Brief Insights from PEF Research N26: The Rise of a FinTech€¦ · Brief Insights from PEF...

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N26: The Rise of a FinTech Brief Insights from PEF Research P R I V A T E E Q U I T Y F O R U M J U S T U S - L I E B I G - U N I V E R S I T Ä T PRIVATE EQUITY FORUM AT JUSTUS LIEBIG UNIVERSITY

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Page 1: Brief Insights from PEF Research N26: The Rise of a FinTech€¦ · Brief Insights from PEF Research 2 FinTechs on the Rise N26 GmbH (N26) is a Berlin-based FinTech that tries to

N26: The Rise of a FinTechBrief Insights from PEF Research

PR

IVATE EQUITY FORU

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JUSTUS-LIEB IG -U N IV ERSIT

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PRIVATE EQUITY FORUMAT JUSTUS LIEBIG UNIVERSITY

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Brief Insights from PEF Research 2

FinTechs on the Rise

N26 GmbH (N26) is a Berlin-based FinTech

that tries to adjust retail banking to the

modern, mobile lifestyle of today’s custom-

ers. The number of FinTechs that challenge

the traditional financial service sector as it

has been for decades is increasing steadily

all over the world. Since the acceptance

and development of these actors has also

risen in Germany, FinTechs are now more

often true competitors to renowned banks,

insurances, or similar financial institutes

(Romanova & Kudinska, 2016). In the case

of N26, this is expressed in the recent ob-

tainment of a full banking license and the

surpassing of the one million customers

mark. Not only does this case reflect a mod-

ern and growing sector, but N26 also has

gained a lot of attention from the venture

capital (VC) industry. Since its founding in

2013, the company has raised more than

$215m in equity funds from different inves-

tors. The diversity of the involved investors

reveals characteristic types of venture cap-

italists (VCs) and their individual ap-

proaches.

The Case of N26

N26 (with its subsidiary N26 Bank GmbH) is

a direct bank specializing in offering its

banking services completely via a

smartphone app. Besides a free bank ac-

count that comes with a free credit card

and customer friendly conditions, N26

partners with other financial services pro-

viders. Thereby, the company offers its cus-

tomers a broad spectrum of services like in-

surances, foreign exchange services, or in-

vestments, all accessible via a mobile app.

Due to its mobile strategy, N26 operates on

a low-cost base with a streamlined organi-

zation and without the need for stationary

bank offices. Customers can deposit or

withdraw money at selected retail stores

like super-markets at no cost; advice and

PRIVATE EQUITY FORUM AT JUSTUS LIEBIG UNIVERSITY October 2018

N26: The Rise of a FinTech

Thomas Heyden & Niklas Poppelreuter

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N26: The Rise of a FinTech

support is solely provided online. The com-

pany is based in Berlin, Germany, and is

currently building up offices in New York,

USA and Barcelona, Spain.

The company, which can be classified as a

FinTech, was founded in 2013 under the

name Papayer GmbH in Vienna, Austria.

Originally, the founders Valentin Stalf and

Maximilian Tayenthal addressed teenagers

to provide them with a free, mobile based

bank account and a prepaid Mastercard.

Additionally, the possibility for them and

their parents to screen the financial activi-

ties in real-time via smartphone was avail-

able. The finding of limited sales possibili-

ties due to their niche product combined

with requests from persons out of their tar-

get customer group led them to perform a

major strategy change in 2014/2015. They

started Number26, as N26 was named pre-

viously, with the goal to simplify retail

banking and adjust it to the mobile lifestyle

of today’s potential customers of all ages.

Especially since the implementation of this

new strategy, N26 has experienced signifi-

cant growth. As of today, the company

states to have more than 1 million custom-

ers across 17 European markets processing

€1bn in monthly transactions and employs

over 430 people.

A big milestone was achieved with the offi-

cial licensing as a bank by the European

Central Bank and the Federal Financial Su-

pervisory Authority (BaFin) in July 2016. Be-

fore that, N26 had to partner with another

bank, namely the Wirecard Bank, to offer

some of their services. The licensing went

along with the rebranding as N26, replacing

the name Number26, and setting the

course for an integrated business model

and further growth. N26 is one of the first

startups to receive a full European banking

license. Besides being independent of a

partner bank, which generated flexibility

and cost advantages, N26 was also able to

offer additional products and services such

as credit options, savings, investment plans

and more. Being one of only two German

FinTechs with a banking license enhances

its positioning and allows them to fully

compete with traditional banks.

Traditional banking institutes are increas-

ingly challenged by FinTechs, as they offer

comparable services while being more flex-

ible and agile, thus keeping up better with

the challenges of digitization like adapting

to a mobile lifestyle. However, many cus-

tomers still ask for tailored solutions and

personal support, which can be harder for

digital- or mobile-only (or as N26 states

“mobile-first”) business models to fulfill. In

that sense, FinTechs like N26 face two

groups of competitors: The first group con-

sist of traditional banks and direct banks,

especially as they try to become more digi-

tal and mobile. The second are other

FinTechs that provide similar services.

N26’s close competitors are mainly found

in the non-German environment with the

exemption of the German “Fidor Bank AG”,

who offers online banking services in a sim-

ilar way and is also licensed as a bank. “Rev-

olut Limited” is a comparable competitor

from the United Kingdom, which has al-

ready raised funds to the amount of $336m

according to Crunchbase. “Simple”, as an

US-based counterpart, provides mobile-

only banking services and was sold to

Spain’s second-largest bank, BBVA, in Feb-

ruary 2014, for $117m.

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N26: The Rise of a FinTech

The business model of N26 and its close

competitors sets itself apart from tradi-

tional and many direct banks mainly by its

mobile orientation. A free bank account

with a free credit card is still common in

Germany and thus the conditions are not

unique. Furthermore, most banks, espe-

cially direct banks, offer smartphone apps

for their customers as well. Benefit for the

N26 customer may therefore arise due to

the larger range of services offered inside

their app, a modern layout and an intuitive

and quick handling. N26 states that their

mobile first approach is one of three main

unique selling points (USPs). Additionally,

the full European banking license allows

N26 to offer their services without a part-

ner bank, which enhances their possibilities

compared to direct competitors. By com-

bining modern technology, speed, and cus-

tomer orientation, together with the full

offering of a bank, N26 states to provide a

unique experience for their customers. Ac-

cording to their annual report of 2016, its

third USP is the scalability. They say that

scalability, which allows disproportionate

growth and quick changes, is limited in tra-

ditional banks by old IT-systems, inefficient

structures, and large administrative func-

tions. N26 should be able to outperform

large banks in this category.

The Financing Details

Like close competitors from other coun-

tries, N26 has also attracted many private

equity investors since its founding. In five

funding rounds, N26 has raised more than

$215m from renowned investors like Valar

Ventures, Axel Springer Plug and Play Ac-

celerator, Earlybird Venture Capital, mem-

bers of the Zalando management team,

and most recently Tencent Holdings Lim-

ited (hereinafter Tencent) and Allianz X. Af-

ter its latest funding round, N26 is valued

at approximately $750m, making it Ger-

many’s most valuable private FinTech at

the moment, according to Vertical Media

GmbH.

Such a high valuation should be based on

significant success factors. Hence, before

providing more detail on the current and

previous shareholders of N26 and their in-

vestments, the company’s performance

and positioning is evaluated. Financial re-

sults are, of course, a motive or at least a

criterion of many private equity investors

for investing in companies. However,

startups regularly make losses in their first

years after founding (Wang & Zhou, 2004).

This is also observable in the case of N26.

The first reliable financial data can be ex-

tracted from the annual report of 2016. For

2015, it states a net loss of approximately

€4.7m, even surpassed by a significant loss

of €14.7m in 2016 (Bundesanzeiger Verlag

GmbH, 2018). This may be the result of high

investments, especially to acquire new cus-

tomers and other measures like preparing

for the licensing as a bank. Therefore, it is

usual in the VC business that valuation is

most likely to be based upon the investor’s

expectations for a target’s future (Wang &

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N26: The Rise of a FinTech

Zhou, 2004). N26 has proved that it is capa-

ble of competing with traditional banks.

Additionally, its USPs help them to stand

out of its competitive environment.

Another possible explanation for an in-

creasing valuation over time might be the

investments of well-known and successful

investors, which act as a positive signal of

their trust in the target’s potential. In five

funding rounds, 19 individuals or compa-

nies invested equity in N26. Table 1 dis-

plays the details of each funding round, i.e.

the round type, date of its closing, involved

investors, the funding size of each round

and aggregated over time as well as a cal-

culation of the post money valuation. The

latter describes the implied value of a tar-

get, calculated using the raised funds in re-

lation to the shares granted to investors.

Round Round type Closed date Investors Size ($m)

Cumulative amount raised ($m)

Post money val-uation ($m)

5 Series C 03/19/2018 Allianz X, Greyhound Capi-tal Europe, Tencent Hold-ings

160 213.45 750

4 Series B 06/21/2016 Battery Ventures, HS In-vestments, Novel Trend Global, Offenbach Interna-tional, Rubin Ritter, Robert Gentz, David Schneider, Daniel Aegerter, and other existing sharehodlers

40 53.45 154

3 Series A 04/16/2015 Valar Ventures and other existing shareholders

10.73 13.45 26

2 Seed 06/19/2014 Earlybird Venture Capital, Redalpine Venture Part-ners, and other existing shareholders

2.72 2.72 9 - 10

1 Accelerator 09/05/2013 ImWind Group, Mr Mosen, Mr Dojacek, Mr Masoner

0.025 0.025 < 1

To begin with, Maximilian Tayenthal and

Valentin Stalf founded N26, or more specif-

ically its predecessor Papayer GmbH. They

were already supported by Axel Springer

Plug and Play Accelerator GmbH (hereinaf-

ter Axel Springer Plug and Play) in their ac-

tivities before and during the company’s

founding. Axel Springer Plug and Play as a

joint venture between Axel Springer SE and

the California-based Plug and Play Tech

Center, supports young companies and

provides them with several opportunities

like strategic alignment with experts, an of-

fice space or contact to VC investors. Addi-

tionally, their accelerator programs always

include a capital investment of $25k in ex-

change for a 5% holding of the company

shares (Axel Springer Plug and Play Acceler-

ator GmbH, 2018). Consequently, Axel

Springer Plug and Play held 5% of the com-

pany shares after founding in February

2013, the two founding managers 47.5%

1 Funding rounds of N26

Source: Bureau van Dijk, S&P Capital IQ, and Crunchbase

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N26: The Rise of a FinTech

each. Please Refer to appendix A for a de-

tailed disaggregation of the shareholder

structure.

In September of the same year, the first

funding round of N26 was established, rais-

ing another $25k. In VC it is common, that

a startup receives new capital in several

consecutive rounds rather than in one

transaction like a buyout. As table 1 re-

veals, the new investors were several busi-

ness angels: The CEO of the payment ser-

vice provider Concardis, Mr. Mosen, bank-

ing and investment professionals Mr.

Dojacek and Mr. Marsoner, as well as the

renewable energy group “ImWind”. The

amount was raised by giving away 11% of

the company shares, resulting in a post-

money valuation of around $250k. Axel

Springer Plug and Play maintained their 5%

of shares, which could have been due to a

contractual anti-dilution clause.

The first VCs joined the shareholder base

during funding round 2 in June 2014, which

is still classified as a seed-funding. This

demonstrates a usual process in VC, in

which business angels and specialized ac-

celerators or incubators are the first to in-

vest in startups, before renowned VC firms

get involved. Earlybird Venture Capital

Management GmbH & Co. KG (hereinafter

Earlybird) and Redalpine Venture Partners

AG (hereinafter Redalpine) both regularly

provide seed and early-stage VC, mainly for

tech-related companies. Other similarities

are investments in technical healthcare

companies and the structuring of their in-

vestments via funds. Besides Redalpine’s

initial acquisition of 8.0% of N26’s shares,

they are for example also engaged in the

factoring provider Finiata or the social plat-

form Jodel. Earlybird, who led the funding

round by acquiring a stake of 17.4%, is one

of the most renowned and largest VC firms

in Germany. With more than 40 employ-

ees, they have already invested in more

than 150 ventures since their founding.

With a tech and healthcare focus, they are

a very good example for a typical VC firm,

since those are the most targeted indus-

tries within VC. By raising $2.72m, the im-

plied valuation of N26 increased to a value

between $9m and $10m after this funding

round.

The third round was closed in April 2015

with N26 already being active on the mar-

ket with its products, thus being classified

as the series A financing. Together with ex-

isting shareholders, Redalpine and

Earlybird, Valar Ventures invested $10.73m

into the company, leaving this investor

with 14.4% of shares. The VC company

Valar Ventures was founded by the well-

known entrepreneur Peter Thiel, who co-

founded PayPal and regularly invests in

successful startups via different own pri-

vate equity funds. As a prominent example,

Mr. Thiel was the first external investor

who provided equity to Facebook. Since

N26’s business model had proved itself

over the years, e.g. by acquiring more cus-

tomers, it is not surprising that the post-

money-valuation increased to $26m.

However, a much more significant increase

went along with the fourth funding round

(Series B) in June 2016, raising $40m, im-

plying a valuation of $154m. In that way,

the value of N26 multiplied itself by 15 dur-

ing the two years from seed to series B.

With this fourth round, eight new investors

joined the shareholder base: The members

of the Zalando SE executive management,

Mr. Ritter, Mr. Schneider and Mr. Gentz

(each acquiring 0.33%), the founder of a

Swiss-based family office, Mr. Aegerter

(1.6%), and the VCs HS Investment (7.8%),

Battery Ventures (0.9%), Novel Trend

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N26: The Rise of a FinTech

Global Limited (4.9%) and Offenbach Inter-

national Limited (3.2%). The variety and

quantity of the investors as well as the de-

cent amount of $53.45m in aggregated

funds raised reflect N26’s attractiveness

from an investor’s perspective. The

broader customer base of around 200

thousand people and the licensing as a

bank, which took place around this fourth

round, proved the potential of their busi-

ness model.

Just recently, in March 2018, N26 closed

another funding round, its series C. The two

lead investors Allianz X GmbH and Tencent

Holdings Limited provided capital to the

amount of $160m together with Grey-

hound Capital Europe LLP (hereinafter

Greyhound Capital), while still only obtain-

ing a minority stake of 6% each in the case

of the lead investors and 2.8% for Grey-

hound. As already specified, this results in

a post-money valuation of approximately

$750m. The immense valuation leap can be

explained by a very positive development

of N26 since its series B financing, with cus-

tomer numbers surpassing one million, on-

going internationalization and the ex-

panded range of services combined with

utilized advantages of its bank status. Addi-

tionally, renowned private equity inves-

tors, also being a sign for an established

business model and a promising invest-

ment opportunity, already owned 64.1% of

the company’s shares. According to N26’s

management, the raised funds will mainly

be used to strengthen current markets and

staff as well as to enter the US and UK mar-

kets in 2018 – measures that could gener-

ate significant growth. Like many of the in-

vestors already involved, Greyhound Capi-

tal invests in high-growth companies in

early stages, focusing on technology firms.

With Tencent and Allianz X, another type of

VCs joined N26’s financing, i.e. corporate

VC (CVC). China based Tencent is a multi-

billion-dollar revenue generating company

that describes itself as a provider of inter-

net value added services. It is known for its

social networks and instant messaging ser-

vice like Weixin/ WeChat. In addition to

that, Tencent is a very active VC investor.

They regularly provide growth or early-

stage capital to companies having web-re-

lated business models. Since January 2018,

they already participated in 19 M&A trans-

actions internationally as a buyer. Allianz X,

as the other lead investor of this round, is

the CVC unit of the Germany based insur-

ance group, Allianz SE. They invest in digital

ventures that are of strategic and financial

interest for the Allianz group. In that, they

address topics like mobility, health, or

wealth management. N26 is one of 16 in-

vestments they have already made. Re-

search suggests that the involvement of a

CVC in a startup might enhance the possi-

bilities to gain new partners and most im-

portantly more customers due to a strong

and established company name at their

side (Maula et al., 2005). Therefore, it will

be interesting to evaluate the performance

and development of N26 after its series C

funding.

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N26: The Rise of a FinTech

Will N26 go public?

At the moment, no reliable statement has

been made regarding the plans of addi-

tional funding rounds. The company man-

agement is confident to reach a profitable

level within the next two years with the

help of the raised funds, which could make

them a suitable IPO candidate. However,

another funding round might be possible

beforehand. An IPO would be an additional

funding opportunity for N26 and an exit

possibility for the current shareholders.

The way of exit via an IPO is often favored

in VC business.

Another interesting factor and a distinction

from many late stage buyouts is the devel-

opment of the shares held by Valentin Stalf

and Maximilian Tayenthal compared to the

other shareholder groups since the com-

pany’s founding. Their combined stake in

N26 decreased from a strong majority of

95% to only 24.7% in less than five years,

contrasting a picture often found in more

traditional family firms, where the shares

are typically held entirely by family mem-

bers or heirs for decades before the first

contact with equity investors is made

(Wang & Zhou, 2004). Nevertheless, it

might be possible, that N26 would not have

developed as well or reached such a high

valuation without the involvement of ex-

ternal investors, making the founders mi-

nority stake worth over $180m.

Overall, the financing process of N26 looks

like a textbook example. Especially the val-

uation, which is highly dependent on signs

of potential (i.e. customer base, banking li-

cense) rather than financial results, seems

typical (Wang & Zhou, 2004). Furthermore,

the development of the involved investors

follows a pattern also found by Maula et al.

(2005), as the participation of VC compa-

nies helps to attract more investors like

other VC firms or CVCs. In the case of N26,

the shareholder base broadened signifi-

cantly during and after the first VCs,

Earlybird and Redalpine, joined the pro-

cess. They also invested much earlier than

the two CVCs. A possible explanation is the

broader network of VC firms and the finan-

cial goals pursued, compared to a more

strategic and individual approach of CVCs.

Obviously, once N26 manages to establish

its first office in the US after their opening

in Spain, further capital will be required to

maintain high growth numbers.

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References

Bundesanzeiger Verlag GmbH. (2018). N26 GmbH - Rechnungslegung/ Finanzberichte.

Maula, M., Autio, E., & Murray, G. (2005). Corporate venture capitalists and independent venture cap-

italists: What do they know, who do they know and should entrepreneurs care?. Venture Capital: An

International Journal of Entrepreneurial Finance, 7(1), 3-21.

Romanova, I., & Kudinska, M. (2016). Banking and Fintech: A Challenge or Opportunity? In Contempo-

rary Studies in Economic and Financial Analysis: Vol. 98. Contemporary Issues in Finance: Current Chal-

lenges from Across Europe (Vol. 98, pp. 21–35). Emerald Group Publishing Limited.

Wang, S., & Zhou, H. (2004). Staged financing in venture capital: moral hazard and risks. Journal of

Corporate Finance, 10(1), 131–155.

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Appendix

Shareholder Founding Round 1 Round 2 Round 3 Round 4 Round 5

Company management 95.0% 84.0% 59.7% 47.1% 35.9% 24.7%

Valentin Stalf 47.5% 42.0% 29.9% 23.6% 18.0% 12.3% Maximilian Tayenthal 47.5% 42.0% 29.9% 23.6% 18.0% 12.3% N26 Beteiligungs UG & Co. KG 0.1%

Accelerator 5.0% 5.0% 5.3% 4.2% 3.2% 2.1%

Axel Springer Plug & Play 5.0% 5.0% 5.3% 4.2% 3.2% 2.1%

Business angels 11.0% 9.6% 7.4% 6.1% 4.4%

Celeus (Robert Gentz) 0.3% 0.2% ImWind Group 2.3% 5.0% 3.9% 2.0% 1.4% La Plata (David Schneider) 0.3% 0.2% Daniel Aegerter 1.6% 1.4% Marcus Mosen 2.9% 2.5% 1.9% 1.5% 1.0% Michael Dojacek 2.9% 2.1% 1.6% Rubin Ritter 0.3% 0.2% Thomas Marsoner 2.9%

VC firms 25.4% 41.3% 54.7% 68.6%

AllianzX 6.1% Battery Ventures 0.9% 0.6% Earlybird Venture Capital 17.4% 19.0% 17.2% 12.4% Greyhound Venture Capital 2.8% HS Investments 7.8% 15.2% Novel Trend Global Ltd. 4.9% 4.4% Offenbach International Ltd. 3.2% 3.0% Redalpine Venture Partners 8.0% 7.9% 6.2% 4.6% Tencent Holdings 6.1% Valar Ventures 14.4% 14.5% 13.4%

A Shareholder structure after each funding round of N26

Source: Bureau van Dijk and S&P Capital IQ

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About the authors:

Thomas Heyden is a research associate and Finance Ph.D. student at the Chair of Banking & Finance

at Justus Liebig University Giessen (JLU), Germany, and an active member of the Private Equity Forum

at JLU. He studied Economics and Mathematics in Giessen and Darmstadt, Germany, and holds a Mas-

ter’s degree in Economics, majoring Financial Markets and Institutions.

E-Mail: [email protected]

Niklas Poppelreuter is a Master’s student of Business Administration, majoring Strategy and Finance

at Justus Liebig University Giessen (JLU), Germany. Additionally, he works as an M&A consultant at

Giessen-based advisory boutique Sonntag Corporate Finance, advising on mid-market M&A transac-

tions. He holds a Bachelor’s degree in Economics from Johannes Gutenberg University Mainz, Ger-

many.

E-Mail: [email protected]

Research publication from Private Equity Forum at Justus Liebig University (JLU). This paper is for information

purposes only and not intended for commercial use. Private Equity Forum at JLU is an officially recognized non-

profit organization connected to the Chair of Banking & Finance at JLU. The views expressed in this paper are

those of the authors.

Photo on front page by N26 GmbH

Version as per October 2018.

© 2018 - Private Equity Forum an der Justus-Liebig-Universität e.V.