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Do fintechs deserve SaaS revenue multiples?

As my former boss Alex Wilhelm wrote in his analysis of Toast’s public debut and Remitly’s pricing of its IPO at $43 a share, “fintech revenues are not taking the sort of valuation hit you would expect from their reality of lower-margin, non-recurring incomes.”

In fact, it’s looking more likely than not venture capitalists are being conservative in their valuations of fintech startups. 

It’s a reality that is a little mind boggling to me. I have spent years covering massive valuations in the private market that have cratered in the run up to an IPO (see WeWork). My usual dour view, however, will need to be put on pause.

So why are public investors rewarding fintechs with stellar valuations? There are two possible answers:

  1. Growth. Much like SaaS companies, growth is being rewarded handsomely by public investors. And there is no shortage of fintechs who are set up to take massive slices of the financial services market from incumbents. 
  2. Revenue sources. Interchange fees, as Christian Garrett pointed out on Twitter, could be considered “truly recurring revenue.” And there’s nothing public investors like more than recurring revenues — even if our interpretation of what recurring revenue is becoming… flexible. 

But there’s plenty of room for this to change. Both startups and the banks they partner with have told me that interchange fees alone are not enough to build a fintech that can stand on its own two feet over the long haul. 

Furthermore, the regulatory environment is increasingly fraught with unknowns. The SEC has ramped up its crackdown on how fintechs present themselves to the public (you are not a bank), and it isn’t a huge fan of payment order flow.

But for now, none of that matters. As long as fintechs keep going public with SaaSy revenue multiples, private investors will continue to pour money into fintech startups with abandon, and I will need to stop being aghast at the massive valuations that come with it.

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