As the collapse of Powa shows, fintech can be a dangerous game because the UK’s capital structure is prohibitive to growth
Another day, another failed fintech business. I don’t say this glibly as it is in my interests to be part of a thriving UK financial technology industry. I do however think that we need to analyse ‘sustainable’ fintech and concentrate on that arena.
Companies like Powa Technologies, the payments group, stand out. Powa was at one point valued at £1.8bn and has raised at least £160m in the past three years. The company consumed vast amounts of growth capital and, according to the founder Dan Wagner, had an eye on a listing at some point during 2016.
The company’s collapse has been well documented but was it really that unpredictable? On what basis were investors looking to make a return? Was it on the IPO and the share price going up (or down)? There is as much money to be made in ‘shorting’ a listed stock as there is on the increase in share price, potentially more.
Transferwise, the second London-based unicorn, has yet to prove that its financial model does not contain the same risks. Yes, five fold increase in turnover is positive but increasing losses have to be a cause for concern. The difference in the two entities is that Transferwise has shown growth and an ability to attract customers. If the customer base continues to grow and the cost of customer acquisition stays the same or lessens, and the overall metrics make sense, then it will make money. Maybe.
So it may be that fintech companies have a perfectly sustainable business model with sound management capabilities but in the desperation for cash, the lure of an IPO is just too much. Early stage investors seek the confirmation from the public markets that the share price is sustainable or set for growth and, of course, the chance to potentially realise some of the investment gain by selling shares.
So why does a UK IPO equate to sinking not floating in the UK fintech sector?
To use a recent example, had Monitise, the UK mobile payments service provider, been a US entity, it would not have been forced to list so quickly.
Instead, it was pushed in into going to an Aim listing too early and it had to re-address its strategy from being one focused on growth, to being focused on a curve to hit profitability before the cash runs out. That is not the basis for a sustainable high growth business. That is the equivalent of taking a deep breath and hoping to swim the length (or width) of the pool before the air runs out. Life is then interesting, but short.
Earthport, a company that also promised huge growth since 1999 and to be a true disrupter in the payments sphere, has a similar tale to tell: it has consumed £135m in cash to date and shows little sign of troubling HMRC with corporation tax calculations in the foreseeable future. Its annual turnover is likely to be circa only £20m, 17 years after launch. Difficult to describe that as ‘high growth’.
On the contrary, if like Square – a payments company, founded by Twitter entrepreneur Jack Dorsey – these companies had been based in the US, they would have probably been given the runway and the operating cash war chest to go for growth instead of having profitability and liquidity concerns that emerge during and after an IPO.
The capital structure in the US lends itself to growth, in part, due to the prevalence of 401k workplace saving plans. These allow the opportunity for more individuals to access tax free investments, often matched by the employer.
The capital ecosystem in the US is also just different and better funded: venture capitalists are more prevalent, more proactive and perhaps in-keeping with the American persona, less risk adverse than those in the UK and Europe. I generalise, but those who’ve tried to raise funds here and in the US will understand the point. Naturally, capital gains tax on assets held longer than one year is also considerably lower for investors.
The UK, specifically London, fares pretty well in rankings about where is best to do fintech business and we are certainly punching above our weight if the limited capital opportunities are considered. I fear the lure of an IPO and public markets is actually an end to a means as opposed to the means to an end.