The $5.3 billion that Visa Inc. is shelling out to acquire Plaid Inc. is small compared to Visa's roughly $440 billion enterprise value. But for U.S. financial technology startups, it is a big deal.
The transaction demonstrates that the paper valuations of companies like Stripe Inc. ($35.3 billion) and Robinhood Financial LLC ($7.6 billion) are not merely theoretical. It also provides an attractive exit for Plaid's investors, which could help lure additional money into the sector.
Plaid's price tag is steep relative to some past deals for companies that specialize in account aggregation, which is the process of linking a user's bank and investment accounts to the fintech apps they want to use. Perhaps the most suitable comparison is Yodlee Inc. The $660 million deal value that Envestnet Inc. announced for its acquisition of Yodlee in 2015 is roughly one-eighth of Plaid's valuation and 7.4x Yodlee's 2014 revenue. While Plaid has not disclosed revenue figures, a Jan. 13 Forbes article said its revenues are in the $100 million to $200 million range, citing a person familiar with the matter. That lines up with the revenue accretion assumptions that Visa laid out in its merger call. Assuming the midpoint of $150 million in annual revenue, Plaid's deal value would be 35.3x revenue.
Yodlee is now producing around the same amount of revenue for Envestnet. The Envestnet | Yodlee segment generated approximately $180 million in revenues in 2018. But prior to the acquisition, Yodlee produced only about half that amount. The segment had operating losses each year from 2016 to 2018, and Yodlee struggled to turn a profit for several years when it was a stand-alone company.
Plaid's rapid adoption is noteworthy. Despite being less than 10 years old, the San Francisco-based company's technology is used by more than 200 million consumer accounts, according to the slides accompanying the merger call. Plaid has also cultivated valuable connections within the financial services space, integrating its technology with more than 11,000 financial institutions. This has not always been smooth sailing, however. A few months ago, Plaid was reportedly unable to connect customers of PNC Financial Services Group Inc., which has been evaluating its data security, to third-party financial apps. Plaid was eventually able to resolve the issue.
Plaid is benefiting from not only the boom in U.S. fintech startups, but also from the increased tech focus of incumbent financial institutions. In particular, incumbents are becoming more aware of application programming interfaces, the technology that helps link user accounts to apps. Only a few U.S. companies mentioned APIs on their conference calls prior to 2011, based on an analysis of transcripts. But from 2016 through 2019, the word API was used much more frequently. Tech-focused Live Oak Bancshares Inc. was among the companies that mentioned APIs the most. In its 2018 Form 10-K, the Wilmington, N.C.-based bank cited its technology-based platform as one of its principal advantages, accelerating its ability to issue proposals, complete credit due diligence, finalize commitments and improve the customer experience.
Outside the narrow field of account aggregation are some other comparable transactions. Companies like MuleSoft Inc. and Apigee Corp. are both focused on APIs, but they provide slightly different services. They help institutions create their own APIs, offering a platform to build, run and monitor them. MuleSoft and Apigee likely make it easier for Plaid to operate. In cases where a bank does not have an API, aggregators often engage in screen scraping to enter the user's account information. An API offers a more secure route for developers to access the bank's data.
MuleSoft fetched $6.5 billion when it sold to salesforce.com inc. in 2018. The price tag was higher than Plaid's, but it was only 21.9x MuleSoft's 2017 revenues, a lower multiple than our estimate for Plaid. Apigee's valuation seemed to be more on par with Yodlee. Google LLC agreed to pay $625 million in 2016, which was 9.1x Apigee's fiscal 2015 revenues.
The Plaid deal should be a lucrative exit for its investors. Early backers were Spark Capital Partners LLC and New Enterprise Associates Inc., which led a $2.8 million seed round in 2013, the year Plaid launched. GV (Google Ventures), Felicis Ventures and Homebrew Ventures I, L.P. also participated in that round. Plaid has attracted incumbents over the years as well, with Goldman Sachs Group Inc., Mastercard Inc. and eventual acquirer Visa all funding the startup. The Visa acquisition should even be a nice payday for the later-stage investors. Plaid's series C round for $250 million in December 2018, which included Visa, valued the company at $2.65 billion on a post-money basis, which is half of what Visa is now paying.
In general, the Plaid deal augurs well for U.S. fintech funding. In addition to factors like the low-interest-rate environment and the bull market in equities, the potential for large buyouts should bring more investors to the table. Prudential Financial Inc.'s $2.35 billion deal (not including the earn-out provision) for direct-to-consumer digital insurance agency Assurance IQ Inc., which the companies completed in October 2019, was an encouraging sign for insurtech in particular and the fintech sector more broadly. Renewed venture capital investor confidence seems particularly important at the moment, following the highly publicized foibles at a few of SoftBank Group Corp.'s portfolio companies.