What Makes Nubank's IPO Special?

The pandemic has been good for FinTech acceleration.

I write about trending IPOs and startups here, on a substack that's free to join.

So when does FinTech enter the mainstream??For Brazil, that time is now.

Brazil's Neobank is a Coming Out Party for Latin America Investment in 2022

Nubank has evolved in seven years from a fintech to one of Latin America's biggest credit card issuers, now on the brink of an IPO that could make it the region's largest listed bank.

Nubank had lowered the marketed range last week after earlier seeking to raise as much as $3.18 billion. That’s about $9 a share.

Softbank, the Japanese conglomerate passed up investing in Nubank during a 2019 fundrasing round that valued the digital bank at $10 billion. What is mistake that was. The IPO for Nubank, as the company is known, will be used as a reference point for many upcoming transactions.

The Nubank IPO is a little bit complex, given that the company is selling Class A shares on the United States’ New York Stock Exchange and BDRs, or?Brazilian Depositary Receipts, on its home market’s B3 stock exchange.

Nubank has appeared on CNBCs Disrupted list?here.?The financial companies of the future are really interesting especially in the developing world. The world’s largest and most valuable “challenger bank” is disrupting the Latin American financial ecosystem.

Things are Changing Faster in the Developing World

Colombia-born David Vélez founded Nubank in 2013 with a purple no-fee credit card in Sao Paulo, Brazil, a country notorious for its high-fee, low-tech banking system. Building a neobank at scale is not cheap. Leading startups and unicorns in the market niche have raised tectonic sums of capital to get to where they are today.

Nubank has?raised $2.3 billion?up until now. Nubank would have a market value of $41 billion based on the outstanding shares listed in its filings with the U.S. Securities and Exchange Commission. Accounting for employee stock options and restricted stock units, the company would have a fully diluted value of $44 billion. That’s a steep valuation that likely won’t stick.

Nubank investors include Sequoia Capital, Tiger Global Management and Dragoneer Investment, joined SoftBank in saying they’d be willing buy the shares. Nubank is looking to raise more than $3 billion in an IPO that could value it at $50.6 billion, according to regulatory filings, more than any other financial institution in Latin America.

Sequoia Capital?have seen excellent returns from their initial investment already. Sequoia Capital, which?invested $1 million in Nubank in 2013 in a seed round, now has a stake that is worth $7.1 billion.?In August, 2021 Nubank and Sequoia partnered in a $44 million funding round for Indian digital bank Jupiter, along with Matrix Partners.

The most exciting venture capital movement in 2021 and 2022 is happening in the developing world namely Latin America, Indonesia and India. Nubank already has over 40 million users across Brazil, as well as Mexico and Colombia.

With almost 700 million people and 8% of the world’s population, Latin America has proved to be an almost ideal environment for startups looking to upend established companies. While China is gaining influence in the region, American Venture Capital is backing it as well.

Berkshire Hathaway, Buffett’s investment firm,?invested $500 million?in a fundraiser for Nubank in June to deliver a valuation of $30 billion. Buffett is no stranger to investing in financial firms, as traditional banks and insurance companies make up a large portion of Berkshire’s investment portfolio.

Money is rushing into the Brazilian FinTech and banking sector recently which will mean Nubank has a lot of competition. Overseas interest in Brazil includes JPMorgan in June acquiring a 40% stake in digital lender?C6 Bank,?with more than 12 million clients, private equity firm General Atlantic financing two capital increases in?Neon?since 2019, while Japan's SoftBank has a 15% stake in?Banco Inter.

Another major investor in Nubank is none other than China’s Tencent. They?invested $180 million in 2018, very smart. Attacks against the business model of Nubank are all around though. Nubank's zero fees for credit card and checking accounts has been copied by both upstarts and incumbents, making competition fiercer. Since 2015, the number of credit cards in Brazil has risen by 57% to 133.8 million in 2020, central bank data shows.

SoftBank Latin America Funds are among the investors willing to buy at least $1.3 billion in Nubank’s Class A shares at the offering price, according to the filing. This will only cause the stock to pop on IPO even further. Pop until it plummets, with rising competition.

Closely held Latin American unicorns have became so valuable that the local public markets are now too small for them. With a $30 billion valuation on its last round of private investments in June, Nubank filed its IPO in the U.S.

Nubank identifies itself as a “neobank”, offering consumers digital accounts and international credit cards. The best part? It does all this without any additional fees. Coupled with a broad array of financial solutions packaged into a tightly integrated mobile app, Nubank’s appeal becomes apparent.

Having Buffet, Softbank, Tencent and Sequoia Capital means it has the kind of blue-chip backing that nearly guarantees an interesting if volatile future. So what is Nubank so far? It’s just the biggest digital bank in the world by number of customers: 48 million.

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