Novo: Banking for Small Businesses

The Evolving Landscape of SMB Banking

Historically, small to medium-sized businesses (SMBs) have faced challenges in securing appropriate IT solutions. They often exceed the capabilities of consumer-grade products but lack the resources to implement or fully utilize enterprise-level systems. However, the neobank sector presents a markedly different scenario, with ample options and substantial venture capital investment directed towards serving the SMB market.

Novo Secures $40.7 Million in Series A Funding

Novo, a neobank specifically designed for small businesses, has recently completed a $40.7 million Series A funding round. This capital injection will be utilized to facilitate continued growth of both the company and its platform.

Valar Ventures spearheaded the funding initiative, with participation from Crosslink Capital, Rainfall Ventures, Red Sea Ventures, and BoxGroup. While the exact valuation remains undisclosed, Novo—initially established in New York in 2018 and now headquartered in Miami—has amassed 100,000 SMB customers. These customers are defined as businesses generating between $25,000 and $500,000 in annual revenue, and have collectively processed $1 billion in transactions, demonstrating accelerating growth in recent years.

A Proliferation of Banking Solutions for Small Businesses

Small businesses now have a diverse range of banking options available. These include traditional banks, which are actively enhancing their services and benefits to retain SMB clients, alongside a growing number of fintech companies—including neobanks like Novo—that are developing specialized banking and financial tools for startups and smaller enterprises.

A comprehensive search reveals numerous other players in this sector, such as Rho, NorthOne, Lili, Mercury, Brex, Nearside (formerly Hatch), Anna, Tide, Viva Wallet, Open, and more. Some operate internationally, while others focus on startups or freelancers, collectively highlighting the significant opportunity and attention this market is receiving from the technology industry.

Novo’s Differentiated Approach to SMB Banking

According to CEO and co-founder Michael Rangel, Novo distinguishes itself by approaching SMB banking from the perspective of a small business owner. He notes that SMBs typically utilize an average of seven different finance applications to manage their finances, payments, and other operations. Consequently, Novo has created a user-friendly “drag and drop” dashboard that allows businesses to integrate and view activity across all these applications in a centralized location.

Currently, the platform supports “dozens” of integrations, with more being continuously added. This integration capability represents the initial phase of Novo’s strategy.

Future Development and Automation

The company’s future plans involve developing technology to monitor and potentially automate activity between integrated applications. Rangel explained, “We’re able to see this is your balance and what you should expect.” He further stated, “The next frontier is to marry the incoming with outgoing. We’re using the funding to build that, and it’s on the roadmap in the next six months.”

While Novo has not yet incorporated cash advances or lending products, these are also under consideration. The company is actively gathering customer feedback and observing platform usage patterns to identify areas for improvement and expansion.

Rapid Growth Fueled by Market Shifts

Novo experienced substantial growth following its initial launch. Between 2018 and the end of 2019, it acquired only 5,000 accounts. However, the onset of the COVID-19 pandemic in 2020 triggered a period of “hockey stick growth,” as described by Rangel.

This surge in growth was driven by the widespread lockdowns and the resulting increase in individuals starting businesses. These new entrepreneurs encountered significant obstacles when attempting to open bank accounts with traditional institutions, as in-person authentication was often required, but branches were either closed or inaccessible.

As a result, Novo’s customer base expanded to 24,000 within the year.

Benefiting from Market Disruption

Additional market dynamics have also contributed to Novo’s success. The closure of Simple and its small business banking service, Azlo, by BBVA during its merger with PNC resulted in a significant influx of users migrating to alternative platforms, with Novo being a major beneficiary.

Over the past six months, Novo’s customer base has quadrupled, largely attributed to former Azlo users seeking a new banking solution.

Competition and Investment Potential

The presence of numerous SMB banking providers indicates a competitive landscape, but also a fragmented market. Consequently, a startup demonstrating traction is likely to attract investor attention.

Andrew McCormack, founding partner at Valar Ventures, commented, “The ability of the Novo team to grow the company rapidly during a year where businesses have faced unprecedented challenges is impressive.” He added, “Novo tripled its small business customer base in the first half of 2021! Their custom infrastructure and banking platform put them in prime position to expand their services at an even faster pace as we come out of the health crisis. All of us at Valar Ventures are excited to join this team.”