December 12, 2023: Raising in 2024 and beyond

What is the news?

Last week Koho announced an $86m round of financing with participation of Drive Capital, Eldridge Industries, HOOPP, Portage, Round13, BDC and TTV. 

Was this a "successful round"?

The company claims that the valuation was equivalent to the prior round at a $800m valuation.

Normally companies would be hoping to increase valuations between rounds but given the current environment this seems like a successful round especially if it did not include any "structure".

Let’s explain this further:

There have been very few late-stage rounds over the last two years and many of them have been done at lower valuations. In addition to lower valuations, many companies have included terms that protect the downside of the new investors. These may include:

• Liquidation preferences: These provide investors with the right to receive their investment back before any other shareholders during a liquidity event, such as the sale of the company. This ensures that investors recoup their initial investment before the remaining proceeds are distributed among other shareholders. In good times late-stage investors will get one-time liquidation preference, and some deals with structure will get 2x to 4x liquidation preferences.

• Participating preferred: In this case, investors first get their money back (like a standard liquidation preference), and then also participate pro-rata in the distribution of the remaining proceeds. This can lead to a much higher multiple on their investment.

• Anti-dilution provisions: These protect investors from dilution in future financing rounds where shares are issued at a lower price than in the previous round.

• Redemption rights: This term gives investors the right to require the company to repurchase their shares after a certain period of time, typically five to seven years. This provides an exit strategy for investors if the company is not sold or does not go public.

Why was Koho able to raise on preferable terms?

A combination of diversified scale, growth, and strong unit economics:

• Koho looks like it has built a successful consumer neo bank with multiple products with traction including 100,000+ users of a credit builder, 9-figures on its loan book, and B2B business

• The company doubled revenues to $100m which is impressive for a company its size

• The company claims the unit economics are positive and growing

What is next?

The company appears to be focused on improving unit economics by capturing a larger share of wallets with its customers. They plan on using funds to expand their product range. This will allow them to cross-sell more to its current customers which will improve the margin it makes per customer and is usually more affordable than acquiring new customers.

What is the takeaway and what does this mean for the future?

Many in the ecosystem talk about the need for focus.

Eventually, it pays off to have a suite of products. If done right it enables you to sell more to your customers, increasing revenues and improving margins. This enables companies to grow in ways - one by growing revenue with each customer and enables you to fuel growth by paying enabling you to pay more to acquire customers.

Profitable growth will be valued by investors no matter the market conditions. As markets seem to have 'stabilized’ we may see more and more late-stage growth rounds announced.

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