FinTech Unicorns: How to Spot Early Winners

Which FinTech unicorns did you buy this year after their IPO?

If you bought Robinhood (NASDAQ:HOOD) HOOD early last month under $40 -- before the epic WallStreetBets short squeeze to $85 -- you're doing okay. I know that's a costly "if" for some traders-turned-investors who got caught up in the mania above $50.

Speaking of new-fangled brokers, if you bought cryptocurrency exchange Coinbase (NASDAQ:COIN) COIN on the IPO, or any time in the month following that failed launch above $400, your money is still hurting. More patient investors are doing better if they nibbled under $240 since late May.

SoFi: The One-Stop Fin-App

Then there's SoFi Technologies SOFI, the consumer-focused platform with an app offering everything from credit and loans to home finance and brokerage. They built an initial business around student loan refinancing and were released from a SPAC (special purpose acquisition company) on June 1 at $22.

Investors in SoFi's brand of FinTech may be looking for bargain opportunities under $15, but there's a reason the stock made new lows after the company's August 13 quarterly report: earnings estimates were cut dramatically.

If You Bought This IPO Then, You Paid Later

Finally, if you bought Affirm AFRM, the payments app that Amazon (NASDAQ:AMZN) just selected as its "buy now, pay later" (BNPL) partner, then you are possibly back in the green after its January IPO at $90. I say "possibly" because after shares soared to $145 in February, they collapsed to nearly $45 by May.

So if you waited and learned more about their business and outlook, you had a good chance to buy as the stock consolidated below $70 for several months. And you got a positive whisper in your due diligence ears on August 2 when Square SQ announced they would be buying the Australian BNPL company Afterpay in a $29 billion deal.

But honestly, even as a Square investor who liked that deal, I had never heard of Affirm. So I missed Monday's 46.7% rocket launch back to the $90s.

And that brings me to today's video. I want to be learning about more FinTech unicorns -- companies with a private valuation exceeding $1 billion -- before they go public so that I can pay better attention to them after they IPO.

Sorting Out the Unicorns

To this end, in the video I show an excellent graphic from the research firm CB Insights that they call The FinTech 250. It's their 2020 list published last September, but it's loaded with ideas we should be tracking like Chime, Toast, and Juniper Square.

I take a look at these unique business models one at a time, with Chime offering credit score improvement, Toast providing a full-stack tech platform for restaurants, and Juniper Square as the digital portal for real estate investors.

Another unicorn I mention in the video is Root, provider of an app to score your driving and get better insurance rates. I didn't know that Root had its IPO in November at $27. Maybe that's because the stock valuation has collapsed from roughly $7 billion to under $2 billion, with shares trading near $6 now, and so it looks like pretty much every investor is ignoring it.

And while we await the biggest FinTech unicorn of all to IPO soon -- yep I'm talking about Stripe -- I just learned of another pending giant I wasn't familiar with.

Grabbing Business from Doordash, Uber (NYSE:UBER), SoFI

Grab calls itself "the everything app," offering deliveries, mobility, and financial services. Their website boldly states "From essential services to earning opportunities. We're an all-in-one platform."

Obviously, some early investors agree as Singapore-based Grab is the most well-funded company on the CB Insights Fintech 250 list, having raised approximately $9.7 billion across 22 rounds since 2014. Not surprisingly, it also garnered the top deal of 2020, with an $856 million Series I in Q1’20 with participation from investors Mitsubishi UFJ (NYSE:MUFG) Financial Group and TIS INTEC Group, according to CB data.

And if you are wondering whether all this investment attention is justified, you might be interested to see Grab's growth. Last month, the company reported their Q1 2021 where adjusted net sales reached an all-time high of $507 million and grew 39% year-over-year.

A $2 billion plus revenue run rate for Grab sounds great, especially if they can maintain that high double-digit growth.And they'll need to whenever they decide to emerge from a SPAC deal with Altimeter Capital, since the current valuation is already $40 billion.

Based on last September's tally of the Fintech 250, there were 31 other unicorns besides Grab, and the entire private crowd had raised $10.3 billion in equity funding across 120 deals, including 35 "mega-round" ($100M+) equity investments.

The CB Insights report also breaks down the Fintech 250 by global representation, with 46% of companies based outside the US. The authors write "After the US, the UK is home to the most Fintech 250 companies (38), followed by India (20)."

A Ribbit Heard Round the World

Another interesting observation in their data was about the top VC investor: "Ribbit Capital is the most active investor in this year’s Fintech 250 companies. Since 2018, Ribbit has participated in 45 deals to this cohort of companies, including to Hippo, Nubank, Upgrade, Robinhood, and BharatPe."

I had come across Ribbit Capital, also an early investor in Credit Karma and Affirm, while exploring what Walmart (NYSE:WMT) was trying to accomplish in their Fintech ambitions. Noted industry watcher Ron Shevlin, who writes a column for Forbes called Observations from the Fintech Snark Tank, tried to decipher earlier this year what the big "W" was up to when they announced a strategic partnership with the Fintech investment firm to “develop and offer modern, innovative and affordable financial solutions.”

Shevlin noted at the time that Walmart also "hired two key executives away from Goldman Sachs’ fintech unit Marcus to help run the retailer’s new fintech unit. Omer Ismail and David Stark were key players in leading Marcus’ growth to more than $97 billion in deposits."

Shevlin's conclusion: "Walmart’s fintech aspiration is a lot bigger than just creating a digital bank -- it’s creating a true digital ecosystem in the form of a super app."

And what better way to accomplish that than to be intimately involved with the #1 investor in Fintech startups and unicorns. Ribbit's mantra is "It takes money to change money." From their website...

"Our goal isn’t just to write checks. It’s to deposit and grow ideas. We look at finance with a hungry eye for change, and with a desire to share our learning and experience – including some painful mistakes along the way – with ambitious entrepreneurs."

By partnering with Ribbit, Walmart management learns faster about the companies, the technology and business models, the founders and all their potential so they they know what they want to roll out to the majority of middle America consumers. Pretty savvy move, if you ask me.

How to Be Like Ribbit

While few of us have the risk capital to take chances on ambitious fintech entrepreneurs, like Ribbit does, we can be constantly learning about financial innovation opportunities that come from companies we will probably encounter on a weekly basis.

Think about fintech apps you used before they went public. Square was a big one in my household, and the company even offered us pre-IPO shares. But I sold them too soon because I didn't see the ecosystem vision that Jack Dorsey was creating for small business.

The good news is that there will be many hundreds more ideas coming down the fintech river. And in the video, I show you how to get a copy of the CB Insights FinTech 250 list so you can begin visualizing the innovation landscape for yourself.

Even though the 2020 list is dated because of who has already gone public -- and CB Insights should be rolling out their 2021 list soon -- it's still a great starting point to see and track who and what's out there.

Do you use Chime and like it? Keep an eye out for any SEC S-1 filing they might issue, the initial registration form for new securities required by the SEC for public companies. That will tell you about their sales, growth, debt, margins and potential profit trajectory.

According to CNBC last month, Chime raised a fresh $750 million to value the company at $25 billion -- $10 billion above its valuation less than a year ago. That could be a very rich valuation, so we'll have to do our homework before putting any money at risk.

Do you work in the restaurant or real estate industries? Then likewise be looking for numbers and reports for Toast and Juniper Square.I know I will be, and I'll be back next week with some answers. So be sure to click on + Follow up top to stay tuned to my latest FinTech research.

Disclosure: I own SQ shares for the Zacks TAZR Trader portfolio.

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