A substantial capital boost could be on the horizon for Revolut.

On Monday, July 5, Revolut announced that it is starting a process that could make it one of the most valuable fintech firms ever launched in Europe. The story, first broken by Sky News, revealed that Revolut is approaching several investors with the hope of acquiring a substantial cash injection of $1 billion.

Currently, the identity of one investor is known. Revolut is in detailed talks with SoftBank, in particular their Vision Fund 2. Given the size of the investment, only US-based firms such as Tiger Global Management or Dragoneer Investment Group could be under consideration.

The SoftBank Group is a multinational Japanese conglomerate. It invests primarily in companies working in the fields of technology, energy and finance. The Vision Fund is the venture capitalist arm of SoftBank. In 2019, SoftBank launched the Vision Fund 2. As of March 31 2021, its Vision Fund 2 has assets under management (AUM) of $154 billion.

The Vision Fund 2 was in the news last month. The fund led to an investment in the fintech firm Klarna of $639 million. The investment helped to secure Klarna’s status as one of the top fintech start-up’s in Europe. Subsequently, Klarna’s valuation soared to $45.6 billion.

An investment by the Vision Fund 2 could have the same effect on Revolut. If the investment happens, Revolut’s valuation could be between $30 and $40 billion. In April, Revolut was plotting a $10 billion valuation with a new fundraising effort. Now, its value could triple.

How did we get here?

The news of the potential investment in Revolut comes at an interesting time for the company. The company profited from cryptocurrency’s surge in popularity. In 2020, the company made £39 million on cryptocurrency alone. Crypto services make up between 15-20% of Revolut’s revenue. The success from cryptocurrency gave Revolut an accumulated total income in 2020 of £222 million. Revolut is now looking to develop its crypto services. It is now adding dogecoin to the currencies already available to buy and sell.

However, the uptick in Revolut’s income has come at a cost. As revenues increased, so too did Revolut’s losses.

The £222 million made by Revolut in 2020 came with £207 million in losses. Losses rose by nearly 93%, whilst revenue jumped by 34%. These figures suggest that, beneath the headlines of a 34% jump in revenues, Revolut’s finances may not be quite as rosy as they first appear.

The losses in 2020 can in part be attributed to Revolut expanding its business in the past year. The increase in administrative expenses from £24 million to £92 million was caused by the number of staff increasing from 633 to 2,261. They have been embroiled in several controversies concerning monitoring money laundering and the internal work culture. These hirings will help Revolut’s governance and controls.

The key takeaway from the increased losses is that Revolut’s costs are growing at a faster rate than its revenue. Revolut’s success in increasing its revenue will be irrelevant if it cannot cover its costs. It also raises serious questions about Revolut’s financial viability going forward.

Revolut broke even at the end of 2020 for the first time since December 2018. However, it does not have a proven track record of making durable profits. In 2020, Revolut’s costs exceeded its revenue by over £200 million. Revolut’s losses have increased each year since it began operating. Unless this trend can be reversed, profitability will remain an ambition rather than an achievable goal.

To become consistently profitable, Revolut must lower its customer-acquisition costs. It could also try to increase its revenue per customer. These are just a couple of the options available for Revolut. There is another factor at play. CEO Nik Storonsky does not foresee taking Revolut public until it is worth at least $20 billion. If the current fundraising effort proves successful, Revolut’s valuation could eclipse $30 million. Revolut’s goal with its fundraising is unknown. However, if it can secure the capital investment, then Storonsky will have the option of taking Revolut public.

The record losses suffered in 2020 do not seem to be denting investors’ belief in Revolut’s future. Storonsky has built up a fintech giant worth $5.5 billion, making it already one of the most valuable in Europe. It has a presence in 35 countries and a client base of more than 15 million. The pandemic could have been terminal for Revolut, but it thrived. Both its customer base and revenues grew. All of this appeals to prospective investors. Storonsky is therefore preparing to cash in and cement Revolut’s status as one of the most valuable fintech companies ever launched in Europe.

About the Author: James Hingley

James Hingley is a contributing Features Writer with extensive expertise in International Relations, Politics and Culture.