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The startup enemies of Wall Street are booming

Many investors are making bold predictions that these startups will upend big banks, established credit card providers, and in some cases, the entire financial system

By Erin Griffith
Published: Mar 30, 2021

The startup enemies of Wall Street are boomingShamir Karkal, founder of Sila, in Portland, Oregon, on March 26, 2021. Sila is one of thousands of financial technology start-ups riding an investor frenzy driven by a growing realization that Big Finance is ripe for a tech makeover. (Ricardo Nagaoka/The New York Times)

SAN FRANCISCO — In 2009, Shamir Karkal and several colleagues struggled to raise money for a banking startup, Simple. Most of the 70 venture capital firms they met over the course of a year did not see the point of the idea, he said. The few that did thought it would fail.

By last year, things had changed. When Karkal set out to raise funding for his new financial technology startup, Sila, which makes regulatory compliance software, he garnered $5 million in a few months with a fraction of the pitches. He said he was frustrated it did not happen even faster.

“I know folks in the space who raised rounds in less than one week,” he said.

Sila is one of thousands of financial technology startups riding an investor frenzy driven by a growing realization that Big Finance is ripe for a tech makeover. When the pandemic forced businesses to speed up their usage of digital tools, including e-commerce and online banking, the demand for what is known as fintech exploded.

Now startups with names like Blend, Brex and Dave that provide decidedly unglamorous banking, lending and payment processing offerings are hot tickets. That was punctuated this month when Stripe, a payments company, raised $600 million in a financing that valued it at $95 billion, the highest ever for a private startup in the United States.

Financial technology companies are also making a splash on the stock market. On March 23, Robinhood, a stock trading app popular with young adults, filed for an initial public offering. And Coinbase, a cryptocurrency startup, is scheduled to go public in the next few weeks in what could be a $100 billion listing.

Even tiny financial startups that have not formally introduced their products — such as Zeller, which will offer banking services to businesses; and Sivo, which is building lending software — have raised millions of dollars and been valued at nine-digit sums.

In total, venture capital investors poured $44.4 billion into financial technology startups last year, up from $1.1 billion in 2009, according to PitchBook, which tracks private financings.

Many investors are making bold predictions that these startups will upend big banks, established credit card providers — and in some cases, the entire financial system.

“The banks are extremely vulnerable” because they have not kept up with what customers expect, said Mark Goldberg, an investor at the venture capital firm Index Ventures. He predicted $1 trillion of market value could transfer from old guard financial institutions to tech companies over the next two decades.

“It’s what Amazon did to offline retail,” he said. “It’s just playing out 10 years later in fintech right now.”

The financial technology startups that are riding the boom run the gamut. They provide services including checking accounts, mortgages, insurance, investing, payment processing and cryptocurrencies.

Many are capitalizing on people’s long-simmering distrust of the big banks, especially after the 2008 financial crisis. Often, the startups offer slick and easy-to-use apps, no physical branches and low or no fees. And they are building on people’s growing familiarity over the past decade with tech tools and digital payments, a shift that has accelerated in the pandemic.

Just as cheap cloud computing and smartphones once enabled a wave of new app startups, the financial technology sector has developed its own set of building blocks, allowing new companies to spring up faster.

One of the building-block companies is Stripe. Founded in 2010, Stripe started out by offering to process payments for small businesses and startups. By 2018, it was worth $20 billion and had begun investing in other startups.

Stripe now processes hundreds of billions of dollars in payments a year, has expanded to larger customers including Salesforce and, and has made more than 30 investments in other fintech startups.

“We are in a hypergrowth industry and within that, the company itself is experiencing hypergrowth,” Dhivya Suryadevara, Stripe’s chief financial officer, said in an interview.

Domm Holland, chief executive of Fast, an e-commerce checkout software startup, said Stripe sped up his company’s progress. Customers who use Stripe to accept online payments can then use Fast’s software for their checkout process.

“If Stripe didn’t exist today, we would first have to build Stripe,” Holland said. “That’s a lot of work. They’ve already done that.”

Last year, as Fast’s business grew in the pandemic, investors began messaging Holland daily asking to invest in the company. “I have people LinkedIn messaging and emailing, just offering, ‘Take $5 million at any valuation you like,’” he said. “It is a bizarre world to live in.”

He ended up raising $102 million for Fast in January. Stripe was one of the main investors in the financing.

Some caution that the excitement has gotten far ahead of reality.

Robert Le, an analyst at PitchBook, pointed to the valuation of Affirm, which has a market capitalization of $20 billion, or roughly 40 times its annual revenue. That is significantly higher than the value that investors typically assign to blue-chip financial services companies. American Express, for example, trades at just three times its annual revenue.

“I think it’s a little irrational,” Le said. “Over the long haul, some of these companies will have to come down.”

©2019 New York Times News Service

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