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Many once-promising financial startups are cash-strapped; others have broken business models.
By Jeff Kauflin & Emily Mason, Illustration by Matt Chase for Forbes
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ON November 15, the cofounders of Ribbon Home, a five-year-old financial technology company that promised to fix a “broken” homebuying market by offering buyers the ability to make all-cash offers, sent a cryptic and disconcerting email to its entire staff. “During this time of uncertainty, we ask team members who are not customer- or finance-facing to shift their focus from work to self-care, spending time with family and doing things that bring you comfort,” it read in part.
Six days later, New York City–based Ribbon dismissed 85% of its staff—190 people—and cut severance to one week’s pay versus the six weeks employees had been previously promised. Fewer than 30 people remain today, and the company recently announced that it has paused all new business.
Ribbon’s days are numbered, but in September 2021, amid the pandemic housing boom, venture capitalists including Bain Capital and Greylock threw $150 million at the startup, valuing it at $500 million. The money was supposed to fuel explosive growth—the company predicted “$10 billion in home transactions annually”—and staff ballooned to 360.
Those easy-money days are over. Home mortgage rates have more than doubled since 2021, cooling the market and the need for all-cash offers. Ribbon, which likely never came close to being profitable, relied heavily on a continuous source of outside funding. Unlike traditional banks whose deposits fund home mortgages, Ribbon needed Wall Street firms to fund its customers’ cash offers. Goldman Sachs and Waterfall Asset Management, Ribbon’s primary financiers, have pulled back funding because Ribbon no longer meets their lending requirements. Ribbon declined to comment.
“Some VCs are saying, ‘We don’t know when we hit bottom on this thing,’ ” says one fintech executive. “ ‘There’s no price that we’re putting in money.’ ”
Like many once-promising fintechs, Ribbon is caught between Scylla and Charybdis. It’s quickly running out of money, and its broken business model isn’t going to generate fresh cash. Troubled fintechs can choose either to close up shop or sell the business at a fire-sale price. Says one fintech executive, “We have VCs tell us, ‘Everything in our portfolio is for sale.’ ”
Fintech is the term widely used for technology startups focused on financial services. These fledgling companies were founded mostly in the last decade, with the goal of disrupting old-guard banks, insurers and credit card companies with whizbang tech. Only a few short years ago, venture capitalists couldn’t get enough of the sector. In 2021, CB Insights reported that fintech outfits raised more than $140 billion in 5,474 funding rounds. That was more than the previous three years combined. As the public markets soared, many went public, raising $10 billion from some 28 fintech IPOs in 2020 and 2021, S&P Global Market Intelligence reports. Insta-billionaires were minted at companies such as Affirm (buy-now, pay-later loans), Marqeta (newfangled payment processing) and Upstart (AI-vetted loans).
But with the IPO market in a coma and fintech stocks down 60% from their peaks, venture investors and bankers have turned off the cash spigot, not just for new investments but for additional funding to existing portfolio companies. According to CB Insights, fintech funding sank to $11 billion in the fourth quarter of last year—the lowest level since 2018.
ZOMBIE FINTECHS
These 25 venture-backed startups are facing a troubled future. Some are cash-strapped; others have broken business models. Getting acquired at a deep discount is the only hope for most.
“Some VCs are saying, ‘We don’t know when we hit bottom on this thing,’ ” says one fintech executive. “ ‘There’s no price that we’re putting in money.’ ” Adds Sheel Mohnot, a cofounder and general partner at Better Tomorrow Ventures: “We’ll definitely see shutdowns this year. It’s going to be painful.”
A survey of 450 early-stage startups conducted last fall by January Ventures, a Boston-based venture firm, concluded that 81% had less than a year’s worth of cash on hand. In a months-long investigation, Forbes used data from CB Insights and PitchBook to comb through more than 200 fintech startups whose last funding round was at least 18 months ago. We then called dozens of insiders, investors, bankers, analysts and fintech founders to narrow the list of cash-starved startups to those with unproven and unprofitable business models. Many are clearly demonstrating signs of distress, such as mass layoffs. Our reporting also uncovered other troubled fintechs that have raised money more recently. In all, our 25 zombie fintechs have collectively absorbed some $7.5 billion worth of investor cash at recent valuations as high as $2.5 billion. Many of them will be purchased—or they’ll perish.
“Behind closed doors,” says Jigar Patel, who leads Morgan Stanley’s investment banking business in fintech, “a lot of mergers-and-acquisitions conversations are going on.”
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NO category within fintech may be more troubled than the so-called “neobanks.” The idea behind these legacy-bank disruptors is simple: Offer basic consumer banking services like debit cards, credit cards and small loans on mobile phones. The apps minimize paperwork hassles, reduce fees and eliminate face-to-face meetings. During the pandemic, when millions banked minor windfalls in the form of stimulus payments, neobanks such as Chime, Current and Varo attracted scads of customers. CB Insights estimates that since 2020, 47 neobanks raised a combined $7.5 billion in venture capital.
Four-year-old Step is a Palo Alto, California–based neobank that provides savings accounts, credit cards and crypto investing for teens. In 2021, it secured a lofty $920 million valuation from backers including tech investor Coatue, payments giant Stripe and actor Will Smith. By the end of the year, it claimed 2.7 million customers, but its annual revenue was stuck in the single-digit millions, according to sources familiar with its finances.
“What if there’s a softball game, and there’s 16 kids with lemonade stands? The lemonade tastes great, but they’re all going to go out of business.”
Step’s last equity funding occurred nearly two years ago, in April 2021, for $100 million. It has yet to break even. Last July it laid off roughly 20% of its staff, though its CEO, CJ MacDonald, framed the reductions as performance-based cuts and claims the firm’s revenue surpassed $10 million in 2021 (he rebuffed Forbes’ request for proof).
Another neobank, Aspiration, launched in 2014 with a climate-friendly mission that included the option of rounding up debit card purchases to the nearest dollar to plant a tree and had backers including actors Leonardo DiCaprio and Orlando Bloom. It saw its monthly application downloads drop from 400,000 per quarter at the end of 2021 to 35,000 per quarter at the end of 2022, according to Apptopia, a mobile analytics firm. Last October, its CEO resigned when a planned SPAC deal, which valued the money-losing company at $2.3 billion and promised to inject $400 million in fresh cash, was delayed. Aspiration recently made a hard pivot toward enterprise clients, promising carbon credit solutions to corporations, while its SPAC merger and IPO deadline have been extended to March 31, 2023.
“Neobanks tried for 10 years, and they had more runway than I think anyone would’ve ever imagined,” says one bank executive. “None of those businesses figured out how to make the economics work. Building a brand is too expensive. Acquiring customers via paid search and social media is too expensive. Building out expertise in lending is really hard and takes a lot of time.”
Another huge obstacle: Neobanks aren’t actually banks. Because they lack bank charters, if they want to lend to customers, they must pay fees to other banks or find investors to fund their loans. This gets expensive, especially when the cost of capital is greater than zero. Today the federal funds rate (the interest rate at which banks lend to one another) is around 4.25%, up from 0.08% a year ago.
DISAPPEAARS
As the value of tech stocks plummeted in 2022, venture capitalists have cut back drastically on the funding they’re providing for fintechs.
Varo, a San Francisco–based neobank, spent $100 million to get its own bank charter so it could lend more profitably. Now it faces another challenge: It doesn’t have a sizable deposit base from which it can make loans. As of the end of December, Varo reported 5.3 million accounts with a total of $276 million in deposits, meaning its average account held just $52. One factor that is likely driving the tiny balances: Varo—which advertises no fees, early access to paychecks and 6% cash back on credit card purchases—caters to lower- and middle-income customers, many of whom aren’t using Varo as their primary bank account.
Varo currently makes most of its money on interchange, the 1% to 2% fees merchants pay when consumers swipe their credit and debit cards, with lending making up less than 10% of its 2022 revenue. According to its most recent regulatory filing, it has 14 months’ operating capital left.
“We remain confident in Varo’s ability to successfully operate through this economic cycle,” says a company spokesperson.
Neobanks aren’t the only ones with flawed business models. Vise is a buzzy New York startup led by two 22-year-old founders that sells AI-powered software to financial advisors, enabling them to quickly create custom, low-cost investment portfolios. The startup hit a $1 billion valuation in a 2021 round backed by Ribbit Capital and Sequoia. Despite boasts that it had a big pipeline of assets coming from advisors, financial disclosures reveal that as of September 2022, its assets under management were just $362 million (Vise claims assets are close to $500 million). With fees of roughly 0.5% of assets, Vise’s revenues are in the low millions. Given the abundant competition from existing portfolio management software platforms and advisors’ reluctance to change, it’s no wonder Vise is struggling.
Cofounder and CEO Samir Vasavada says his 50-person startup has $70 million in cash and over five years’ worth of runway. Yet it has also been pursuing partnerships with large financial institutions, the types of deals that often end in acquisitions. Vasavada says Vise isn’t considering a sale, but in the same breath, he adds, “I could change my mind in a couple years.”
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Then there’s the problem of too many companies chasing too few customers.
“What if there’s a softball game, and there’s 16 kids with lemonade stands?” says Steve McLaughlin, founder and CEO of San Francisco–based, fintech-focused investment bank FT Partners. “The lemonade tastes great, but they’re all going to go out of business.”
The overcrowding issue looms large for banking-as-a-service (BaaS) firms, an overhyped niche of startups trying to sell their software to other companies, especially neobanks, that want to offer financial products like checking and savings accounts. Two of the most well-established, publicly traded BaaS providers are both based in Austin, Texas: Q2, with a $1.8 billion market capitalization, and Green Dot, whose market cap is $940 million. Green Dot is only marginally profitable, and Q2 has never turned a profit since it IPO’d in 2014. In the last 12 months, it lost $100 million on $550 million in revenue. Since January 2020 alone, 13 different BaaS startups have raised a combined $2.1 billion in venture capital funding, according to CB Insights.
Not only are there too many BaaS vendors pursuing too few customers, most of which are themselves financially strapped, but expensive regulation is also on the horizon. In November, the Treasury Department issued a report recommending that companies, including BaaS providers, involved in “bank-fintech” relationships be subject to regulation and oversight by bank regulators including the Consumer Financial Protection Bureau.
It’s therefore no surprise that lots of BaaS startups are now on the block. Rize, a New York–based BaaS company, is looking for a buyer, according to people familiar with the matter (Rize didn’t respond to Forbes’ requests for comment). So is Railsr, a BaaS in the U.K. Says a Railsr spokesperson, “The market conditions over the past 12 months are driving a race to scale and market consolidation.”
San Francisco startup Synapse has more traction than most BaaS providers. But abusive management practices, including arbitrary public firings, prompted a talent exodus in 2020. Over the past six months Synapse has been shopping itself at a price significantly lower than the $180 million value it commanded in its last funding round in 2019, say industry insiders. “Synapse is cash flow–positive and growing with a strong balance sheet and currently not for sale,” insists a company spokesperson, who also disputes that it had excessive employee departures.
A slew of BaaS failures poses a risk to the entire fintech ecosystem because their software provides vital connections to traditional banks. “What happens when your core infrastructure provider is an unprofitable startup and can’t raise their next round?” asks Merritt Hummer, a fintech investor and partner at Bain Capital.
Not everyone believes fintech’s bloodletting is a bad thing. Says one partner at a top venture capital firm: “I just see it as a natural part of how capital formation is done.”
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