Last year, fintech companies worldwide were expected to fetch $84.7 billion in funding, according to third quarter 2022 projections from the research company CB Insights. While that sum might sound impressive, they raised $141.2 billion in 2021.
“It’s the big reset,” says Peggy Mangot, head of fintech partnerships for New York, New York-based JPMorgan Chase & Co.’s commercial banking. “There’s tremendous investor caution. Right now, they’re waiting.”
For some fintech founders, it marks an unfamiliar reality that’s akin to a violent yo-yo. While building businesses always requires enduring vexing surprises, now entrepreneurs are attempting to do so while interest rates are rising and company valuations are falling. With less capital to go around, the stakes are high and some founding teams might feel added pressure to sell.
“It will be a buyers’ market over the next 12 to 18 months,” says Shamir Karkal, co-founder and CEO of Sila, a fintech software platform.
While fintech founders have long held conflicted feelings about bank buyers, the banks can make attractive bidders. At their best, such deals make the fintech team money, provide instant distribution with built-in customer trust and help cultivate products of consequence. At their worst, entrepreneurs’ dreams of changing finance dissolve into nothing when the bank suppresses innovation. Yet for startups, something has to give, regardless of a grimmer economy. It’s part of the gig.
“When you’re a startup, you aren’t going to raise funds forever,” Mangot says. “There has to be an exit eventually.”
As she sees it, the bank-fintech pairing has entered its golden age – both parties want to partner. “It’s just about how you find the right time, team and fit, and price of course, to make it all come together,” Mangot says.
In 2022, numerous bank-fintech deals seemed to solve the riddle. In May, for example, Cincinnati-based Fifth Third Bancorp bought Dividend Finance, a point-of-sale solar lender, while Charlotte, North Carolina-based Truist Financial Corp. acquired Long Game, a savings gamification app. Whether now is the right time for other fintech companies to follow suit depends on the buyer, the vision, the values and the terms.
“Nobody can tell you that this is the right type to sell,” says Karkal, who co-founded Simple, one of the original neobanks. “You have to make that decision yourself. At the same time, making that decision at the wrong moment or too late can end up leading to disaster, right? The best time to sell a company is when you don’t have to.”
Is the Bank’s Offer Better Than the Outlook as an Independent Company?
When considering selling, start by imagining which outcome is best for your team. “It seems like it would boil down to the return on investment,” says Jim Bruene, founder of Fintech Labs, which offers consultancy services to banks, fintech companies and industry events. “What are they willing to pay you and is that better than staying as an independent company?”
Jason Henrichs, chief executive officer at Alloy Labs Alliance, a community and mid-sized bank consortium, recommends investigating the reason why the bank wants to buy the company and how the fintech would fit into the overarching strategy before deciding.
“If it’s a vanity play of like, ‘we’re going to buy a fintech because then we’re cool and it’s sexy,’ it’s just not going to work,” says Henrichs, a founder of one of the original neobanks, PerkStreet Financial. “It will have organ rejection every time [the bank is] in there and trying to do something new. Now, if there is a part that ladders up to ‘here’s what our strategy is and what we’re trying to accomplish,’ then you’ve got a fighting chance.”
He recommends reaching out to a variety of the bank’s board members to see if there is consistency in defining the vision. Henrichs also advises figuring out who the bank’s champion is for the acquisition, whom that person reports to, and the source of funding and timeline for the deal.
“Getting Acquired by a Bank Isn’t the End of the World”
For founders who thought their companies would replace banks and are skittish to work at one, those who’ve done it offer solace. “Banks aren’t evil and bank people aren’t evil people,” Karkal says. “Getting acquired by a bank isn’t the end of the world.”
He speaks from experience in having sold Simple in 2014 with his co-founder, Josh Reich, to the Spanish bank BBVA. The bank shut down Simple in 2021, but it remained a top exit for a neobank in the U.S. — Simple sold for $117 million.
Karkal chose to work directly at the bank for a couple of years building application programming interfaces. The experience revealed what it’s like working for a larger bank. “You realize that your business unit might be doing fine and on plan, but something happened in like Turkey or Spain or Mexico and they have to readjust the portfolio and suddenly your budget is cut or you are being sold off or whatever and it has really nothing to do with how well your business is doing at that moment in time, but about how the whole giant ship is doing,” he says.
There are, of course, plenty of positive trade-offs for making a bank a long-term home. “You get to wildly accelerate the growth path of the business and stop flying around to go meet with [venture capitalists] or go meet with banks for balance sheet access and sponsorship and other things,” says Ben Hoffman, chief strategy officer at Fifth Third. “Or at least, I hope that’s the case.”
That’s not to say a bank wants to buy just any fintech company. Far from it. “We won’t partner with the fintech unless it’s something of central importance to us,” Hoffman says. “The challenge is there are a lot of talented people out there. There’s a lot of good ideas. There’s a fair number of good products, but there really aren’t that many good businesses.”
Eric White, founder and president of Fifth Third’s Dividend Finance, recommends founders understand their end goals early to have a better shot at a sale. “As other fintechs start to consider what they want to be when they grow up, they have to decide: Am I trying to be a bank? Am I trying to be the next Google or am I going to try to build a business that’s very attractive for an insurance company, for a bank?” White says. For Dividend Finance, the startup evolved from wanting to be the next Google to spending years building a business that a bank would want to own.
Trabian Technology’s owners sold the software development company to Fairmont, West Virginia-based bank holding company MVB Financial Corp. in 2021, in part to learn how to work within the limiting factors at an institution and apply that knowledge to other bank customers.
For Long Game, the gamification startup’s plans flowed from seeking Truist as an investor to finding a buyer with a shared mission and sizable reach. In early 2023, Truist will roll out Long Game as a standalone app that includes the bank’s branding. “Our goal as a company was to help people save for their future,” says Lindsay Holden, co-founder and CEO of Long Game and head of Truist Foundry, the bank’s innovation unit. “Being able to come into a bank and have access to 15 million households is super attractive as a startup [to help us] achieve our mission to really get out there and help consumers prepare for their futures.”
Her point underscores something more universal. If the bank is willing to acquire a fintech startup, it’s a sign that it values what the fintech has built or its vision.
“Lean into that,” says Matt Dean, CEO of Trabian and chief technology officer of MVB Edge Ventures, the venture capital arm of MVB Financial Corp. “Don’t see it just as an out. See it as an opportunity to really bring your vision for your product or your service into the organization that you’re joining.”
What to Negotiate and What to Accept
If selling, industry executives urge entrepreneurs to build independence into their contracts as ammo to stay creative while working in a heavily regulated industry. That can include inking a deal where the bank will keep the startup intact after acquiring it or a model with light integration for a certain amount of time before moving into a deeper partnership, for example.
The bank must set expectations with the founding team on the level of integration, JPM’s Mangot says. For the acquirer, one of the most important pieces of the deal is keeping the core team on for at least 12 months. So, it’s typical for buyers to include so-called earnouts, which let the startup’s employees earn a payout for staying on at the bank. Here, Sila’s Karkal encourages founders to negotiate so the earnouts depend on time rather than specific outcomes.
Some gripes, like anywhere, require acceptance, including using software tools that may lack appeal but check a compliance box. At a previous company, Mangot remembers attending a function with companies it invested in or acquired. There, a founder expressed frustration in using the bank’s Microsoft Outlook software.
“Until you actually close the sale and spend the first three months post-sale, you don’t really know how things are going to work,” Karkal says. “It’s like a marriage, but there wasn’t much dating before.”
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