Question

How are fintech companies valued in comparison to the broader market? What are typical multiples, and why are fintech companies priced as such?

Answer 1

Valuing Fintech companies can be a bit tricky. We cannot use the tradition methods of valuating companies in traditional businesses like retail, manufacturing etc. or even traditional Banking and/or finance companies. Same is true while comparing with competitors. For example, at one-time Nokia was the largest seller of cell phones in the world until Black berry came which changed the market but as soon as the story of Blackberry started it ended with the launch of apple iPhone. At one-time Yahoo was valued more than Google and when it was bought by Verizon it was sold for approximately 5 billons while googles value at that time was approximately 100 Billion.

These two examples indicate how complex it is to value tech companies as no one knows for sure which invention/innovation can catapult the company to top spot or pull them down. This leads us to another important factor in the success and failure of a tech firm its CEO or founder. Everyone knows the famous story from apple when Steve Jobs was thrown out of apple and brought back after it was failing in all departments and how Steve Jobs pulled it back up to the top spot.

We cannot put value on these factors hence we need a thumbs rule which may not seem appealing and may not capture its actual growth potential or its risk profile, but we do not have any credible and established model. In this way they are valued differently in comparison to broader markets.

We cannot use the price-to-earnings (P/E) ratios as many of such companies are having negative earnings especially startups and early stage companies. Hence, we are left with either discounted cash flow (DCF) or relative valuation using comparables. While we perform a relative valuation, we use multiples such as enterprise value to EBITDA and price to sales. For example, as we have recently heard in news that Tesla may go public. While valuing Tesla we may consider that Apple’s price to sales ratio is 4.07, Face book 10.34, Alphabet(Google) at 6.82.

We also need to look at certain Internal and external factors. Internal factors such as who is the founder/CEO? share holding pattern and shareholders preference, exposure to risk, any patents or copyrights. Research or development in progress. Is the technology they are working on a desruptive one or an existing pone? Do they have tie up with a big finance firm or have them in the form of a share holder. External factors such as regulations, industry dynamics, competition and opportunities. Furthermore, we need to consider a couple of points like Is it a startup in early stages, what is their business model? are they Robo Advisors, HTF (high frequency Traders)? Are they peer to peer lenders? Etc.