Revolut has revenues of £2.3 million.But its sales costs are £7.8 million. Despite that, investors are planning to put £50 million more into the company. “Growth is the new profitability,” some fintech insiders say.
LONDON – Fast-growing fintech app Revolut is close to sealing a £50 million funding round that will value the nascent company at £300 million, Sky News reports.
London VC Index Ventures, already an investor in Revolut, is leading the round, Sky says. Silicon Valley investor Ribbit Capital is also said to be taking part in the round. CEO and founder Nikolay Storonsky told TechCrunch earlier this month that the company was close to “large equity round.”
London-based Revolut offers a pre-paid international currency card, initially offering zero-fee, zero-commission foreign exchange. Cash is pre-loaded to the card through an app.
The big round and chunky valuation are eye-catching for a number of reasons. Revolut has only just celebrated its second birthday and it’s unusual for a company to get such a huge cash injection at this early stage.
The firm’s accounts also raise eyebrows. I reported earlier this week that Revolut’s first year of full accounts show it lost £7.1 million on £2.3 million of revenue. It’s not unusual for an early stage company to lose money. But what is unsual here is that the losses were down to “cost of sales,” which were £7.8 million.
“Cost of sales” measures how much it costs for a company to provide the service or products it is selling, before any other incidental and operating expenses are taken into account. It is the most basic, fundamental measure of whether a business makes money or not. A fintech entrepreneur chatting to me at the Money2020 conference in Copenhagen this week said it looked like Revolut is “spending $1.00 to earn 50¢.”
Investors don’t look at it that way. What attracts venture capitalists is Revolut’s rapid growth. Storonsky told BI this week that it is on track to have 1 million customers by the end of 2017. Not bad for two years’ work.
VCs argue that it is more important to pull in customers in the early days and worry about making money later – even in a fintech business.
Index Ventures made a similar bet on international money transfer business TransferWise when it was unprofitable but growing fast. Index partner Jan Hammer told BI in 2015: “In terms of profitability, it’s a very well-known phenomenon in online and mobile industries that if you want to get true scale, you invest for growth.” (TransferWise is still unprofitable but growing fast, but says it will make an operating profit this year.)
“Growth is the new profitability,” another fintech insider told me at Money2020. But a consultant at the conference questioned how many active users Revolut has. Close to 1 million people may have opened accounts but how many are actually regularly using them?
The financial accounts also suggest that Revolut’s growth is being fuelled by an inbuilt subsidy in the product – spending $1.00 to earn 50¢.
This is not necessarily unusual. Startup bank Monzo loses around £40 per customer per year on its pre-paid cards and blamed a bigger than expected loss on the fact that more people signed up for its cards than it had projected.
But the big unknown is will customers stick around once the freebies disappear?
Revolut is now testing this theory. It added “fair usage” caps on its foreign exchange transfer, with people having to pay a fee if they transfer more than £5,000 a month.
It is also pivoting to become a quasi-financial supermarket, rather than just FX provider. The company has “made additional effort to monetize the business model by introducing delivery fees and affiliate programmes,” partnering with a bunch of other fintechs and encouraging users to do everything from invest in property to borrow money through its app.
An extra £50 million probably won’t hurt, either.