Creating Strategic Value through Financial Technology

CHAPTER 10Early Stage FinTech Valuation Issues

INTRODUCTION

The excitement around FinTech is evident in several areas, including the outperformance of the publicly traded FinTech companies relative to the broader market, the increase in the number of both FinTech unicorns and venture capital and corporate/bank investments in FinTech companies, and increasing M&A activity in the sector. Up to this point, we have discussed FinTech as an area that has been the beneficiary of additional funding and investor interest and highlighted potential benefits for community banks. Factors driving optimism toward FinTech include technology advancement, evolving consumer behavior and expectations for digital delivery of financial services, and regulatory response to the financial crisis, which has served to create opportunities for emerging, less regulated FinTech companies.

This chapter seeks to help investors, entrepreneurs, and potential partners—such as community banks—better understand valuation mechanics for early‐stage FinTech companies. It covers:

• When an early‐stage FinTech company will need a valuation performed—such as for equity compensation
• Unique considerations when assessing and valuing FinTech companies
• How investor preferences can impact valuation
• Unique valuation issues related to valuing venture capital interests in FinTech companies (given that the level of venture capital investments in FinTech has grown in recent periods and venture capital firms face increasing pressure ...