What does Revolut's Valuation Mean for the Rest of European Fintech?

Rumours emerged a fortnight ago that Revolut was near to closing a $250 million round at a valuation of over $1 billion. The company confirmed the news this morning, saying its valuation had increased 5x since it raised $66 million in the middle of last year and now stands at $1.7 billion. The round was led by Hong Kong based DST Global and the cash injection will be used to fund global expansion, starting with the US, Canada, Hong Kong, Singapore, and Australia this year alone.

Revolut’s accomplishment makes it Europe’s fifth fintech unicorn based on data from CB Insights. Unicorns are private companies valued at over $1 billion. When it comes to fintech, the more of them created in a country or jurisdiction, the more successful that location’s fintech industry is perceived to be. Revolut’s news will be viewed as a win by those who have seen the number of recent unicorn births in the US rocket (the country boasts 16, with 6 having been created in 2017) and are gunning for Europe to catch up. The idea is that the creation of fintech unicorns, and in turn the perceived success of an industry, will lead to increased funding for the region’s fintechs more broadly. In Europe that would be welcomed by most as it has consistently lagged significantly behind both Asia and North America when it comes to attracting fintech funding. However, questions remain as to whether Revolut’s success will have this impact or if it is a lone example. It also remains to be seen whether companies should be reaching for such lofty heights.

Why is European Fintech Funding Low?

The reasons behind European fintech funding’s relatively small volume are myriad, but broadly it breaks down to the European VC industry being newer, funds being smaller, and more barriers to firms reaching audiences of hundreds of millions (e.g. language, multiple financial services infrastructures). Revolut’s success does not surmount these hurdles, but it can be used as evidence that global interest is growing in European fintechs. That trend is likely to increase as the European Commission amends regulation to make it easier for firms to make cross border investments in the EU, and Asian and US investors ramp up their searches for less competitive rounds. With these factors in mind, we should take Revolut’s recent valuation as a sign of good things to come for European fintech funding, even if few others will reach such scale any time soon. When it comes to whether individual companies should be seeking, and accepting, valuations of over $1 billion the situation is more complex. Unicorn status is certainly good PR for a company, and signifies investors’ belief in it, but in some cases it can be a double edged sword. Investors’ expectations of incredible returns can put significant pressure on a young firm, and if a company doesn’t show stellar performance and chooses to raise again, it could end up with a lower valuation. So called “down rounds” are most definitely not good for PR. Additionally, when a fintech comes to exit the market, either through an IPO or a sale, a huge valuation presents hurdles. It can be harder to find a buyer willing to stump up the funds, while IPO’ing at such a value is incredibly difficult if the firm cannot back it up with revenues to match, and in many cases profitability, both hard tasks for young companies. All in all, Revolut’s success is great news for the company, and a positive sign for European fintech, but should not be taken as a sign that Europe will see a plethora of unicorn births and skyrocketing funding volumes any time soon. Sarah is a Principal Analyst at 11:FS and regularly hosts Fintech Insider and Insurtech Insider as well as guest-hosting on Blockchain Insider. You can follow her on Twitter @SarahKocianski or email her at sarah.kocianski@11fs.com