25 April 2022 |

More Fintech M&A Doesn’t Mean Bigger Exits


Something I’ve noticed over the last few months — an uptick in fintech acquisitions. I mentioned it in my newsletter on Friday, but there was a few just last week:

Brex bought financial planning software company Pry Financials for $90 million, the company announced on the 19th. On the same day, Robinhood announced it was buying UK based crypto company Ziglu for an undisclosed amount. And just a month before, Apple bought up UK open banking startup Credit Kudos, according to The Block.”

I ended the section by saying that it’d be fair to expect more acquisitions in fintech. And…well I thought about it over the weekend and while that’s true I might have been a bit presumptuous. 

Let’s take a step back. Or zoom out. Or whatever startup phrase you’d like to use. 

When I think about the fintech sector and how things play out in the future, M&A’s always one of the many gorillas in the room. In theory, fintech startups have a number of potential acquirers: banks, tech companies, late stage private fintech “startups,” newly public fintech companies answering to Wall Street. Even SaaS platforms that are thinking about vertical fintech and bringing financial software solutions in-house. 

But if there are so many acquirers, why haven’t we seen a lot more? In theory, the market is ripe for M&A over the next 8-12 months: Series A-Series C deals are already seeing some pullback, with founders either settling on valuation or amount raise or a combination of both; investors reemphasizing diligence and discipline as a mechanism to slow down investments; and capital rich companies looking for new sources of growth or revenue to live up to peak market valuations. 

But in practice fintech acquisitions — especially the big ones — are few and far between. There are probably a few reasons, most obviously, fintech companies are looking for sky-high exit prices to live up to their valuation. 

The issue is that while these companies can and are willing to pay up, they’re only willing to pay for the right company that’s a perfect fit (see: Square-Afterpay.) It might seem like acquirers are looking for new products that they can fit into their existing product suite easily, but there are other reasons companies buy other companies. If we look at some of the other larger acquisitions in the fintech market, they’ve looked like great game changing moves in hindsight. 

Coinbase is reportedly in talks to buy 2TM, a crypto holding company that owns the largest Brazilian crypto exchange and was recently valued at over $2 billion. Galileo sold to SoFi for over $1 billion a little over 2 years ago now. Bolt bought Wyre for $1.5 billion way more recently.

What makes these deals different? They’re all big bets to bring in new sources of revenue growth — not to add new features into their product or buy a hot brand. Fundamentally, these acquisitions are based around driving direct and meaningful business value — either these companies are making money already or their revenue can be bolstered if they’re brought in internally, sometimes with better tech, or leveraging a bigger company’s operations. 

Coinbase potentially buying 2TM is a great example: 2TM is not only the biggest crypto exchange in Brazil, but raised to expand into Argentina, Colombia, Chile, and Mexico, and recently purchased a Portugal crypto exchange that’s the country’s first licensed exchange. Similarly, 2TM owns a multiasset wallet that’s reportedly working on getting a Brazilian Central Bank license too. With this purchase, Coinbase isn’t just getting deeper into Latin America; it’s buying a company that owns the regulation, compliance, and the software infrastructure too, and has proven it understands international expansion with its foray into Europe through regulated subsidiaries.

On top of that, 2TM is profitable. These are crypto exchanges similar to Coinbase, so from a business and financial modeling perspective, these assets are really similar to Coinbase’s core business. Considering 2TM was worth $2.2 billion in January, is spending what I’m assuming is around $5 billion to buy all this worth it? Given where Coinbase’s publicly trading now, a new narrative around international growth and expansion could attract shareholders. 

So, where does this leave us? On a spectrum of small to large deals, I think we’ll definitely see a lot more “smaller” acquisitions than we expect. We might see more big billion dollar acquisitions, but it’s safe to assume they’ll be around supporting an existing core business: some examples of acquisition drivers are regulated international growth or expansion into adjacent markets. 

In the meantime, on the other side of the table, founders are going to have a really tough choice: raise a mediocre Series A/B/C by taking a lesser valuation or giving up more equity in your company for less cash than you expected? Or, keep the equity you already have, get your existing team some cash, and sell out to an acquirer that has similar strategic goals? For many founders (including myself recently), the benefits of selling at the potential top of the market are becoming more attractive.