When two family office professionals meet in 2020 and discuss their venture capital investment strategy it is very likely that they will discuss Europe’s fintech startups. Especially the so-called challenger banks are pushing in a multi-billion dollar industry, thereby capturing market shares from traditional banks at breathtaking speed. Challenger banks want to offer a better customer experience for less money. Lean structures, fancy mobile banking apps and innovative services are the foundation of “neobanks” like Revolut or N26. Europe’s family offices – the investment firms of high net worth families – are already playing a major role when new funding rounds are due. We are thoroughly investigating where which family offices are investing – and where investment opportunities for smaller family offices arise.
1) Overview of Europe’s challenger banks
In this first section of our in-depth challenger bank analysis, we are introducing you to the challenger banks that are attracting the most attention of international family offices. We are giving you an overview of current customer numbers, valuations and funding amounts. The information is summarized within the following table.
* 2018 Number, ** 2019 Number, *** 2020 Number
Some striking observations are:
- Every challenger bank is still loss making: the focus is on strong growth and customer acquisition.
- N26 has the highest valuation ($3.5BN), followed by Monzo (£2BN)
- All the main challenger banks managed to accumulate millions of customers within just a few years. Revolut has the most customers (>7M) once again followed by German competitor N26 (>5M)
A speaker of the venture capital firm Earlybird Capital (who is also an investor in N26) explains why challenger banks are interesting investment targets for VCs and family offices:
“Retail banking markets across Europe are large and growing, while incumbent banks have long lost their ability to capture this tremendous value. This is because they have not yet reached the “amazon-age” of service levels and operational efficiency. They are not agile enough to address evolving consumer demand. In contrast, challengers have fundamentally innovated the bank business model. They have automated, fully digital operations without the need for physical outlets. They iterate fast. They build personalized products by thinking like the customer. Most importantly, they turn the old model upside-down by offering true platform functionality: Neobanks are integrating an ecosystem of financial products and letting customers choose the best ones, while incumbents are not able to offer products other than their own without significant changes to their technical infrastructure. Consequently challengers are significantly better positioned to bank happy customers and do so profitably and at growing market shares. Doing so, they are tremendously successful, opposing the trend of incumbents retreating more and more from retail banking.”
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Starling Bank (UK), £323M Total Funding. Investors: McPike Family Office
In 2014, Starling Bank was founded by banking executive Anne Boden, who formerly served as RBS’s Head of EMEA as well as COO for Allied Irish Banks. Starling Bank offers personal and business accounts through its modern mobile banking service. In November, the digital bank announced that it has reached one million accounts. From its strong position in the UK market, Starling intends to grow in other European countries. A major investor in Starling is the single family office of Bahamas billionaire Harald McPike. In an interview, Starling Bank CEO Anne Boden spoke about a possible IPO by 2022, and the digital-bank’s aspirations to reach break-even by 2021.
Latest Valuation: n.a.
Latest Funding Round: £60M (Venture Round)
Investors: CIF, Merian Global Investors
Family Office Investors: Harald McPike Family Office (Bahamas)
Revolut (UK), $337M Total Funding. Investors: Nicole Junkermann Family Office, Andy Murray
Revolut is probably one of the most known fintechs in Europe. The company was founded one year after Starling Bank in 2015 by Nikolay Storonsky, Vlad Yatsenko and Tom Reavy. Storonsky was formerly a trader at well-known investment banks, Yatsenko was a software developer at Credit Suisse and Deutsche Bank. Revolut’s service is based on an innovative online banking app and certain services (like implemented cryptocurrencies and seamless currency exchange). According to Revolut, the fintech reached 5 million customers in 2020. Thereof, 250,000 customers are based in the United States. From a family office perspective, Nicole Junkermann’s investment firm NFJ Capital joined Revolut’s Series A in 2016. Also tennis legend Andy Murray was an early investor. Probably, even more family offices have stakes in Revolut, since the company also raised multiple crowdfunding rounds through Seedrs and Crowdcube.
Nik Storonsky, CEO and Founder at Revolut, gave us an answer on the question what makes Revolut special – and what differentiates it most from “common” banks:
“As a financial technology company, we are able to move faster and invest in our products and services differently than a traditional bank might. Instead of focusing on where to invest deposited funds, our primary focus is providing our customers with a beautiful and seamless experience.
Revolut’s long term goal is to build the world’s first truly global bank – where consumers worldwide are serviced via the same app operating on a single technology platform. Since we launched in 2015, we have expanded Revolut significantly beyond its origins as an FX product, adding new features such as Commission-Free Stock Trading, Cryptocurrencies, Insurances, Business Accounts and more.
We’ve also invested heavily in our engineering and data science teams, building many of our systems in-house, in line with our vision to automate, accelerate and improve the quality of decision-making across the business.”
Latest Valuation: $1.7BN (Series C, April 2018)
Latest Funding Round: $250M (Series C, April 2018)
Investors: Balderton Capital, Index Ventures, DST Global, Ribbit Capital, Global Founders Capital, Greyhound Capital, Seedcamp Point Nine Capital, Seedrs etc.
Family Office Investors: NJF Capital (Nicole Junkermann Family Office), Andy Murray as a business angel (UK)
N26 (Germany), $683M Total Funding. Investors: Aegerter Family Office, Ki-La Shing Family Office
From its headquarters in Berlin, N26 rolls out its mobile banking services to the rest of Europe and since July 2019 also in the United States. The Berlin-based fintech, founded by Valentin Stalf and Maximilian Tayenthal in 2013, reached 5 million customers in January 2020. According to CEO Stalf, the company “added more customers in 2019 than (…) in all prior years put together”. The German challenger bank achieved strongest growth in Germany, France and Austria. Many of the world’s most notable investment firms joined N26’s funding rounds. Also many family offices already invested in N26: Swiss tech millionaire Daniel Aegerter’s family office Armada Investment AG invested in N26’s Series A, Horizons Ventures – the private investment firm of Hong Kong billionaire Li-Ka Shing – invested in N26’s Series B.
A speaker of Earlybird illustrates what makes N26 an interesting investment target:
“N26 is an interesting investment target given a variety of factors that also contributed to its current success being the leading European Neobank. Its visionary founders were some of the first to recognize the growing struggle of the incumbent banks to truly address customer needs. This lead to exponential growth with now more than 5 million customers and a market leading position in 22 European States, and with a strong footprint also in the US. Most importantly, N26 is very well positioned to not only acquire the customer very efficiently but in contrast to some other Neobanks also monetize the resulting customer relationship in a highly effective manner. N26 is certainly also interesting when looking into the future, as it continues its razor-sharp focus on delivering truly digital product innovation to become the financial home for a broad category of customers.”
Latest Valuation: $3.5BN
Latest Funding Round: $170M (Series D)
Investors: Battery Ventures, Tencent Holdings, Earlybird Venture Capital, Insight Partners, Redalpine Venture Partners
Family Office Investors: Armada Investment AG (Aegerter Family Office), Horizons Ventures (Sir Li-Ka Shing Private Investment Firm)
Monzo (UK), £324.7M Total Funding. Investors: Crankstart Foundation
Monzo is another UK fintech with its headquarters in London. Led by Tom Blomfield, the mobile bank reached the 3 million customer mark in 2019. In the beginning, customers were offered a prepaid debit card and services through an app; since 2017 customers can also open current accounts. In June 2019, Monzo raised a £113M Series F funding round to accelerate its growth and to launch in the US. The new funding round was led by YC’s Continuity Fund (the later-stage investment fund of Silicon Valley’s well-known accelerator Y Combinator). Interestingly, Monzo didn’t take part in the Y Combinator progeramme and hasn’t received an investment of YC before. Several “kind-of” family offices invested in Monzo. One of Monzo’s Series D investors is the Crankstart Foundation, which serves as Michael J. Moritz’s philantropic vehicle. Moritz is a British billionaire with an estimated net worth of $4.2BN. His investment sheds a good light on Monzo: Moritz ist an early employee of Sequoia Capital and one of the most succesful venture capital investors in the world. Some of his succesful investments include Google, PayPal or Youtube. Another interesting investor is Thrive Capital, the venture investment firm of Joshua Kushner.
Latest Valuation: £2BN
Latest Funding Round: £113M (Series F)
Investors: Y Combinator, Accel Partners, Crowdcube, General Catalyst, Thrive Capital, Orange Digital Ventures, etc.
Family Office Investors: Crankstart Foundation
Monese (UK / Estonia), £81M Total Funding. Investors: Karam Hinduja Family Office
Monese offers three different pricing models: a free debit card, a classic account and a premium account. Free deductions (up to certain limits), free payments and transfers in foreign currencies as well as Apple and Google Pay are included in Monese’s offering. In 2019, Monese reached one million customers. Interestingly, Monese is London- and Talin-based (Estonia). A frequent investor in Monese’s funding rounds is Tera Ventures, Estonia’s largest venture capital investment firm. Monese’s $60M funding round was so-far the largest raise for the European fintech. One of the investors was Timeless Capital, the single family office of Karam Hinduja. The startup is working on a new funding round which would bring the valuation above £1BN.
Latest Valuation: n.a. (currently in talks for a new funding round, would bring valuation up to £1BN)
Latest Funding Round: £2.5M (Venture Round)
Investors: Seedcamp, Tera Ventures, Spring Capital, Kinnevik AB, YYX Capital
Family Office Investors: Timeless Media (Karam Hinduja Family Office)
2) Investment vehicles for family office investments in challenger banks
Interestingly, Europe’s challenger banks show a broad spectrum of family office investment vehicles and how they play a role. Actually, we just named a few family offices that act as leading investors. The real number of family offices that own in some way shares of Europe’s most important challenger banks probably is in the hundreds. Family offices are major fund sponsors of venture capital firms, which in turn act as investors. If single family office A commited 10% of the money of venture capital firm B’s fund C, which in turn owns a 10% stake in fintech D, single family office A owns indirectly 1% of fintech D. Furthermore, some challenger banks decided to raise money through crowdfunding platforms like Seedrs or Crowdcube. There, especially smaller family offices also have the chance to anonymously invest in the respective startups. In the following, we analyze the various investment vehicles.
Indirect investments through venture capital funds
Probably the most common way for family offices to engage in venture capital is through third-party funds. When relying on third party funds, family offices have a higher diversification in their startup portfolio and don’t need in-house expertise and access to relevant deals. Many of the world’s most renowned venture capital firms raise funds from major single family offices. To name a few important VC fundings: Passion Capital led Monzo’s £5M Series A (2016), Earlybird Capital led N26’s $2M Seed Round (2014), Balderton Capital led Revolut’s £6.8M Series A (2016). Exemplary later stage investments are Index Ventures who participated in Revolut’s $250M Series C (2018) or Insight Venture Partners who participated in N26’s $470M Series D (2019). Interestingly, only the UK early stage investor Seedcamp invested in two different challenger banks (in Revolut and Monese).
For some family offices with an own venture capital investment team or a background in the technology or financial space direct participations in challenger bank funding rounds can make sense. One interesting example is Daniel Aegerter’s single family office Armada Investment AG, which was an early backer of N26. Aegerter himself built up the financial technology company Tradex Technologies, which was acquired by Ariba for $5.6BN in 2000. Another example is the single family office Bahamas billionaire Harald McPike who is the main investor in Starling Bank.
Equity crowdfunding as novel investment vehicle
For challenger banks (and fintechs in general) the rather new funding form of equity crowdfunding has gained traction. Equity crowdfunding means that startups raise funds from thousands of (often private) investors. Private investors can participate in the publicly available rounds amounts from low two-digit numbers on. Monzo raised £20M from 36,006 investors in under three hours on Crowdcube. In 2017, Revolut raised £3.8M on Seedrs at a £276M valuation. Compared to today’s $5.5BN, early investors almost achieved a 20X on their initial investment. Equity crowdfunding campaigns can be a win-win for challenger banks: additional funds are raised, PR is generated and strong promoters of the own brand (private investors who own a small part of the startup) are acquired. Also an increasing part of family offices start investing on platforms like Seedrs for multiple reasons: their investment stays anonymous, no deal-sourcing effort is necessary and also smaller participations are possible. Equity crowdfunding also enables smaller single family offices (without own venture capital teams) to invest in the up-and-coming challenger banks.
Jeff Lynn, co-founder and executive chairman of Seedrs, confirms the interest of family offices in early stage fundings through equity crowdfunding:
“We’ve seen a notable increase in appetite over the last few years from family offices to get into earlier stage businesses, but who don’t have the resources to execute such deals. With Seedrs, they can make use of our technology and nominee structure to build a diverse portfolio of early stage companies. Additionally, as this is relatively a new area for these investment vehicles, many aren’t well known enough yet in the market to receive the best dealflow, so they are using the platform to have access to some of the best startups that the UK and Europe have to offer. Examples of family offices we’ve worked alongside include Celeres, which invested £1.5 million into fintech startup JaJa in 2018, and more recently our portfolio company Oppo Ice Cream exited their Seedrs investors to HP Wild Holding AG, the family office behind Capri Sun.”
Metrics and KPIs for venture capital investments in fintechs and challenger banks
When VCs and family offices have the opportunity to invest in challenger banks, a few metrics are especially important. Earlybird’s speaker especially emphasizes:
- Engagement rates of the user cohorts over time (i.e. Monthly Active Users) to determine how much value the banking offering creates in the eye of the customer.
- Unit economics, especially comparing Customer Lifetime Value to Customer Acquisition Costs (CAC) to determine how much value is captured for the bank and at the same time as another indicator how much value is created for the customer – challenger banks achieve low CACs because customers quickly realize the superiority of their value proposition, thus switching their bank accounts.
- Growth metrics and market share – determining overall competitiveness of the offering. However it is important to note that key competitors are incumbent banks and increasing market shares of other challenger banks are not a red flag but a sign of an ever growing opportunity to disrupt legacy providers.
As illustrated in this article, challenger banks belong to the most relevant investments in the fintech space. Hundreds of millions of euros are flowing in recent financing rounds, customer numbers are increasing drastically, the startups are already worth billions. Nevertheless, all the digital banks still burn more money than they earn. The next years will show where the journey is going: will the challenger banks manage to increase their valuations and reach the break-even zone, will a consolidation phase reach the challenger bank industry or will most of the new banks be acquired by traditional banks – or target an own IPO? Europe’s single family offices already have their skin in the game and pursue different investment strategies, from direct investments through third-party funds or even equity crowdfunding.
Once again, the speaker of Earlybird gave us an intersting outlook in the future of challenger banks:
- We observe a growing verticalization and fragmentation. There are now neobanks, as well as neocards and neotraders for many customer segments and use cases. Examples for this are special accounts for children, accounts with a focus on sustainability or with a strong focus on special geographies, be it cities or whole continents, e.g. new neobanks in the emerging markets.
- We see strong growth across all categories, with one category now especially coming-of-age: SME banking. Here we see both strong activity and an interesting trend of increased vertical integration of the entire financial stack into single category leaders, e.g. offering corporate credit and debit card solutions, expense management, working capital, credit scoring and so on besides mere account services.
- On a macro level, one might argue that over the mid-term incumbents might spin out their own challenger banking products, yet this is hardly credible given the headstart the current generation of Neobanks has in terms of understanding the customer. Alternatively, incumbents may buy their way into the challenger space, yet this may not match the truly global ambition of some of the Neobanks. Ultimately, our guess is that the market landscape will converge to a situation where challenger banks will have displaced incumbents.
Fintechfutures (Starling), 15.02.2020
Learnbonds (Starling), 13.02.2020
Techcrunch (Monzo), 15.02.2020
Independent (Monzo), 15.02.2020
Newswire (Monese), 15.02.2020
N26 (N26), 15.02.2020
RTE (N26), 15.02.2020
Wikipedia (N26), 15.02.2020
T3N (N26), 15.02.2020
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