Chip Crowdfunding Round 2020 Due Diligence

Updated: Sep 15

All of the information given was obtained through public channels, no confidential information has been given here. Please consult the campaign materials for any information not within public domain.


💡Chip's September raise has now closed, but Chip are slated to launch another crowdfund (with a £2.1m funding cap) soon for those who missed out, also via a convertible note.


TL;DR

Sector: Fintech/Wealthtech

Stage: Generating revenue/Scaling


Chip is a savings app targeted towards millennials, their flagship feature being ''autosaves'. The app utilises open banking, i.e. using users' banking data to power the app's intelligence. They have 250k users, who have collectively saved ~£165m.



✔️ High growth (~70% growth in user numbers YoY, fuelled by word-of-mouth - leading to a low acquisition cost)


✔️ Team previous startup experience from founding to exit; talent from Barclays, FundingCircle, PWC, etc; Board members from Monzo, Legal and General, etc.


✔️ Transparency metrics such as CAC , MAU, revenue, churn, etc (see KPI section) are given, making assessing Chip as a business easier.



❌High Cash Burn Chip generate little revenue and incur large costs. Without further capital, Chip could go bust in ~18 months(E).


❌ No VC involvement There are legal restrictions on how much crowd capital Chip can raise, so they're banking on a £20m VC raise to continue growth - this might not happen.


❌ Competition There are several larger and/or faster-growing competitors such as: Moneybox, Plum, MoneyDashboard, etc. Neobanks offer their own savings products too, e.g Marcus (high interest savings), Monzo (cash ISAs and 'pots'/'coinjars'), etc. US-focussed startups Acorns, Betterment, Moneylion, Cleo, etc have already gained significant market share


❌ No EIS relief


⚖️ Convertible note Effectively, Chip's valuation in this raise is anything up to £80m, meaning you almost roll the dice on what valuation you invest at. See the 'valuation' and 'terms' sections for more details.


⚖️ Rewards Chip offer investors their popular socks as an incentive for investments over £1k. Ultimately, though, an investment should be based on the performance of the underlying business, not such perks.



Background 📱💻

93% of adults in the UK alone have a cash savings account, totalling approximately £700bn held in savings, £354bn of which in easy access accounts and ~£190bn in cash ISAs. (FCA) Despite this, more than 16m people in the UK have savings of less than £100, (Money Advice Service). Furthermore, savings account providers exploit the difficulty/inertia involved in switching by offering lower rates to 'loyal' customers (i.e. the 'loyalty tax'). The savings market is dominated by the 'big six' banks (LLoyds, HSBC, Barclays, RBS, Nationwide & Santander), who own 55% of the market. In spite of record low interest rates and Increased uncertainty (COVID, Brexit, etc), the savings market has experienced recent growth, as consumers seek to provide themselves a financial safety net.


Open banking is an emerging sector in finance that has allowed third parties access to banking data for the consumer's benefit. Through open banking, Chip aim to improve consumer saving habits through software, offering a painless saving experience.


Finance/savings is a large, lucrative market but a highly regulated space, which poses certain risks (i.e. regulatory risk). To highlight a potential example of regulatory risk, the FCA (the regulatory authority for finance in the UK) have considered a 'basic savings rate' - this would seek to reduce exploitatively low interest rate products. This could remove incentives for switching, thereby rendering Chip redundant.





Team 👪🧠💪


💡 I expect it will be difficult for Chip to source engineering talent, as it is in shortage in the UK; nonetheless, they have gotten very far with a relatively small engineering team. Financial talent is abundant in London (where Chip is based), which works in Chip's favour.


Product 📱💻🛍️

Chip is an open-banking savings app. Once installed, it 'connects' with your bank account provider, thereafter 'auto-saving' amounts on a monthly basis, the exact amount depending on what their algorithm thinks you can afford. Chip is rated 3.7 out of 5 on Trustpilot, with 25% of Chip's reviews rated 1 out of 5. The app is however rated 4.5 and 4.2 on the IOS app store and Android app store respectively (Google Play). Most negative reviews cite troubles withdrawing money and large autosaves. Nonetheless, Chip's app was winner of 'Best personal finance app' at the 2020 British banking awards. Furthermore, the app has a net promoter score (NPS) of 80, a good score relatively speaking.



Screenshots of Chip's app in action


Onboarding: It is a legal requirement that finance apps perform anti-money laundering checks. This is a point of friction in the onboarding process however, and can make customer acquisition difficult.


-Pros:

  • Competitive (but not the best!) interest rate of 0.90%

  • Autosave feature

  • Savings 'goals'

  • FSCS protection (only on interest accounts)

Cons (missing features):

  • Roundups

  • Repeat payments tracker - allowing cancelling of forgotten subscriptions etc

  • Auto switching (e.g. energy bills, etc)

  • Web application


Roadmap (in order of release, soonest first): ChipX (peer-to-peer lending), Investment products, ISAs, Insurance products, etc

Pricing:

  • Chip charge £1.50 (£1 until October) for every monthly autosave over £100

  • Chip also charge £0.50 for every withdrawal, but allow one free withdrawal per month


Scalability: The app exploits newer engineering technologies (e.g. Kubernetes) and boasts a CTO from PurpleBricks. Based on this crude assessment, Chip could be in a good position to (and has, largely) scale well without outages, etc.


Customer service: through in app chat or email, during office hours and weekends.


💡As per open banking rules, this 'connection' only allows read-only permissions to Chip, making theft from cybercrime,etc less likely, but also restricting Chip's functionality or value-add.


Defensibility


There are few barriers to entry (regulation, etc) in the open-banking space, so it's very easy for new entrants to enter the market. As a result, there are dozens of notable players in the savings/personal finance/wealth space not shown above (e.g. Yolt, Emma, Bud, Oval money, Oaknorth, Marcus, Yoyo, etc) - this is a hyper competitive market.


The one competitive advantage in the savings space is switching costs; once customers are acquired, they rarely switch. This is due to the customer apathy and the perceived difficulty of switching. The FCA found that 80% of easy access accounts have not been switched in the last three years.




Competition 🏎️🏁🏆

The chart below is not comprehensive, instead it aims to give an example of each 'branch' of compeition, i.e. incumbents (e.g. Lloyds banking group), direct insurgents ( e.g. Plum and Moneybox - Chip's rivals in my view) and indirect insurgents (e.g. Raisin - savings marketplace, think comparethemarket for savings). Do consider the wider competitive landscape (e.g. 'robo-advisors' such as nutmeg)





💡 Banks are well placed to capture/retain the savings market as consumers want their savings product in the same place as their current account, mostly for convenience; the FCA found that 74% of savers held their savings product with their current account provider. Banks also have a brand advantage; 80% of consumers would consider opening a savings account with a provider they've heard of, compared to 30% for one they haven't heard of. All this makes Chip's open banking proposition a possible advantage, as they can acquire customers regardless of who they bank with. What's more, Incumbent banks haven't much strength/agility with regards to financial technology, as epitomised when RBS launched their challenger bank proposition Bo, only to close it in six months after having gotten poor traction.


💡Chip do not have a banking license , which means they are less capital intensive (no capital requirements, governance costs, etc) but can't utilise revenue streams such as lending. Chip is simply software that uses bank data, i.e. an open banking startup;


💡Not all competitors are businesses; National savings and Investments (NS&I) is a government enterprise, with around 25 million customers, and over £165 billion of client assets in savings products. Their safe/government image and market leading interest rates have made them quite competitive.






As you can see above, Chip has gone from 25k users to 250k users in two years and their trajectory could take them to 1m users by late 2022 - that's pretty impressive. Competitors have, however, outperformed (e.g. Plum grew from 75k users to 1m users in two years).



KPIs 📊 📐🗄️





Most metrics are given, but are in the pitch deck and therefore confidential. Where this is the case, I have given a qualitative summary of the KPI e.g. Chip's customer acquisition cost is confidential, but i've commented that it's 'good'.


Valuation 🏷️🛒📊






All round valuations are taken from Crowdcube.



Comparables/Revenue multiple



Given that they're a similar business, have also crowdfunded, and are at a similar stage (recent monetisation) with similar growth (in user numbers, headcount, revenue, etc), I think Oval Money make a perfect comparable.


Oval raised using a convertible recently too, but with no valuation cap. This makes comparison impossible, so i've used the valuation of their prior (2019) raise:



Chip have only recently monetised the business, but Oval had a track record of generating revenue (£250k in 2019). This makes a revenue multiple comparison difficult, but assuming chip's MAUs have all paid the £1 fee, their monthly recurring revenue would have been roughly similar to Oval's at the time of their raise (MRR seems more appropriate than trailing revenue given the recent monetisation).


Chip (2020) matches or lags Oval (2019) on nearly all fronts (including growth and revenue - not shown above as confidential), having 250k users, similar MAUs and AUAs to Oval, etc. However, at a valuation cap of £80m, Chip is going for nearly twice Oval's pre-money valuation. Being conservative and assuming the convertible converts at the £80mn valuation cap, I would consider Chip overvalued in comparison to Oval. The way convertibles work, though, Chip could convert your shares at a much lower valuation than £80m (see 'terms' section). It's a tough call.


💡Plum would have made an interesting valuation comparable, but their revenue and AUA are shrowded in mystery, making a comparison difficult/uninformed.


Expected return


Fair valuations can be determined by deducing what valuation would give a reasonable return (often considered as an amount equal to your total portfolio). This ultimately depends on your exit valuation estimates, etc; It is a highly speculative process.


Consider the chart below for an idea of potential returns for Chip investors at certain ‘starting’ valuations and exit (taken from other wealthtechs) valuations:



💡 Please be mindful that this chart doesn't account for the (often heavy) negative effect of dilution! If in doubt, just halve the cash returned on exit to simulate dilution (i.e. rather than £1k on exit, assume £500 on exit).


30x is often touted as commensurate reward for venture risk (this is because a 30x return would 'return the fund' for a classic VC fund portfolio size of 30).


This valuation method would suggest that, If you believe Chip is the next Acorns, a ~£27m valuation is fair.


Exit outcomes



There is relatively modest M&A activity in this space:


- Clarity Money, acquired by Goldman Sachs in 2017

- Vaamo acquired by Moneyfarm in 2018

- Mint acquired by Intuit in 2009.


I therefore expect IPO to be a likely exit possibility. There is always the argument that the savings/wealthtech space hasn't yet matured, and therefore m&A activity could grow over time.


Commentary 💳🏦💸

⚠️According to Crowdcube, Chip are currently engaged in a legal dispute with a tax advisory firm regarding fees they refused to pay. The fees amounted to ~£90k, but could ultimately involve legal costs also if and when Chip lose the dispute.

Terms 📝🏛️🤝🏼

Chip are using the future fund to offer a convertible note. This means that the despite only raising ~£5m from the crowd, they get £10m overall (the government 'match' any investment up to £5m). This allows Chip more capital for growth.


Here are the terms:


In jargon:


The convertible has a 3 year maturity date, £80m valuation cap, 8% coupon, a 100% redemption premium will convert to A shares (the highest share class, that comes with voting and pre-emption rights).


In plain english:

  • You will get 8% of your investment back as cash or further shares (i.e. 24% after 3 years) - usually shares.

  • If three years pass by, or Chip gets acquired/becomes listed, you will either get a 20% discount on the share price , or a straightforward 100% return.

Some worked examples:

  • E.g. if chip's next raise is at a monstrous £800m valuation, you shares convert at a £80m valuation. You've gotten a 10x return (ignoring dilution), plus any interest you've accrued

  • E.g. if Chip's next valuation is £50m, you get shares that reflect a £40m valuation (i.e. 0.8x50; a 20% discount). You've gotten a 1.2x return, plus any interest you've accrued.

  • E.g. In certain exceptional circumstances, you'll simply get double what you paid back.


Shareholder Communication ☎️📻✉️

Chip host a private forum for shareholders and publish quarterly updates (typically product development news and growth figures). Furthermore, they often host Q&A sessions/webinars for investors. The more sensitive figures (e.g. churn, CAC) are typically only given during fundraises. This level of communication is, in my experience, more comprehensive and informative than the average crowdfunded business.


COVID-19 strategy


COVID has proved a boon for Chip's growth as consumer assets excperienced a 'flight to safety', presumably as the need for savings/emergency funds became apparent given the economic turmoil. Chip did initially cut costs (salaries, etc -

It is not clear if Chip furloughed staff.) by 20% in anticipation of a difficult fundraising market, but soon returned to growth following their successful april raise. The Government's future fund - a fundraising initiative for startups amidst the pandemic- has allowed Chip to fortify their cash position, albeit at a cost of equity.



| Not financial or legal advice | All opinions my own | Please do your own

research | Capital at risk |

| Startups are illiquid | Don't pay dividends | Suffer dilution | Usually fail |

| Even tax relief is at risk |

Disclosure: I am a shareholder of Crowdcube and Chip. I will not be investing in Chip this round.

Whilst I can't share confidential information, for any questions please feel free to comment in the forum, or even email me (admin@crowdfeed.net).



References (non-exhaustive)

  1. Chip Companies House filings

  2. Chip's blog, website and social media

  3. Numerous articles and press releases on Chip

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None of the content at crowdfeed is financial advice. Remember when investing that your capital is at risk.

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