London-based digital bank Monzo is set to close its next funding round at an approximately £1.25bn valuation as coronavirus dampens investor appetite, according to sources close to the raise.

The fintech is looking to raise £70-80m at around a 40% discount from the £2bn valuation it raised at last June, according to three sources. The story was first reported by the Financial Times.

One source with direct knowledge of the deal told Sifted that the company was expected to close the round in the next two to four weeks, with at least half of the funds already committed.

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The person also said that Monzo was expected to bring in a handful of new investors alongside existing venture capital groups, which include US-based Accel and Y Combinator Continuity.

A bump in the road

The down round is a difficult pill to swallow, but investors insist it’s not a serious indicator of Monzo’s fate.

“It’s not ideal but it’s also not surprising — nobody is paying silly money in this climate,” one VC told Sifted, indicating that Covid-19 will force most private consumer fintechs to adjust their valuations (in line with public markets).

“Look at Uber — the folks that participated in that [flat] round did very well”

Indeed, Sifted reported in March that fintech unicorns would likely see an average of 15% wiped off their individual valuations.

The VC also added that Monzo had perhaps been overly optimistic with its £2bn price-tag last year and said down rounds were a natural consequence of “raising at such a high number”.

In addition, they suggested that, while a down round would be tough for Monzo’s existing investors to take, their commitment to joining the next fundraise was a testament to their continued faith in the business.

“It happens, we all take those hits once in a while.”

Another VC that Sifted spoke to agreed that down rounds weren’t a reliable indicator of a company’s future.

“It’s tough on teams, it’s tough on morale. But we’ve seen companies do down or flat rounds that go on to do great things. Uber famously had a round that was a flat round, and people were like ‘oh no, this is the end of Uber’. Looking back on it, the folks that participated in that round did very well,” they said.

“It’s not necessarily a death-pill for these companies, it’s a rationalisation and an adjustment and the broader tech world has shown that it’s recoverable.”

A down round would also be preferable to a less-than-optimal sale, which some startups will now be forced to consider.

Written in the stars

Monzo will have had its hand forced in part by regulatory pressure, prompting them to secure a raise to ensure the company continues to fulfil its capital requirements as a licensed bank (it is required to hold at least 8% of its risk-weighted assets in liquid cash).

Several investors also told Sifted earlier this year that Monzo and its peers had been struggling with “challenger bank fatigue” among wary investors, delaying the raise even before the UK lockdown took hold.

“[Their] achievements are heavily funded through equity injections… Eventually, [the banks] will need to transition to a growth model funded by sources other than equity,” Alessandro Hatami, a financial services veteran told Sifted earlier this year.

Monzo seems to have hiked down its fundraise from the $130m it was said to be eyeing earlier this year.

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BlueP
BlueP

Pretty lame they don’t get the little individual crowd funding investor to put more in.. Let my previous investment get diluted and disallow any additional injection.

Thanks

Anon
Anon

Sounds like they’re in big trouble. They’re borrowing to pay wages they can’t afford and maintain 8% liquid cash. The money they raise, assuming they manage to raise it, will get swallowed up.