ONLINE BANK: Here's why N26 can be valued at $2.7 Billion

One key prediction for 2019 -- digital, mobile-first Fintech bundles -- is already coming true. N26, a German neo-bank, has raised a new $300 million to fund international expansion at a ridiculous, eye-popping, anxiety-inducing $2.7 billion valuation. After just a few years of operation and some European Millennials downloading the app. Can this thing really be worth it? Our initial bearish take was that this is not about how much the company is worth, but how much it needs. Venture investors are happy to burn money in order to grow B2C consumer brands, which have now gotten large enough to need (rather than earn through revenue or income) their unicorn valuations. Anecdotally, there's a 5x difference between the public and private markets -- so if you divide the billions by 5 and are no longer outraged, then this price is fair.

But on further thought, there is some defensible industrial logic here. Let's assume -- for the sake of argument -- that all the tech and financial product is trivial, and that all of the venture funding is being used to acquire customers. Further, let's assume that each round is responsible for client acquisition in the prior period. This translates into a simple fact: venture money is a marketing budget, so traction acquiring customers isn't an accomplishment. It's just paying for Facebook ads. On N26's 2.3 million users, customer acquisition costs are between $20-100 per user.

Let's assume that deposits are at $1.5 billion, which is about $650 per customer. That looks a lot like Acorns and Robinhood to us. Depending on assumptions, N26 could make somewhere between $3 and $10 per user per year, which is roughly a 5-10 year payback period. Looking at Revolut, who raised $344 million and probably spent about $150 million of that, venture capital per user looks like $40-110, slightly more expensive. Revolut's revenue is somewhere in the $20 to $30 million range, with a per user revenue of $5-10 as well. There are 600+ banks in the US with assets over $1 billion, so this looks ridiculous (i.e., not special) on its face. Until you realize that customer acquisition cost for financial products is $300, regardless of business line, that customer turn-churn is low, and that acquisitions in the market recently happened at $60 per lead. So we think that the customer acquisition machine is fairly reasonable. Deriving enterprise value on that by multiplying money raised by 10x does seem a meaningful stretch.

Another interesting angle is the fact that the last two rounds involved Asian money -- Tencent and GIC respectively. Those are not particularly price sensitive investors, and N26 is -- from that frame -- a cheap experiment to run in order to see what a foreign banking entrant can do in the United States. If I were Tencent, I would be taking detailed, copious notes.

64791b03-d611-4586-938f-d6963e6204d4[1].png
7f8a7ba8-cfe7-4584-a534-098a9dcdb87b[1].png
91007846-1324-47b0-81a0-1b1dc3a98bb9[1].png
6ddbc3bf-1e9a-4d25-a738-685dd163d834[1].png

Source: Autonomous NEXT analysis, Bloomberg (N26), Company website