Analysis

May 24, 2023

Exec churn and cash burn leaves N26 a long way from IPO

Regulatory issues, executive churn and a shutdown of the public markets have set the neobank back on its IPO plans


N26 cofounders, Maximilian Tayenthal (left) and Valentin Stalf

N26 started talking about an IPO in 2018. At the time, the neobank had raised cash from Silicon Valley guru Peter Thiel and heavyweight investors like Tencent, GIC and Allianz. The company was forecasting as many as a 100m customers in a decade, which would have made it bigger than Wells Fargo and Chase. 

The pinnacle of startup success — a public listing — was as little as three years away, cofounder Valentin Stalf said back then. 

“An IPO is definitely something we would like to do,” he said. 

Today, the IPO market is on ice, as higher interest rates and inflation have cast a pall on global markets. Fintechs such as Solarisbank and Zopa, which were supposed to go public last year, have had to delay their plans. Some investors say the IPO window for tech companies may not open up until 2025.

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Meanwhile, N26 has seen its growth hamstrung by German regulatory oversight and executive churn. Fellow European neobank Revolut — founded in 2015, two years after N26 — has 25m customers in 36 markets; N26 has 8m across 24 countries according to its latest financial results. 

The fintech has a long way to go if it’s going to reach that IPO goal when markets reopen, say investors and market watchers. But an IPO will likely have to come if investors — some of whom have been with the company for eight years — are to ever see a return on their capital. 

Profitability

The first hurdle in N26 getting ready for life as a public company — or any sort of exit — will be achieving profitability. Neobank rivals Revolut and Starling have already cleared that hurdle, while Monzo says it's on track to reach profitability by the end of this year. 

N26 says that reaching profitability is “a priority” for the company and that it's already been profitable on a per-customer basis for several years. 

“A few years back, it was possible to have a non-profitable company IPO,” says Thomas Lesche, partner at Speedinvest, speaking about European fintech broadly. “But now with such a fast increase in interest rates… public investors and bankers organising an IPO will basically say, ‘Hey, sorry. There is no IPO unless you can deliver on profits now, and not in the far future.”

N26 is making steps to cut costs, having laid off 4% of its staff in April, but has been shouldered with sizeable compliance costs over the last 18 months. 

The company is still locked in a tussle with the German financial regulator BaFin over a September 2021 fine of €4.25m for N26's failure to install effective money-laundering controls. N26 said in a press release at the time that it had taken “numerous detailed measures” to meet high standards of financial crime prevention.

Along with the fine, BaFin capped N26’s customer acquisition numbers to 50k a month, compared with 170k a month previously. Assuming that number had stayed steady, N26 could have missed out on as many as over 2m  customers because of the cap. N26 declined to comment on previous customer numbers.

N26’s net losses rose to €172m in 2021 and its administrative costs grew 47% to €167.7m due to increased spending on regulatory compliance, according to the company’s 2021 filings, its most recent. 

However, an early investor in N26, who invested in the fintech’s latest round in October 2021, says that despite BaFin’s rather draconian measures, N26 is on track to reach profitability in the second half of 2024. And it has enough cash in the bank to not have to raise funds “for a while". 

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Being under BaFin supervision will also be a positive thing for N26 in the end, says Barbod Namini, partner at HV Capital, who invests in fintech but is not an investor in N26. “Completely cleaning your crop from a regulatory perspective [means] you’re in a way better position to grow profitably from that point on,” he says. “It's a task that any bank has to do at some point in their lifetime as they grow.”

Product

Alongside profitability, investors will be looking for neobanks to demonstrate “healthy growth” if they want to IPO, says Namini.

That means not just absolute customer numbers, but a company’s ability to create new sources of revenue — for instance, by expanding their product portfolio.

In 2021, N26’s revenue grew by 60% year on year. But the largest chunk of that revenue (40%) was made up of subscriptions, which are typically low margin, say investors.   

N26 says that the company onboarded 1m new customers in 2021 which resulted in a “significant uptick” in customer deposits and “drove strong net interest and commission income growth of nearly 70%”. 

Yet unlike other neobanks, N26 has a narrower product offering than its competitors. For example, N26 was five years behind Revolut on launching a crypto offering, and does not yet offer equity trading. It also only offers interest on savings below €50k in Spain.

Its also missing a core part of many rivals' offerings: business banking. N26 offers accounts for freelancers and self-employed individuals but not for enterprises. Banks can charge more for business accounts, but can also offer adjacent services such as expense management and invoicing, opening them up to more recurring revenue streams.

Jeroen de Bel, cofounder of Fincog, a consultancy building digital banks for incumbents, says N26 needs to convince existing customers with free accounts to move onto paid-for premium plans if it wants to edge closer toward profitability. 

Team

The third ingredient in N26 readying itself for an IPO will be the team — something that potential IPO investors and regulators will be scrutinising. Several investors that Sifted spoke to were doubtful an IPO would be possible until turnover was brought under control. 

N26 has a history of high C-level churn, and several of the company’s senior executives have recently stepped down from their posts. 

CFO Jan Kemper — who previously led fashion giant Zalando through an IPO — stepped down in January 2023. Chief risk officer Thomas Grosse resigned in March this year citing personal reasons, and chief growth officer Alex Weber, one of N26’s earliest employees, is also due to leave soon, a person with knowledge of the matter tells Sifted.

N26 says that the average tenure of its executive team is over six years, which is above the average for the industry. Its recent prize hire is Arnd Schwierholz, who has experience in both private and public companies and who was formerly CFO at global mobility provider Flix and German airline Air BerlinHe. He was appointed as N26’s new CFO in January of this year. 

The company’s recently appointed external board of directors will also look closely at the management roster. An early investor in N26 says that the board is “upgrading” the company’s management team to “ensure good growth, get rid of BaFin and signal to investors that this is a very good company”. 

Capital stack

The final wrinkle in N26’s plans for an exit is how much priority different investors have in getting their money back, also known as its capital stack. 

When N26 raised its latest funding round in October 2021, its new investors — including Third Point Ventures, Coatue and Dragoneer Investment Group — were given a 25% preferred return per year on their investment, a source familiar with the matter tells Sifted.

This means that on exit, those investors get a guaranteed 25% annualised rate of return calculated from when they invested — and that's paid back before others have the chance to see any return. Third Point Ventures and Dragoneer Investment Group didn’t respond to Sifted’s requests for comment. Coatue declined to comment. 

If the aggregate liquidation preference is bigger or close to the overall company valuation, it wouldn't leave early investors, or indeed management, with much incentive to IPO as they would see “very little of the proceeds” — especially as valuations are down, speculates Speedinvest’s Lesche. 

“If I was a Series A investor and my shareholding was worth $50m last year and now it is worth zero, then I’d ask the […] management to please wait a few more years until the company is back at the valuation that makes sense for me,” says Lesche.

New investors would say we don’t want to invest in a company where we know there’s a highly demotivated management and pissed off older shareholders

The terms its existing investors have negotiated don’t make it very easy to price an IPO or convince new investors to come on at that stage, says a Berlin-based fintech VC who isn't an investor in N26. 

“New investors would say we don’t want to invest in a company where we know there’s a highly demotivated management and pissed off older shareholders,” they add.  

What happens next?

N26 will have to exit at some point if it's to return capital to its investors, but it still has time on its side. Average industry timelines are for early-stage investors to have their capital returned within 10 years while Series C/D investors will expect returns after about six years. 

N26 commented that “there are multiple options for us on the table and there wouldn't be a set timeframe (to IPO) even if we decide to take this step”. 

Over the last 18 months, it has already made “great strides”, it says, to lay the foundation for an IPO, including converting from a GmBH, a German limited liability company, into an AG, a public limited company, and creating formalised audit, regulatory, nomination and remuneration committees. 

Investors agree that an acquisition of N26 is out of the question for a bank at such a high valuation. The other only avenue for an exit would be a trade sale. That could be difficult given N26’s size; there aren’t many companies big enough to absorb it, investors say. 

The other unanswered question is: where would N26 list? 

The fintech doesn't have a market presence in the UK or the US, after it withdrew from them in February 2020 and November 2021 respectively. And while Germany is where the company has the majority of its customers, the IPO market is smaller than in other nations and is less friendly on a regulatory level. In 2022, just nine companies went public on the Frankfurt Stock Exchange, compared to 149 in the US. N26 declined to comment on its preferred IPO location. 

N26 needs to work on crafting itself a sexy IPO story, say investors, and putting itself in a strong position to go public with strong revenue growth, a profitable business model, a high-performing executive team and a high level of compliance, once it’s shaken off BaFin. And some are confident that N26 can meet those goals. 

“Things can change, right?” says an investor in Revolut. “You see that with Monzo. They were not doing well. They replaced the CEO. They focused on the core product and on profitability... And suddenly they're actually profitable and doing okay — maybe not growing as fast as they were, but they turned it around.”

Update: This article was changed at 10am on Weds May 24 to clarify that N26 does offer interest on savings below €50k, for Spanish users.

Miriam Partington

Miriam Partington is a reporter at Sifted. She covers the DACH region and the future of work, and coauthors Startup Life , a weekly newsletter on what it takes to build a startup. Follow her on X and LinkedIn