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Raising money in a downturn

This week, the global payment processor Checkout.com announced it closed a $150m funding round, tripling the company’s valuation to $5.5bn. Not all recent funding rounds were as successful, though, with Monzo raising less than expected and being hit by a severe 40% reduction in its valuation (from $2.5bn to $1.5bn).

What can we take from this?

Our main takeaways:

  1. Has the cream risen to the top? 
    Companies with more stable and diversified revenue streams have held up their valuations much better. Case in point – Monzo. A thin revenue stream based on interchange fees and driven by travel revenue has not held up. At the same time, Checkout.com has benefitted from the shift to digital and e-commerce brought along by the crisis and has become one of the most valuable fintechs in Europe.

  2. The importance of a differentiated product
    A commodity product offering is not enough. Starling is hanging in there by providing a more complete offer to its SMEs clients compared to other digital banking players in the business segmentCheckout.com is focusing on providing access to local payment systems (as are others such as PPRO) and networks to make international payments easier and faster. 

  3. Geographic expansion convincing investors
    N26 raised funds to adapt its product to the US market and to expand in Brazil (good luck vs. NuBank). Monzo is applying for a US banking license (good luck vs. 5,100+ banks) and Airwallex is pushing outside of China (well, just good luck). If nothing else, another market provides a growth story for investors. Executing that is something else.

Investors now have the tough choice of funding market share growth or focusing on the sustainability of their investments. Better to make this choice before it is forced upon you.

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