A Fintech Paradox: Innovation Stalls at the Gates of Public Markets
Private Markets remain complex, and Trust matters more than in financial sectors like Consumer Banking and Public Markets.
Have you noticed that Morgan Stanley is in most (if not all) the pre-IPO deals in Fintech? Revolut, Chime, and Klarna have engaged Morgan Stanley. I can’t help but wonder why have we not seen any disruptor emerge in this Investment banking subvertical?
This brings to the forefront the credibility trauma that the Fintech sector suffered when Carta was caught using data from its core product—the Carta cap table management data—to generate leads for its secondary market business.
Axios reported in Jan 2024 when the incident came to light because of the complaints of the CEO of Linear — a VC-backed software startup –
One VC told me it was akin to “Oracle using your database to share supply-chain data or Salesforce using your CRM data to inquire about the state of your sales leads.” Source
As a result, Carta exited completely the secondary market business and its valuation has suffered since.
Techrunch is now reporting that Carta is actually looking into a secondary sale (now it can't use its own platform as it did back in 2021) and is being advised by the investment bank Jeffries.
This year we have seen high-flying European Fintech secondary sales.
Revolut was the largest in size (advised by Morgan Stanley) with $500 million worth of shares being sold. The success of the sale is twofold: (a) it established a higher valuation at $45 billion for Revolut, (b) it brought in two New Institutional investors — Coatue, a specialist technology investor in public and private companies; D1 Capital Partners, the hedge fund founded in 2018 by billionaire and former chief investment officer of Viking Global Investors Daniel Sundheim.
Klarna is also been weighing a secondary share sale as part of its strategic preparations for an IPO. The company is working with major financial institutions like Morgan Stanley to manage these transactions. The range of valuations reported are very wide and ranges from $10 Billion to $20 Billion.
Upmarket`s valuation model, a Fintech specializing in pre-IPO private share trading for accredited, shows Klarna at $9.10 Billion. Chime, another pre-IPO Fintech, at $23.59 Billion.
Monzo actually executed a secondary share sale (also advised by Morgan Stanley but not only) but the size of the sale hasn’t been disclosed. Monzo`s sale seems to be via existing investors only. The secondary sale was at a higher valuation — $5.9 billion — compared to $5.2Billion which was the valuation when they raised $610 million earlier this year.
None of the Fintech marketplaces for trading private company shares, either direct secondary sales or LP-secondaries, have made a dent in private markets. Hiive, UpMarket, and EquityZen are the most known companies and cater to accredited investors. None of them have raised any meaningful funding and none of them have been able to move the needle in a market with very little IPO activity.
Back in 2021, Robinhood had made headlines by launching IPO Access which gave access to retail traders at IPO prices before they began trading on public exchanges. I remember Figs — a healthcare apparel company whose shares were accessible to Robinhood users during its IPO and Duolingo — the language-learning platform. But I haven't heard anything over the past 23- years about Robinhood IPO Access offerings.
The landscape of private market transactions remains a complex and evolving terrain. Incumbents continue to invest and dominate in this space. Just look at BlackRock’s acquisition of Peqin and the expected increase in allocations to private markets by retail investors.
Morgan Stanley and Oliver Wyman report that retail wealth investors are expected to more than DOUBLE their allocations from $2.3T in 2020 to $5.1T by 2025. Private markets (shares, funds, credit, etc,) are growing at $1T+ per year.
The irony is that not much has changed in terms of the intermediaries — the gatekeepers — for non-institutional investors to access private markets.
Why is it that the high-flying Fintech themselves only trust the incumbent investment banks and have shown no intent of working with Fintech marketplaces for secondary sales?
While the success of secondary sales for companies like Revolut and Monzo demonstrate the ongoing appetite for private (especially, pre-IPO) investments, yet the struggle of Fintech dedicated platforms to gain significant traction underscores the challenges of disrupting this space.
As we look to the future, several questions emerge: Will we see a resurgence of platforms like Robinhood’s IPO Access, bridging the gap between private markets and retail investors? Can specialized Fintech marketplaces innovate, and overcome the trust deficit, and regulatory hurdles to become sizable players in private markets?
It has been two decades since Google’s innovative IPO, which revolutionized the public listing process. The Dutch auction method and their “Owner’s Manual” set a new standard for transparency and inclusivity in going public. Yet, it’s striking — and somewhat concerning — that none of today’s high-flying Fintechs are showing any sprinkle of innovation in the final stages of their journey towards becoming publicly listed companies. Have Grown-up Fintechs forgotten the democratization mantra and the innovative culture?
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