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The Start-Up Enemies of Wall Street Are Booming

Times are flush for young tech companies like Stripe and Coinbase, which are having a moment as they upend the financial establishment.

SAN FRANCISCO — In 2009, Shamir Karkal and several colleagues struggled to raise money for a banking start-up, Simple. Most of the 70 venture capital firms they met over the course of a year didn’t see the point of the idea, he said. The few that did thought it would fail.

By last year, things had changed. When Mr. Karkal set out to raise funding for his new financial technology start-up, Sila, which makes regulatory compliance software, he garnered $5 million in a few months with a fraction of the pitches. He said he was frustrated it didn’t happen even faster.

“I know folks in the space who raised rounds in less than one week,” he said.

Sila is one of thousands of financial technology start-ups riding an investor frenzy driven by a growing realization that Big Finance is ripe for a tech makeover. When the pandemic forced businesses to speed up their usage of digital tools, including e-commerce and online banking, the demand for what is known as fintech exploded.

Even tiny financial start-ups that have not formally introduced their products — such as Zeller, which will offer banking services to businesses; and Sivo, which is building lending software — have raised millions of dollars and been valued at nine-digit sums.

In total, venture capital investors poured $44.4 billion into financial technology start-ups last year, up from $1.1 billion in 2009, according to PitchBook, which tracks private financings.

Many investors are now making bold predictions that these start-ups will upend big banks, established credit card providers — and in some cases, the entire financial system.

“It’s what Amazon did to offline retail,” he said. “It’s just playing out 10 years later in fintech right now.”

The financial technology start-ups that are riding the boom run the gamut. They provide services including checking accounts, mortgages, insurance, investing, payment processing and cryptocurrencies.

Just as cheap cloud computing and smartphones once enabled a wave of new app start-ups, the financial technology sector has developed its own set of building blocks, allowing new companies to spring up faster.

Stripe now processes hundreds of billions of dollars in payments a year, has expanded to larger customers including Salesforce and, and has made more than 30 investments in other fintech start-ups.

“We are in a hyper-growth industry and within that, the company itself is experiencing hyper-growth,” Dhivya Suryadevara, Stripe’s chief financial officer, said in an interview.

Domm Holland, chief executive of Fast, an e-commerce checkout software start-up, said Stripe sped up his company’s progress. Customers who use Stripe to accept online payments can then use Fast’s software for their checkout process.

“If Stripe didn’t exist today, we would first have to build Stripe,” Mr. Holland said. “That’s a lot of work. They’ve already done that.”

Last year, as Fast’s business grew in the pandemic, investors began messaging Mr. Holland daily asking to invest in the company. “I have people LinkedIn messaging and emailing, just offering, ‘Take $5 million at any valuation you like,’” he said. “It is a bizarre world to live in.”

He ended up raising $102 million for Fast in January. Stripe was one of the main investors in the financing.

“The infrastructure has gone to a whole other level,” said CJ MacDonald, founder of Step, a debit card provider aimed at teenagers. Introduced in September, Step quickly reached one million customers, partly from endorsements from social media influencers like Charli D’Amelio.

In December, Step raised $50 million in funding. The company was not looking for more money, Mr. MacDonald said. But investors started calling as soon as the app joined the top-downloaded finance app list shortly after it was released. The money came together in a matter of weeks, he said.

Sheel Mohnot, an investor at Better Tomorrow Ventures, said Plaid’s sale price to Visa was viewed as “so amazing” at the time. But now, with multiple fintech companies approaching $100 billion valuations, it looks low.

Some caution that the excitement has gotten far ahead of reality.

Robert Le, an analyst at PitchBook, pointed to the valuation of Affirm, which has a market capitalization of $20 billion, or roughly 40 times its annual revenue. That’s significantly higher than the value that investors typically assign to blue-chip financial services companies. American Express, for example, trades at just three times its annual revenue.

“I think it’s a little irrational,” Mr. Le said. “Over the long haul, some of these companies will have to come down.”

Leigh Drogen, chief executive of Estimize, an investment data start-up, said the hiccups, high valuations and irrational behaviors haven’t canceled out all the progress in fintech.

“There are a lot of very, very real things, and then there’s some insanity,” he said. “That happens in every boom.”

Category: Technology

Source: New York Times

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