In business, and especially for small businesses, there are a number of exit strategies depending on the macro environment they face.
When markets are booming, management teams may pursue an initial public offering, seeking to tap into the stock market to raise operating capital. In many cases, these founders can also monetize their own existing stakes in the company. In more difficult times, liquidation or bankruptcy are options.
There is usually the possibility of pursuing another path, where a merger or acquisition can help a struggling company survive, partnering with cash, yes, but also a strategic roadmap where the proverbial whole of the combined entity would be greater than the sum of the parts.
The window for an M&A exit could be closing for at least part of the FinTech sector – especially for smaller companies which have seen stock prices fall and cash burn accelerate.
As reported earlier this month, it has become more difficult for potential suitors in any industry to secure the capital needed to fund any deal in the first place. Potential deals totaling more than $150 billion have been postponed or canceled as funding becomes scarce.
The FinTech IPO Tracker, as formulated by PYMNTS, shows that sentiment on the sector — at least the outlook for some digital-only upstarts — has been anything but positive. As seen below, the index fell 38% for the year, far worse than any benchmark.
Getting a bit more granular in detail, the average return of the over 40 names in the index shows an average loss of 46% since the companies’ IPOs – a number that is significantly skewed (upward) by more than 380% return.
None of this is meant to flag any particular name – but given that only a handful of the companies tracked are expected to show longer-term earnings, the pressures are a little obvious.
The FinTech IPO member’s average market capitalization is around $3 billion, indicating that the financial “hurdle” to acquiring one of these companies is not insignificant, even with the recent downturn. . Of course, there are names like Katapult and OppFi where the market caps are around $100 million and $300 million, respectively. In just one example, Katapult, as reported in this space recently, saw its raw origins drop by double-digit percentage points and cited macroeconomic turmoil as impacting consumer confidence and Elsewhere, companies expanding their activities (like Paysafe, in Argentina, in a recent announcement) are punished by the markets.
And as stock prices continue to be volatile, it should be noted that using stocks as a currency becomes less attractive (and less feasible) to enter into transactions. And in the meantime, at least for some companies, cash burn continues, as evidenced, for example, by Katapult’s negative operating cash flow of $1.7 million in the first six months of 2022.
Today, innovation is a long-term game, and within FinTech, innovating financial services away from paper-based and manual processes takes time (and money). But in today’s environment, with deals increasingly on the back burner, the pressure is on to make more money in less time.
We are always looking for partnership opportunities with innovators and disruptors.