amid the ipo gold rush, how should we value fintech startups?

The Current Boom in Fintech

The present era arguably represents a peak period for the fintech industry. By the first quarter of 2021, the United States alone had surpassed 10,000 fintech startups – a figure exceeding double when considering the EMEA and APAC regions.

Currently, three fintech firms—Paypal, Square, and Shopify—have achieved valuations exceeding $100 billion. Furthermore, another three companies – Stripe, Adyen, and Coinbase – fall within the $50 billion to $100 billion valuation range.

Challenges in Public Market Valuation

Despite this growth, a degree of uncertainty surrounds the valuation of fintech companies as they transition to public markets. This stems from their relative inexperience with Initial Public Offerings (IPOs) when contrasted with companies in consumer internet or enterprise software sectors.

A significant factor contributing to this complexity is the diverse range of business models employed by fintechs. Some operate on a transactional basis, while others rely on recurring revenue streams, or a combination of both.

Navigating the Path to Public Listing

Fintech companies now have several avenues for becoming publicly traded. These include the conventional IPO process, a direct listing, or a merger with a Special Purpose Acquisition Company (SPAC).

Considering the numerous factors involved, accurately assessing the value of these companies and forecasting their performance in the public market is a complex undertaking. Predicting future success is far from simple.

Here's a breakdown of the options:

• Traditional IPO: The standard route for companies seeking to raise capital.
• Direct Listing: Allows existing shareholders to sell shares directly to the public.
• SPAC Merger: A faster path to public markets through a merger with a blank-check company.

A Surge in Fintech IPOs is Underway

For a significant portion of the last twenty years, the fintech sector remained relatively subdued in the public investment landscape. However, this began to shift notably around the middle of the 2010s.

By 2015, fintech’s emergence was undeniable, evidenced by the initial public offerings of both Square and Shopify.

The previous year marked a peak, witnessing eight fintech companies launching IPOs. This momentum hasn't diminished in 2021; the first four months alone have seen seven additional IPOs.

Anticipated Future IPOs

Our projections indicate that over fifteen further fintech firms are poised to enter the public market this year. Consequently, the existing record for fintech IPOs is highly likely to be surpassed long before the year concludes.

Understanding Kubernetes Networking: A Deep Dive

Kubernetes networking is a complex subject, but fundamentally it’s about enabling communication between pods, services, and the outside world. It’s a crucial aspect of deploying and managing applications within a Kubernetes cluster.

Core Concepts in Kubernetes Networking

Several key components work together to facilitate networking within Kubernetes. These include Pods, Services, and Network Policies, each playing a distinct role in the overall architecture.

Pods are the smallest deployable units in Kubernetes, representing a single instance of an application. Each pod is assigned a unique IP address within the cluster.

Services provide a stable network endpoint for accessing pods. They abstract away the underlying pod IPs, which can change dynamically. This ensures consistent access to applications even as pods are scaled or replaced.

Network Policies define rules for controlling traffic flow between pods. They allow administrators to restrict communication based on labels, namespaces, and IP addresses, enhancing security.

How Kubernetes Networking Works

Kubernetes doesn't have its own networking implementation; instead, it leverages the networking capabilities of the underlying infrastructure. This flexibility allows it to operate across various environments, including cloud providers and on-premises data centers.

The process typically involves a Container Network Interface (CNI) plugin. CNI plugins are responsible for setting up the network for pods and assigning them IP addresses.

When a pod needs to communicate with another pod, the traffic is routed through the Kubernetes network fabric. This fabric is created and managed by the CNI plugin.

Key Networking Components

Several components contribute to the functionality of Kubernetes networking. Understanding these is vital for troubleshooting and optimization.

• kube-proxy: This network proxy runs on each node in the cluster. It maintains network rules that allow communication to pods from inside or outside of the cluster.
• CNI Plugins: As mentioned, these plugins handle pod networking, including IP address allocation and network configuration. Popular options include Calico, Flannel, and Weave Net.
• Service Discovery: Kubernetes provides built-in service discovery mechanisms, allowing pods to locate and connect to services by name.

Types of Kubernetes Services

Kubernetes offers different types of services to cater to various networking needs.

• ClusterIP: Exposes the service on a cluster-internal IP. This is the default service type and is only accessible from within the cluster.
• NodePort: Exposes the service on each node's IP at a static port. This allows external access to the service, but it can be less flexible.
• LoadBalancer: Provisions an external load balancer to distribute traffic to the service. This is typically used in cloud environments and provides high availability and scalability.
• ExternalName: Maps the service to an external DNS name.

Ingress Controllers

For more complex routing scenarios, Ingress controllers are often used. They act as a reverse proxy and load balancer, allowing you to expose multiple services through a single IP address.

Ingress controllers can handle features like SSL termination, virtual hosting, and path-based routing, providing a centralized point of control for external access to your applications.

Network Policies for Security

Implementing Network Policies is crucial for securing your Kubernetes cluster. They allow you to define granular rules for controlling traffic flow between pods.

For example, you can restrict access to a database pod to only allow connections from application pods, preventing unauthorized access. This significantly reduces the attack surface of your applications.

Troubleshooting Kubernetes Networking

Networking issues can be challenging to diagnose in Kubernetes. Several tools and techniques can help.

• kubectl exec: Allows you to execute commands inside a pod, enabling you to test network connectivity.
• ping and traceroute: Standard network utilities for verifying reachability and identifying network paths.
• Network Policy logs: Review logs to see if network policies are blocking traffic as expected.

Careful monitoring and logging are essential for identifying and resolving networking problems quickly.

Conclusion

Kubernetes networking is a powerful and flexible system that enables complex application deployments. By understanding the core concepts, components, and best practices, you can effectively manage and secure your Kubernetes cluster’s network infrastructure.

Proper configuration and monitoring are key to ensuring reliable and secure communication between your applications and the outside world.

The Varied Landscape of Fintech Valuation

It’s crucial to recognize that the fintech sector isn't monolithic; it encompasses a diverse array of companies, and their valuations aren't uniform. Not every fintech firm’s public valuation will fulfill initial expectations. A deeper understanding requires analyzing the distinct business models utilized by fintech companies and the revenue multiples the public market assigns to them.

Generally, fintech IPOs can be categorized into four primary groups: (1) Lending 1.0, exemplified by LendingClub, (2) Payments, such as Square, (3) fintech SaaS, like Avalara, and (4) BNPL, represented by Affirm. Three years ago, all except Lending 1.0 were valued around 10x forward revenue, but these multiples—and the corresponding valuations—have significantly shifted, especially following the onset of the COVID-19 pandemic.

Lending 1.0: A Consistent Valuation

The initial wave of lending companies has consistently held the lowest valuations, trading at approximately 2x-3x forward revenue. This remains true despite generally favorable public market conditions for technology companies. This lower multiple reflects deteriorating business fundamentals, including negative growth, substantial losses, and challenging unit economics.

Many Lending 1.0 companies also cater to customers particularly affected by COVID-19, such as subprime consumers and small to medium-sized brick-and-mortar businesses. We anticipate these firms will continue to trade at low, single-digit revenue multiples, likely around 3x. Consolidation is already occurring within this space, as demonstrated by Enova’s acquisition of OnDeck, and further mergers and acquisitions are expected.

Payments: Steady Growth and Valuation

The payments sector has demonstrated the most consistent valuation of the four categories, increasing modestly to around 12x over the past three years, despite some market fluctuations. This group includes established businesses like Square and PayPal, which generate billions in revenue with healthy gross margins (in the 40s-50s) and maintain year-over-year growth rates of approximately 40%-50%.

As these companies mature and achieve scale, they have diversified their product lines and pursued inorganic growth strategies. We forecast a slight valuation increase to 13x-15x in the coming years, driven by the potential IPOs of newer companies like Stripe and Toast. Their strong growth rates should command higher multiples, raising the average for the payments category.

Fintech SaaS: A Recent Surge

Mirroring the broader enterprise software trend, fintech SaaS experienced significant gains over the last year, doubling forward multiples to approximately 20x. This surge was fueled by positive COVID-19 impacts, recurring revenue streams, high gross margins (70%-80%+) and increased reliance on core financial software. These companies often exhibit high net-dollar retention—in many cases exceeding 120%—a key metric alongside growth.

However, this category may have seen the most substantial multiple inflation. As we transition into a post-COVID environment, 20x revenue multiples may prove unsustainable. We expect fintech SaaS companies to settle into a new “steady state” above 10x, but likely within the 15x-20x range.

Buy-Now-Pay-Later (BNPL): Rapid Expansion and Adjustment

BNPL represents the newest and most dynamic category. Before COVID-19, this group rapidly increased in value, reaching approximately 15x due to growth rates exceeding 100%, strong network effects, large addressable markets, and consumer virality. Initially, COVID-19 briefly lowered multiples to levels similar to Lending 1.0, but the market subsequently recognized the strength of these models and their support for e-commerce merchants—many of whom benefited from the pandemic—without significant increases in loss ratios.

Currently, BNPL commands the highest multiples in fintech, around 25x, although multiples briefly reached 30x+. Given the early stage of e-commerce globally, we anticipate a near-term steady state for BNPL multiples in the 20x-25x range. We are closely watching the public market reception of Klarna’s upcoming IPO.

Insurtech and Crypto: Emerging Categories

Two additional categories, insurtech (Root and Lemonade) and crypto (Coinbase), are emerging within fintech. While data is limited due to the relatively small number of IPOs and the short time these companies have been publicly traded, we will eventually incorporate them into our analysis. As of the end of April, Root traded at 6.6x, Lemonade at 46.7x, and Coinbase at 12.5x.

The Resurgence of Special Purpose Acquisition Companies

A significant consideration when discussing valuation and multiples is the renewed activity surrounding SPACs. These companies experienced a notable revival in 2020, quickly reshaping the initial public offering (IPO) environment.

Metromile marked the first fintech company to go public through a SPAC this year, and a substantial number of additional SPAC IPOs are anticipated. Investor appetite for these offerings remains strong, with over 150 fintech and financially-focused SPACs currently searching for acquisition targets.

SPACs and Fintech Valuations

SPACs introduce a degree of unpredictability to fintech public valuations. The practice of fintech companies utilizing SPACs for public offerings is relatively recent.

Consequently, many fintech targets are being brought to market sooner than they might have been through conventional IPO procedures. The performance of SPACs in the public markets, and their subsequent influence on fintech valuation narratives, is a key area of focus for 2021.

The way these companies are valued will be closely watched by industry analysts and investors alike.

A Wave of Fintech IPOs

Regardless of the method – whether through SPACs, direct listings, or traditional IPOs – a considerable number of fintech companies are projected to become publicly traded this year. Estimates suggest between 10 and 15 fintechs, and potentially even more, will enter the public market.

This represents a remarkable surge in activity. The attention focused on fintech IPOs will be intense as this period of rapid growth continues.

• The number of fintech IPOs is expected to be significantly higher than in previous years.
• Investor interest in the fintech sector remains robust.
• SPACs are playing a crucial role in accelerating the IPO process for fintech companies.