A New Crop of Fintech IPOs Will Face Skeptical Investors

(Bloomberg) -- While there's no shortage of financial technology startups, few have been brave enough to enter the public market here in the U.S. That's likely to change in the next 12 to 18 months.

There are now close to 30 private fintech startups with valuations at or above $1 billion, according to data platform PitchBook. A few of them are increasingly cited as possible IPO candidates. Among the most closely watched are Pimco-backed GreenSky, which has already filed paperwork with the Securities and Exchange Commission, and Dutch payments company Adyen BV, said to be considering IPO as soon as this year.

The question now is what happens to those billion-dollar-plus valuations when the public gets a look at the companies' financials and growth projections. In the past, fintech companies haven't fared too well. Square Inc., which is set to report earnings this week, is the exception. Yet even Jack Dorsey's payments company endured a slew of negative headlines when it first filed to go public in 2015. After raising funding in the private market at a $6 billion valuation, Square went public at a share price that valued it at $3.66 billion. Since then, however, the firm has bounced back, with shares rising more than 425 percent, reaching a market cap close to $20 billion today. Other companies, like LendingClub Corp. and On Deck Capital Inc., have been hit particularly hard since their IPOs, with shares falling 82 percent and 73 percent, respectively.   

Based on where some funding rounds have priced fintech companies, the trend of lower valuations in the public markets seems likely to continue. According to New York-based venture capital fund FinTech Collective, large fintech IPO rounds typically price in the range of 8 to 16 times enterprise value as a multiple of revenue, a frequently-cited industry metric. Square, for example, is at the low-end of that range, with a multiple of 8.3. But that's still far richer than most established companies.

“These IPO valuations remain at a substantial premium to more mature, publicly traded fintech comparables and legacy financial services players,” the firm wrote in a recent newsletter to clients, “leaving them susceptible to a steep fall if macro conditions falter.”

Of course, a share price tumble for fintech's new public market entrants this year is by no means guaranteed—but heightened investor scrutiny is.

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To contact the author of this story: Julie Verhage in New York at jverhage2@bloomberg.net.

To contact the editor responsible for this story: Anne Vandermey at avandermey@bloomberg.net.

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