The Daily Telegraph - Business

Making sense of loss-making Revolut’s steep valuation

The £24bn app is raising cash and eyebrows as it focuses on rapid global expansion, writes James Cook

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‘People who are afraid of hours are almost never successful”, according to Revolut’s unorthodox descriptio­n of its company culture.

It is a philosophy that Nikolay Storonsky, the founder of the banking and payments app, has carried over from his days as a trader at Lehman Brothers and Credit Suisse.

It has also been credited with making the 36-year-old a multibilli­onaire after Revolut secured a $800m (£577m) funding round yesterday, raising its valuation to £24bn.

The investment makes Revolut the most valuable privately held technology company that the UK has ever seen, giving it a larger valuation than chip designer Arm and payments business Worldpay had before their sales.

The six-year-old business is now worth more than NatWest despite its operating losses doubling to £201m in the last year. The group’s valuation was around £4bn a year ago.

Chancellor Rishi Sunak welcomed the fundraisin­g, saying: “We want to see even more great British fintech success stories like Revolut.”

Martin Gilbert, Revolut’s chairman and the fund manager behind Aberdeen Asset Management, says the deal was about Revolut’s potential, not its current business.

“Investors are interested in the future of financial services and clearly our investors think Revolut could be one of the big winners in the future.”

“We didn’t need to raise any money. But the opportunit­y came along to raise a significan­t amount which will help us grow the business in the future. The focus is on growing globally in places like India, Australia and the US.”

But its sky-high valuation has raised more than a few eyebrows, particular­ly in the context of the company’s growing losses, minimal lending revenue, and the fact the start-up was targeting a lower valuation of $15bn as recently as April.

“There’s no denying that the valuation for Revolut is incredibly high, especially when you consider it was valued at £4bn just over a year ago and it is still loss-making,” says Sarah Kocianski, the head of competitor strategy at financial technology consultanc­y 11:FS.

“However, there is a lot of money around looking for a home at the moment, and that’s helping drive up valuations beyond what you might have expected to see previously.”

John Cronin, a banking analyst at Goodbody, called it a “staggering valuation for a loss-making business”.

“It will be interestin­g to track its progress and to see if this valuation can be sustained (or built on) if the business decides to embark on an IPO in due course.”

The company’s products include bank accounts, internatio­nal money transfers, cryptocurr­ency and stock trading as well as bill paying and budgeting tools.

Revolut’s lending facility is small, standing at just £1.4m at the end of 2020 even as revenues rose to £222m. But the potential of turning its 16m users into lending customers is likely to have won over investors.

Many have faith in Storonsky’s ability to achieve this. The Russianbor­n entreprene­ur has built up a reputation in the industry for a hard-driving approach to leadership.

“I noticed that several team leaders are significan­tly below targets and still do not work on weekends to catch up,” Storonsky wrote in an internal message to employees in 2018. He later admitted that “we haven’t always got things right” and referred to Revolut’s culture at the time as a “mistake”. The former state champion swimmer’s approach shows every sign of having paid off, however.

“You can see the potential gearing in the business if we could lend even a small portion of our balance sheet out,”

Gilbert said last month as the company published its 2020 accounts.

Revolut originated from 2015’s financial technology boom in London which also led to the rise of rivals Monzo and Starling Bank.

Within a matter of months, these three companies all courted major investors, forcing British venture capitalist­s to pick sides. Prominent London funds Index Ventures and Balderton Capital sided with Revolut, handing it £70m in funding in its first two years.

Storonsky used his funding war chest to embark upon breakneck internatio­nal expansion, launching Revolut across Europe at a time when rivals Monzo and Starling remained in the UK.

“What really drives the valuation is the scale of the ambition. You see a lot of people doing just retail, just current accounts in just one country,” says Mikko Salovaara, Revolut’s chief financial officer.

But with that ambition came controvers­y, with politician­s in

Lithuania raising concerns about Storonsky’s family in Russia and the possibilit­y of Kremlin links. A subsequent investigat­ion found no cause for alarm.

Revolut’s current expansion to India and China, along with an applicatio­n filed in March for a US banking licence, gives investors hope that the business still has plenty of room to grow.

The latest funding round was led by SoftBank and Tiger Global, two prolific technology investors that have gained renown for the unrelentin­g pace of their deals.

Revolut now has significan­t funding to resume the pace of its expansion that it kept up before the pandemic. The company applied for a full UK banking licence in January, which would clear the way to a major expansion of its lending business. Launching a buy now, pay later service could also bulk up its lending revenue. Sweden’s Klarna, another SoftBank investment, remains Europe’s most valuable financial technology start-up with a $46bn valuation.

Gilbert says Revolut has “no immediate plans” to launch its own buy now, pay later service but stops short of ruling it out. “It’s the same with an IPO,” Gilbert says. “No immediate plans for an IPO either. I think the strategy is going to be just focus on what we’re doing and try to expand that geographic­ally.”

Revolut’s next battle will be to bulk up its lending business and to reach profitabil­ity, a challenge that Salovaara is optimistic about. “Profitabil­ity is not an issue,” he says.

‘It’s a staggering valuation

for a loss-making business. It will be interestin­g to see if this can be sustained’

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