The Fintech Valuation Methods Mystery

The digitalization process and new technological innovations have brought a new industry - the fintech industry. FinTech stands for financial technology. A project named "Financial Services Technology Consortium initiated by Citigroup to facilitate technological cooperation had given its name to the industry in the early 1990s. Nonetheless, only since 2014 has the sector drew the attention of investors, regulators, and consumers. Nowadays, the term fintech is used to describe new tech that improves and automates financial services delivery and use. A boom in consumer-facing FinTech startups is a global phenomenon.

Given the rising popularity of Fintech startups, it's essential to understand which fintech valuation method is the best valuation method for fintech companies. An appropriate valuation methodology would be a helpful tool for investors all over the world. This blog post describes the practices applicable to FinTech companies.

Fintech Valuation Methods

The first approach is the Equity valuation approach, which seeks to determine its value by estimating its assets' value. According to the Equity valuation method, a company's value lies basically in its balance sheet. The equity valuation method is divided into three valuation methods: 

The Book value method: the value of the shareholders' equity comes from the balance sheet (capital and all kinds of reserves). This quantity is also the difference between total assets and liabilities: the surplus of the company's total goods and rights over its total debts with the third parties. 

The Adjusted book value method: the value of the shareholders' equity comes from the balance sheet with needed adjustments of some balance sheet items (stock, account receivables, account payables, etc.) to their market value. 

The Liquidation value method: the company's value when it is liquidated so when the assets are sold out, and the liabilities are paid off. This value is calculated by deducting the business's liquidation expenses (redundancy payments to employees, tax expenses, and other typical liquidation expenses) from the adjusted net worth.

The substantial value method: The enterprise's value is derived from its assets' market value. It can also be defined as the assets' replacement value, assuming the company continues to operate, as opposed to their liquidation value;

These methods are specially used for valuing real estate companies and holding or sub-holdings as they measure the dynamics of the company's value at a specific time. However, these Equity valuation methods are inappropriate as fintech valuation methods as FinTech startups are not capital-intensive businesses until they have achieved funding rounds. 

there is no ideal fintech valuation method for valuing fintech companies.

The Income valuation approach: The income valuation approach states the value of the company according to its future income capacity. Different from the equity method, this methodology incorporates a forward-looking system. Furthermore, the income approach has other application solutions that derive mainly from:  

• How the income flows are defined and measured in the past: The income flows can relate to historical values and their projection in the future or potential values not yet achieved by the company but based on reliable assumptions.  

• Length of the time horizon and how the related expected future profits are expressed: The time horizon should be indefinite since an enterprise, by definition, is built to last.  

• Discounted profit method: The discounted profit method means that the enterprise value will correspond to the present value of operating profits discounted at the weighted average cost of capital.  

• Object of the evaluation.  

A significant advantage of this method is its forward-looking approach, which can be positively seen for FinTechs, characterized by substantial growth rates. Therefore, the technique is one of the best practices among the fintech valuation methods.

The Discounted Cash Flow method: The Discounted Cash Flow model discounts free cash flow, which is available to all investors (equity holders, debt holders, and any other nonequity investors) at the WACC, meaning the blended cost of capital for all investor capital80. Thus, the critical steps in the DCF method are:  

• Compute the WACC and its components;

• Determine the free cash flows (FCF) to the firm and the terminal value (TV);  

• Discount the FCF to the firm using the WACC and adding TV. Although the DCF valuation model theoretically can be seen as the principal method, relevant and unsolved limits came out, making it challenging to apply this method as one of the FinTech valuation methods.

Multiples method : The firm's value is estimated based on the value of comparable firms that will generate very similar cash flows in the future. The multiples approach is based on previous M&A operations of listed and non-listed companies operating in the same industry and possibly with similar performances. Although it might seem a straightforward process, identical companies do not exist. It can only be applied if the number of listed firms will be big enough.

The conclusion is that there is no ideal fintech valuation method for valuing fintech companies. Therefore, the best alternative should be used - the discounted cash flow method, or the multiple method, assuming that there is information on a sufficiently large sample of company multipliers.

Tools to Evaluate Fintech Companies 

When running a fintech company, you can’t just rely on generalizations and estimates. You need to know the true value of your fintech company. Our company valuation software can do this for you, in 30 minutes, for free!