On November 15, the cofounders of Ribbon Home, a five-year-old financial technology company that promised to fix a "broken" homebuying market by offering buyers the ability to make all-cash offers, sent a cryptic and disconcerting email to its entire staff. "During this time of uncertainty, we ask team members who are not customer- or finance-facing to shift their focus from work to self-care, spending time with family and doing things that bring you comfort," it read in part.
Six days later, New York City-based Ribbon dismissed 85% of its staff-190 people-and cut severance to one week's pay versus the six weeks employees had been previously promised. Fewer than 30 people remain today, and the company recently announced that it has paused all new business.
Ribbon's days are numbered, but in September 2021, amid the pandemic housing boom, venture capitalists including Bain Capital and Greylock threw $150 million at the startup, valuing it at $500 million. The money was supposed to fuel explosive growth-the company predicted "$10 billion in home transactions annually"-and staff ballooned to 360.
Those easy-money days are over. Home mortgage rates have more than doubled since 2021, cooling the market and the need for all-cash offers. Ribbon, which likely never came close to being profitable, relied heavily on a continuous source of outside funding. Unlike traditional banks whose deposits fund home mortgages, Ribbon needed Wall Street firms to fund its customers' cash offers. Goldman Sachs and Waterfall Asset Management, Ribbon's primary financiers, have pulled back funding because Ribbon no longer meets their lending requirements. Ribbon declined to comment.
Like many once-promising fintechs, Ribbon is caught between Scylla and Charybdis. It's quickly running out of money, and its broken business model isn't going to generate fresh cash. Troubled fintechs can choose either to close up shop or sell the business at a fire-sale price. Says one fintech executive, "We have VCs tell us, Everything in our portfolio is for sale."
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Fintech is the term widely used for technology startups focused on financial services. These fledgling companies were founded mostly in the last decade, with the goal of disrupting old-guard banks, insurers and credit card companies with whizbang tech. Only a few short years ago, venture capitalists couldn't get enough of the sector. In 2021, CB Insights reported that fintech outfits raised more than $140 billion in 5,474 funding rounds. That was more than the previous three years combined. As the public markets soared, many went public, raising $10 billion from some 28 fintech IPOs in 2020 and 2021, S&P Global Market Intelligence reports. Insta-billionaires were minted at companies such as Affirm (buynow, pay-later loans), Marqeta (newfangled payment processing) and Upstart (AI-vetted loans).
But with the IPO market in a coma and fintech stocks down 60% from their peaks, venture investors and bankers have turned off the cash spigot, not just for new investments but for additional funding to existing portfolio companies. According to CB Insights, fintech funding sank to $11 billion in the fourth quarter of last yearthe lowest level since 2018.
"Some VCs are saying, 'We don't know when we hit bottom on this thing," says one fintech executive. ""There's no price that we're putting in money." Adds Sheel Mohnot, a cofounder and general partner at Better Tomorrow Ventures: "We'll definitely see shutdowns this year. It's going to be painful."
A survey of 450 early-stage startups conducted last fall by January Ventures, a Boston-based venture firm, concluded that 81% had less than a year's worth of cash on hand. In a months-long investigation, Forbes used data from CB Insights and Pitch Book to comb through more than 200 fintech startups whose last funding round was at least 18 months ago. We then called dozens of insiders, investors, bankers, analysts and fintech founders to narrow the list of cash-starved startups to those with unproven and unprofitable business models. Many are clearly demonstrating signs of distress, such as mass layoffs. Our reporting also uncovered other troubled fintechs that have raised money more recently. In all, our 25 zombie fintechs have collectively absorbed some $7.5 billion worth of investor cash at recent valuations as high as $2.5 billion. Many of them will be purchased-or they'll perish.
"Behind closed doors," says Jigar Patel, who leads Morgan Stanley's investment banking business in fintech, "a lot of mergers-and-acquisitions conversations are going on."
No category within fintech may be more troubled than the so-called "neobanks." The idea behind these legacy-bank disruptors is simple: Offer basic consumer banking services like debit cards, credit cards and small loans on mobile phones. The apps minimize paperwork hassles, reduce fees and eliminate face-toface meetings. During the pandemic, when millions banked minor windfalls in the form of stimulus payments, neobanks such as Chime, Current and Varo attracted scads of customers. CB Insights estimates that since 2020, 47 neobanks raised a combined $7.5 billion in venture capital.
Four-year-old Step is a Palo Alto, Californiabased neobank that provides savings accounts, credit cards and crypto investing for teens. In 2021, it secured a lofty $920 million valuation from backers including tech investor Coatue, payments giant Stripe and actor Will Smith. By the end of the year, it claimed 2.7 million customers, but its annual revenue was stuck in the single-digit millions, according to sources familiar with its finances.
Step's last equity funding occurred nearly two years ago, in April 2021, for $100 million. It has yet to break even. Last July it laid off roughly 20% of its staff, though its CEO, CJ MacDonald, framed the reductions as performance-based cuts and claims the firm's revenue surpassed $10 million in 2021 (he rebuffed Forbes' request for proof).
Another neobank, Aspiration, launched in 2014 with a climate-friendly mission that included the option of rounding up debit card purchases to the nearest dollar to plant a tree and had backers including actors Leonardo DiCaprio and Orlando Bloom. It saw its monthly application downloads drop from 400,000 per quarter at the end of 2021 to 35,000 per quarter at the end of 2022, according to Apptopia, a mobile analytics firm. Last October, its CEO resigned when a planned SPAC deal, which valued the money-losing company at $2.3 billion and promised to inject $400 million in fresh cash, was delayed. Aspiration recently made a hard pivot toward enterprise clients, promising carbon credit solutions to corporations, while its SPAC merger and IPO deadline have been extended to March 31, 2023.
"Neobanks tried for 10 years, and they had more runway than I think anyone would've ever imagined," says one bank executive. "None of those businesses figured out how to make the economics work. Building a brand is too expensive. Acquiring customers via paid search and social media is too expensive. Building out expertise in lending is really hard and takes a lot of time."
Another huge obstacle: Neobanks aren't actually banks. Because they lack bank charters, if they want to lend to customers, they must pay fees to other banks or find investors to fund their loans. This gets expensive, especially when the cost of capital is greater than zero. Today the federal funds rate (the interest rate at which banks lend to one another) is around 4.25%, up from 0.08% a year ago.
Varo, a San Francisco-based neobank, spent $100 million to get its own bank charter so it could lend more profitably. Now it...
Six days later, New York City-based Ribbon dismissed 85% of its staff-190 people-and cut severance to one week's pay versus the six weeks employees had been previously promised. Fewer than 30 people remain today, and the company recently announced that it has paused all new business.
Ribbon's days are numbered, but in September 2021, amid the pandemic housing boom, venture capitalists including Bain Capital and Greylock threw $150 million at the startup, valuing it at $500 million. The money was supposed to fuel explosive growth-the company predicted "$10 billion in home transactions annually"-and staff ballooned to 360.
Those easy-money days are over. Home mortgage rates have more than doubled since 2021, cooling the market and the need for all-cash offers. Ribbon, which likely never came close to being profitable, relied heavily on a continuous source of outside funding. Unlike traditional banks whose deposits fund home mortgages, Ribbon needed Wall Street firms to fund its customers' cash offers. Goldman Sachs and Waterfall Asset Management, Ribbon's primary financiers, have pulled back funding because Ribbon no longer meets their lending requirements. Ribbon declined to comment.
Like many once-promising fintechs, Ribbon is caught between Scylla and Charybdis. It's quickly running out of money, and its broken business model isn't going to generate fresh cash. Troubled fintechs can choose either to close up shop or sell the business at a fire-sale price. Says one fintech executive, "We have VCs tell us, Everything in our portfolio is for sale."
[https://cdn.magzter.com/1369322608/1676974581/articles/MH4PH7qe91677075292854/N2451oZKF1677075448816.jpg]
Fintech is the term widely used for technology startups focused on financial services. These fledgling companies were founded mostly in the last decade, with the goal of disrupting old-guard banks, insurers and credit card companies with whizbang tech. Only a few short years ago, venture capitalists couldn't get enough of the sector. In 2021, CB Insights reported that fintech outfits raised more than $140 billion in 5,474 funding rounds. That was more than the previous three years combined. As the public markets soared, many went public, raising $10 billion from some 28 fintech IPOs in 2020 and 2021, S&P Global Market Intelligence reports. Insta-billionaires were minted at companies such as Affirm (buynow, pay-later loans), Marqeta (newfangled payment processing) and Upstart (AI-vetted loans).
But with the IPO market in a coma and fintech stocks down 60% from their peaks, venture investors and bankers have turned off the cash spigot, not just for new investments but for additional funding to existing portfolio companies. According to CB Insights, fintech funding sank to $11 billion in the fourth quarter of last yearthe lowest level since 2018.
"Some VCs are saying, 'We don't know when we hit bottom on this thing," says one fintech executive. ""There's no price that we're putting in money." Adds Sheel Mohnot, a cofounder and general partner at Better Tomorrow Ventures: "We'll definitely see shutdowns this year. It's going to be painful."
A survey of 450 early-stage startups conducted last fall by January Ventures, a Boston-based venture firm, concluded that 81% had less than a year's worth of cash on hand. In a months-long investigation, Forbes used data from CB Insights and Pitch Book to comb through more than 200 fintech startups whose last funding round was at least 18 months ago. We then called dozens of insiders, investors, bankers, analysts and fintech founders to narrow the list of cash-starved startups to those with unproven and unprofitable business models. Many are clearly demonstrating signs of distress, such as mass layoffs. Our reporting also uncovered other troubled fintechs that have raised money more recently. In all, our 25 zombie fintechs have collectively absorbed some $7.5 billion worth of investor cash at recent valuations as high as $2.5 billion. Many of them will be purchased-or they'll perish.
"Behind closed doors," says Jigar Patel, who leads Morgan Stanley's investment banking business in fintech, "a lot of mergers-and-acquisitions conversations are going on."
No category within fintech may be more troubled than the so-called "neobanks." The idea behind these legacy-bank disruptors is simple: Offer basic consumer banking services like debit cards, credit cards and small loans on mobile phones. The apps minimize paperwork hassles, reduce fees and eliminate face-toface meetings. During the pandemic, when millions banked minor windfalls in the form of stimulus payments, neobanks such as Chime, Current and Varo attracted scads of customers. CB Insights estimates that since 2020, 47 neobanks raised a combined $7.5 billion in venture capital.
Four-year-old Step is a Palo Alto, Californiabased neobank that provides savings accounts, credit cards and crypto investing for teens. In 2021, it secured a lofty $920 million valuation from backers including tech investor Coatue, payments giant Stripe and actor Will Smith. By the end of the year, it claimed 2.7 million customers, but its annual revenue was stuck in the single-digit millions, according to sources familiar with its finances.
Step's last equity funding occurred nearly two years ago, in April 2021, for $100 million. It has yet to break even. Last July it laid off roughly 20% of its staff, though its CEO, CJ MacDonald, framed the reductions as performance-based cuts and claims the firm's revenue surpassed $10 million in 2021 (he rebuffed Forbes' request for proof).
Another neobank, Aspiration, launched in 2014 with a climate-friendly mission that included the option of rounding up debit card purchases to the nearest dollar to plant a tree and had backers including actors Leonardo DiCaprio and Orlando Bloom. It saw its monthly application downloads drop from 400,000 per quarter at the end of 2021 to 35,000 per quarter at the end of 2022, according to Apptopia, a mobile analytics firm. Last October, its CEO resigned when a planned SPAC deal, which valued the money-losing company at $2.3 billion and promised to inject $400 million in fresh cash, was delayed. Aspiration recently made a hard pivot toward enterprise clients, promising carbon credit solutions to corporations, while its SPAC merger and IPO deadline have been extended to March 31, 2023.
"Neobanks tried for 10 years, and they had more runway than I think anyone would've ever imagined," says one bank executive. "None of those businesses figured out how to make the economics work. Building a brand is too expensive. Acquiring customers via paid search and social media is too expensive. Building out expertise in lending is really hard and takes a lot of time."
Another huge obstacle: Neobanks aren't actually banks. Because they lack bank charters, if they want to lend to customers, they must pay fees to other banks or find investors to fund their loans. This gets expensive, especially when the cost of capital is greater than zero. Today the federal funds rate (the interest rate at which banks lend to one another) is around 4.25%, up from 0.08% a year ago.
Varo, a San Francisco-based neobank, spent $100 million to get its own bank charter so it could lend more profitably. Now it...
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