By the end of the month, Chip’s Series B crowdfunding round may become available to the public.
I wanted to share a first draft of my ongoing due diligence, I hope it helps a few of you. It’d be nice to have some critique on my assessment also - so please chime in with any feedback, good or bad. If it’s too much to read, feel free to skip to the summary at the bottom of this post.
Note: I am not finished with my due diligence, nor this post (need references, updates,improved readability etc to follow), but please have a look at this (admittedly patchy) first draft below - I will add to it as the campaign and my research progresses.
Full disclosure: Whilst I am an investor in Chip, I have sought to offer a balanced viewpoint. Please see further disclaimers at bottom of post.
Simon Rabin is the founder and CEO of Chip. He has a theology degree from Birmingham University, and worked in sales and marketing before becoming a serial entrepeneur. He founded mobile app Roamer, eventually exiting the business in 2016. This experience is invaluable in a founder, it demonstrates that he is capable of managing all the challenges in scaling a business to exit.
An important quality in a founder is industry experience - Simon has no prior experience in financial technology. He has, however, surrounded himself with a team that does: Talent from Monzo, Barclays and Fundincircle all in executive roles.
Chip was borne from a seismic shift in the way banking data is regulated, called “Openbanking”. This shift was brought about by EU-wide regulatory changes known as PSD2. Simply put, this change meant that banks were legally obliged to make their customer’s data available to 3rd parties (given consent) - a move intended to increase competition in the banking sector.
In true form to their Fintech strength, the UK has arguably been the quickest to adopt/implement this regulation, ultimately giving UK startups like Chip a first(ish) mover advantage relative to the rest of Europe. This pattern has been Key to the UK’s fintech success, having been crucial in the UK’s relative leadership in (neo)banking, P2P lending, robo-advice and Equity Crowdfunding.
Total addressable market (“TAM”) is large, £10tn is held in savings in europe. If Chip can capture any meaningful slither of this, there’ll be a mighty unicorn in our midst. At this stage, all you want out of a TAM is for it to be big really; market penetration comes into play a little further down the line.
Automated savings feature, which can be modulated if so desired
Completely free, no paywall, a key point of difference
Chip has playful, millenial-focussed branding; The average
Chip user is 34 years old, living in London (centre of fintech adoption)
and has ~£200 saved
Chip is not yet offering FSCS protection
Chip has a cap (£600) on monthly deposits.
Extremely buggy, particulary with regards to withdrawals
Underwhelming customer service (response times, etc)
To invest in a company that leaks money, my first question is always how fast it is leaking that money. They call this burn rate. Whilst I am still waiting on an answer from the Chip team on this, it I will point out that the company are raising finance 9 months after raising £4m in what is a relatively capital efficient sector (until they foray into banking). Their size means they are not only exempt from filing full profit and loss accounts with Companies house,but also exempt from auditing these filings – so take them with a pinch of salt. Chip has no outstanding loans - although they hold a business credit card with Silicon Valley bank - a minor detail, granted.
As chip have not yet generated revenue, let alone profit (According to their deck), their business model is unproven. The CEO has, surprisingly, disclosed their unit economics (this information is considered quite sensitive). As we might expect, Chip are losing money on a per customer basis, but its on a trajectory towards profit (i.e. they are losing less and less per customer). The exact figures I cannot disclose.
Chip has aimed for three primary revenue streams going forward:
Interest rate spread: Earning interest from a small spread on the interest paid out by user deposits. I.e. You deposit £100, which earns 2% interest -Chip take 0.1%, say, of this amount, with the remainder (1.9%)going back to you. Freetrade has a similar business model. This revenue stream is tied to the base rate, and downward shifts in interest rates may impact
Chip’s revenue. One could argue, however, spreads would simply be managed accordingly. Furthermore, a downturn would see increased demand for Chip as people shifts to less risky assets (e.g savings/cash).
-Chipx fees ; fees placed on their p2p lending offering, yet to fully launch.
-Commision on saving goals
N.B. Further details to follow
As publicly stated, Chip has grown from 25k registered accounts in 2017to 153k accounts today. These are just signups though, and only active users (will) generate revenue. Whilst i’m not at liberty to disclose exact user numbers, according to shareholder updates they are growing at a similar rate, which is excellent. Obviously, active users only make up a fraction of total accounts - this ratio is better than what freetrade has achieved. Growth has been one of Chip’s most noteworthy achievements.
This series B is being mostly crowdfunded. There is a material risk that Chip might fail to raise
VC/instutional funding as and when required. In their 2018 raise, they hoped to raise institutional funds in 2019 - this has since been postponed for Bar revenue, Chip ticks the main VC’s boxes: It’s got Team strength, traction, is hyper-scalable and has a very large addressable market. One has to wonder why an institutional raise didn’t materialise as planned. It might be a completely benign reason , and might not be.
Round/Valuation/Share price history
2017 £0.97m invested £4.8m Pre-money valuation Share price £0.22 2873 investors
2018 £3.8m invested £14.4 pre-money valuation Share price ~£0.52 6535 investors
2019 £7m? invested £36.8 Pre-money valuation Share price £1.12 xxxx investors
- Chipx community lending is basically a p2p lending platform. Chip users can lend to fellow chip users, with the idea that Chip has rich creditscoring data.With risk-addled returns of 8% forecasted, It will be interesting to see their default rates underwriting process going forwards. The feature is currently in Beta, effectively.
- FSCS protection
- Interest paying accounts.
- Banking license: Chip CEO Simon Rabin has on several occasions noted that a Banking license is
a likely goal, although he’s postponing this for as long as possible to remain capital efficient.
N.B. Further details to come.
Surprisingly, the idea of an automated savings is fairly unique in Chip’s target market (UK/EU), with only a handful of similar offerings. This could be due to the UK’s unparalleled adoption of Openbanking regime. Chip just couldn’t work in a country where banks haven’t yet liberated their data for 3rd party use. This could pave way for an opportunity to monopolise. So competition risk is relatively low in comparison to Freetrade, say, who have a multi-billion dollar rival breathing down their necks. I am still in the process of confirming that any intellectual property Chip uses is owned by them, and sufficiently
protected (patents, etc) – these are important in ensuring Chip remain unique.
Openbanking personal finance apps:
There are a plethora of such apps; Curve, Moneydashboard, Emma, Yolt, I could go on…
I’ve tried to keep things simple by evaluating the most direct competitors:
Plum is a savings/investment startup backed by “500 startups”. Uniquely, Plum is a chatbot that lives in Facebook messenger, rather than being a fully fledged app. Whilst this means it relies heavily on messenger’s for their UX, it lightens their back-end engineering load, and should therefore make them marginally more capital efficient. They have recently received ~£3m in funding, following stellar growth from 75k to 400k users in a year (over 400% growth). They boast a feature rich UI that includes not only automatic saves, but also roundups and microinvestment features (Stock/Bond ETFs (ISAs available!)and p2p offerings via RateSetter). They have an insights feature which will function as an analytical hub, featureing automatic bill switching. The app at one point reached #1 in the finance apps category of the app store, and
has a strong 4.7 rating. As an investor, I can only tell you that their future looks impressive and
they poses a material threat to Chip.
Cleo is a chatbot personal finance management known for its chatbot interface, boasting
~2m users. They are backed by EU VC heavyweights Balderton Capital and the founder of Transferwise.
N.B. Further detail to come:
Challenger banks: Monzo, notably, do offer a savings product of sorts - their ‘pots’ feature, a savings vehicle that can pay interest, is ISA eligible and boasts features such as roundups (rounding transactions to the nearest £ and investing the spare change) and locking to prevent the temptation to dip into savings. Monzo’s integration with IFTTT (an app that simplifies api calls) means users can leverage API calls to reward themselves (i.e. save) for good behaviour such as exercise via strava activity and penalising the bad (“taxation”).
Chip’s CMO gave a compelling argument against neobank competition: Chip point of differentiation is that it is a automated, data-driven (and therefore personalised) savings engine. It seeks to save what the user is capable of saving, and does so largely without user intervention.
Furthermore, Monzo have in previous pitch decks expressed interest in becoming more of a
marketplace - a “financial control centre”, aiming to ultimately partner with products like Chip. Starling have made significant headway with this already.
In their pitch deck, Monzo express desire to build marketplace offering through partnerships rather than building their own offerings
P2P lenders: Few have considered p2p platforms as competition, and admittedly
Chip’s primary offering is a savings tool, not a p2p platform. Nonetheless, the Chipx feature is essentially a p2p lending model, so I thought it prudent to address this. Zopa are the standout competitor here, having opted to become a bank, as Chip intends on doing.
Valuation is arguably the most important thing to consider when investing. The pitch deck makes a comparison to Monzo. As monzo is a different product, this could be considered an inappropriate comparison. let’s consider Plum as they are a more direct comparison. In July 2018, Plum raised ~£1m at ~£8m pre-money valuation on Seedrs, having grown from ~21k to 130k users – a rate greater than Chip’s, but an incredibly similar company stage/milestone. Furthermore, Cleo is rumoured to have been valued at £30m when they reached ~600k users, were revenue generating, and growing by 30k users weekly at the time. Crowdfunding suffers from an especially inefficient market – no one is going to pay a higher price for your business than the people that use and love it, especially if they are inexperienced investors tackling an asset class that is likely new to them, with a dash of information asymmetry on top of that. On this basis, one could consider Chip expensive. But then everything is in this bullish market, so good luck trying to find a cheap deal right now.
N.B. more to come.
N.B. information to come on EIS relief, Shareholder rights (Nominee structure, pre-emption rights, voting rights, etc)
Company updates since i’ve invested have been quarterly and reasonably informative. Investors will have their shares managed by capdesk, and gain exclusive access to an investor-only forum and facebook group, where Q&As with executives, Beta Testing groups, and meetups are facilitated. If it’s something that worries you, rest assured this is not a company that will take your money and leave you in radio silence, quite the opposite.
Your shares would be illiquid and you cannot realise their value until a liquidity event, an “exit” occurs. By and large, private companies exit by either an IPO or trade sale - a possible exit could be a secondary offer made by a VC, as occurred with Revolut.
N.B. More information to come on recent M&A in the fintech sector, and the IPO market for fintech businesses.
Most, not all, investors understand the risks inherent here, but in my opinion few truly appreciate the magnitude of these risks. Perhaps the most crucial thing to consider is that should you invest in Chip, that investment should be one of many in a portfolio of startups,which should ideally be a small portion of your wider portfolio in less risky, more liquid assets. The science says a minimum of 28 diversified (don’t be that guy that is all in on 7 challenger bank startups in the UK) startups should do the trick. You should expect the majority of your startups to fail, with the hope being that the outlier “home runs” recoup your losses and then some.
To truly appreciate the risk I’ve illustrated some scenarios that could lead to Chips demise to make the risks easier to intuit. If only one person thinks “Oh, wait, I could see that happening. I’m not okay with that - i won’t invest”, or even “Oh wait, that’s actually well within my risk tolerance. I’ll invest.” Then i’m happy.
Chip fails to raise instutional funding, and having exhausted crowd capital, Chip runs out of cash.
Brexit causes hiring issues that stymie growth/product development (They have a development office in Latvia, and a notable number of their staff are EU nationals), leading to failure
A rival app outcompetes Chip, forcing their failure
Chip fail to address product shortcomings, leading to reduced traction/usage and ultimately failuere.
Increased regulation increases operational costs to unviable levels
A data mishandling incident leads to a regulatory penalty that cripples/closes the business.
Crowdcube nominee, being the legal owner of nominee held shares, take/use the valure of your shares as permitted in their terms (surprised? Read the fine print)
On a more optimistic note, should Chip reach a valuation around unicorn status, there is scope for something in the region of a 20x return (assuming dilution of around 30%)
Chip is a smartphone app that automatically saves money, such that you save without ‘feeling it’. They have grown from 25k to 153k signups in 2 years (active users show similar growth), and their product is fairly unique in the market, but is experiencing bugs. They also have a large user community acting as brand ambassadors, much like freetrade or Monzo. Despite a planned instutional capital injection this year, they aren’t raising VC money, and this round comes 9 months after their previous £4m round. They have a few competitiors that are more capitalised and further in product development. The valuation is ~4x what a competitor at a very similar stage. Market conditions, Regulation and Brexit are also a concern. Investors are likely receive prompt, informative quarterly updates upon becoming shareholders (via the crowdcube nominee).
This is not financial/investment advice, and opinions are my own. PLEASE consider the risks before investing - see crowdcube’s risk disclaimer for more details.