seems to be doing well. It’s seen multiple exits at what appear to be favorable returns, a lot of up rounds and not too many high-profile flops. It probably helps that most portfolio companies had a number of other investors. The vast majority that raised cash from Rothenberg Ventures did so as part of a larger investor syndicate, and those startups weren’t relying on the firm as a major provider of follow-on capital.

With that in mind, here’s what the portfolio looks like now.

Exits

At least 13 Rothenberg-backed companies have gone on to exit, according to Crunchbase data. Point-of-sale systems company Revel Systems sold a majority stake to private equity firm Welsh, Carson, Anderson & Stowe.

All of the exits were through acquisitions, and most of those exits involved early-stage companies selling for undisclosed amounts. Typically, Rothenberg was a non-lead investor in a syndicate for these startups. Most had raised a few million dollars prior to exit, though a few had raised larger rounds.

A couple of acquisitions involved companies that had already stopped offering their services.

Generally speaking, if an early-stage company that is not known to be in distress gets acquired, backers make money. This seems to be the pattern for most of the Rothenberg portfolio company acquisitions to date. The list includes Sweet IQ Analytics, a provider of local search tools that sold to Gannett; Payable, a provider of software for paying contractors that sold to Stripe; and Propeller, a platform for updating apps that sold to Palantir. One of the few deals with a disclosed price was a celebrity-heavy investment, Hello Giggles, a women-focused online media startup that sold to Time for $30 million in 2015. (You can view the full list of acquisitions here.)

A couple of acquisitions involved companies that had already stopped offering their services. AltspaceVR, a social VR platform closed over the summer, was snapped up by Microsoft in October. And Luxe, a valet parking app, had also shut down before it sold to Volvo in September.

So far, the firm’s big bets on virtual reality have yet to produce lucrative exits, though some have raised follow-on rounds, which we’ll look at next.

Up rounds

Seed investments take a long time to mature, so it’s not surprising to see the majority of viable portfolio companies still in follow-on fundraising mode.

To date, the Rothenberg portfolio has a number of companies that have gone on to raise much larger follow-on rounds, presumably at marked-up valuations. We assembled 30 of them here.

The portfolio includes some unicorns. Mike Rothenberg said there are three companies in the portfolio that have surpassed the $1 billion valuation mark, but did not name them. It seems clear looking at the firm’s list of investments that one unicorn is RobinHood, the zero-commission platform for buying stocks, which raised its last round at a $1.3 billion valuation. The firm is a non-lead investor and one of at least 28 known backers.

The biggest exits and biggest flops are probably yet to come.

It’s unclear whether SpaceX counts as one of the unicorns. Rothenberg invested in a 2012 Series D, but SpaceX already had a multi-billion dollar valuation at the time, (although its value has since multiplied). We couldn’t identify an additional potential unicorn, so probably we either missed it or it’s a company whose billion-plus private valuation hasn’t been publicly disclosed.

There were also a number of companies that raised early-stage funding from Rothenberg that have secured significantly larger follow-on rounds in the past couple of years. Some of the bigger ones are Patreon, an online platform for sponsoring artists; 8i, a VR software developer; Andela, a tool for finding African tech talent; and Rinse, a garment care service.

Flops

Most seed-stage startup efforts don’t end in success, so we’d expect that any firm operating this stage for a few years would have some flops.

Rothenberg is no exception. Crunchbase turned up a few portfolio investments that raised small sums a few years ago and have since closed, like Butter, an app for making new friends; Buttercoin, a Bitcoin startup; and Bloodhound, an app for managing leads at trade shows. There are certainly more, though putting together a full list is challenging, as many startups prefer to quietly fade away rather than officially announce their closure. Also, seed investors commonly don’t disclose all their micro-investments, particularly for stealth startups.

The firm’s most high-profile potentially troubled asset is River Studios, a virtual reality production house Rothenberg launched in 2015. The investment came under fire last year, with Wired and other publications reporting that River hadn’t been properly green-lit by investors, lost money and was behind on rent.

The current status of River Studios is unclear. Its blog hasn’t been updated since mid-2016, and there are no open positions listed on its site.

Takeaway

Overall, the takeaway seems to be that Rothenberg Ventures’ downturn hasn’t extended to its portfolio companies in a meaningful way.

The firm’s performance seems similar to those of other funds of a similar vintage and approach. That is, it’s largely what we would expect from a well-connected Silicon Valley angel or VC participating in large investor syndicates for hot seed and early-stage startups in hot sectors. Rothenberg was somewhat of an outlier in its heavy focus on virtual reality, a sector that continues to attract reasonable funding but has yet to produce fat exits. VR hasn’t produced any big outcomes for Rothenberg, either — yet.

Given the long-time horizons that seed-stage startups require to mature, however, it’s still early innings for the bulk of the portfolio. The biggest exits and biggest flops are probably yet to come.

Featured Image: iStockPhoto / honglouwawa