Affirm and SoFi, two of the most well-funded venture capital-backed fintech companies in the US, are set to go public in what is expected to be a breakout year for new public listings in the sector. Their success—or struggles—could be a bellwether for other offerings in the making.
Emboldened by pandemic-era growth and higher stock market valuations, fintech providers are increasingly willing to go public. Several late-stage companies like Robinhood and Klarna are said to be mulling offerings in the near-term. And cryptocurrency exchange operator Coinbase is poised to make its market debut soon after confidentially filing with the SEC in December.
Last year, fintech exit activity took off, setting a record $29.1 billion in exit value across 80 deals, according to PitchBook data. The achievement was led by Credit Karma's $7.1 billion acquisition by Intuit in December and auto insurance company Root's $6 billion IPO.
"2020 was a pretty clear inflection point," said Ben Savage, a partner at Clocktower Technology Ventures, which invests primarily in fintech startups. "I think 2021 will be a continuation of that, presuming market conditions don't materially change."
A confluence of factors have helped to create the current opportunity, said David Blumberg, founder of Blumberg Capital. Those include high multiples for stocks, tailwinds for digital financial services adoption during the pandemic, and low interest rates.
Many startups are now in a position to seize the moment. Over the last three years, fintech funding has trended toward bigger deals for later-stage companies, leading to a buildup of startups that are primed to go public.
The number of US fintech mega-deals rose to a decade high last year, with 44 transactions logging $12.2 billion, according to PitchBook data. Late-stage financing is also at a decade high, accounting for more than three-quarters of total funding for US fintech companies in 2020.
US fintech deal value by stage
Despite their age and stacks of venture dollars, relatively few fintech companies had pursued an IPO in years past. But PitchBook analyst Robert Le predicts that VC-backed consumer fintech companies will drive a record year for public market exits.
"They're ripe and ready to exit," said Le.
Robinhood is among the most anticipated IPO hopefuls for 2021, having raised more than $1.2 billion last year, boosted by a surge in retail investor stock trading. The company could go public in the first quarter of 2021 and has weighed selling some of its IPO shares to customers, Bloomberg reported.
Swedish startup Klarna, which pulled in a $650 million round last September, is also reportedly drawing up plans for a public offering in New York. Like Affirm, Klarna offers a “buy now, pay later” service for online shopping.
Despite growing enthusiasm, fintech IPOs have suffered from a relative lack of comparable public companies, investors say. And the available case studies aren't all encouraging: the online lending boom that launched companies like LendingClub and OnDeck Capital ultimately failed to meet expectations.
"The fintech sector overall has not done great in public offerings," said Jeremy Solomon, a principal at Nyca Partners and former Affirm and SoFi executive.
More recent history paints a brighter picture. Insurtech company Lemonade was the best-performing IPO of 2020, with its stock rising more than 350% between its July 1 debut and the year’s end, Bloomberg reported.
In a sign of strong demand for fintech companies early this year, Affirm this week upped the target price range for its offering, indicating a fully diluted value of around $13 billion at the midpoint price.
Last week, Chamath Palihapitiya's special-purpose acquisition company, Social Capital Hedosophia Holdings Corp. V, agreed to merge with SoFi, valuing the company at $8.65 billion; the company was worth around $5.7 billion last May, according to a PitchBook estimate.
SPACs take private companies public through mergers and are seen as an attractive IPO alternative for fintech specialists. Several large blank-check companies backed by private equity firms like Motive Partners have identified financial services as their preferred industry for target companies.
A number of Blumberg's portfolio companies have been approached by blank-check companies. One of them, ecommerce startup Katapult, recently announced its SPAC merger plans.
Target companies in a SPAC merger are able to communicate expectations around future revenue—typically not included in an IPO—as well as product roadmaps.
"One of the potential advantages of a SPAC for a fintech is that it lets you paint a richer picture of the future," CTV's Savage said.