Well-funded startups, to be precise. , a company that provides banking services with a focus on pre-paid cards, saw its share price fall from the upper $40s to the high $20 after reporting its second-quarter earnings.

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What caused the firm to lose such a sharp percent of its worth? Green Dot pointed at competition from one of our most-watched startup categories, the neo-banks.

Downgrades

Green Dot did not disappoint investors by reporting underwhelming . In fact, the company beat on revenue ($278.3 million; GAAP) and earnings per share ($0.90; non-GAAP, diluted).

So what caused the firm to drop so sharply? The future. As :

Shares in the bank known for issuing prepaid debit cards fell 42% to $27.42 on Thursday after it scaled back its revenue and profit outlook for the rest of the year, citing competition from financial-tech startups that offer checking and savings accounts.

How sharp were the changes that led to such a dramatic repricing of Green Dot’s equity, and therefore the company itself? Pretty sharp, as it turns out.

You can read the company’s entire “Updated Outlook” in its earnings report , but the short version goes as follows:

• Full-year non-GAAP revenue of $1.060 billion to $1.080 billion against prior guidance of $1.114 billion to $1.134 billion. (The company employs precise revenue numbers due to the granularity of its growth.)
• Full-year adjusted EBITDA (an adjusted profit metric) of $240 million to $244 million, down from prior guidance of $255 million to $261 million.
• Full-year adjusted earnings per share (EPS) of $2.71 to $2.77, lower than the previously expected $2.82 and $2.91 in per-share adjusted EPS.

So Green Dot expects smaller revenues, lower adjusted profit, and slimmer profit-per-share. Investors reacted by hitting the “sell” button. Let’s return now to who is to blame, from the company’s perspective.

Who Is To Blame?

Companies like , , and others are at fault, it seems. According to the , Green Dot’s CEO said the following:

Several so-called neobanks flush with new rounds of venture capital [are] spending a record amount of marketing dollars to convert customers to their largely free bank account offerings. […] There’s little doubt in our minds that the increased marketing spend from so many competitors in aggregate is taking its toll on our new-customer acquisition.

Astute and regular readers of Crunchbase News should not be surprised at this result.

Continuing our coverage of neo-banks, we noted a slide in Mary Meeker’s Internet trends report showing that, among the startup cohort, customer acquisition costs (CAC) are rising. Why would CAC rise among neo-banking startups? In short because as more companies with more dollars pursue the same sorts of channels to reach the same sort of customers, the cost to acquire a marginal customer increases.

Startups are tasked with growth. So, when a number of startups target the same customers, they are going up against companies with similar charters (fast growth) and bank accounts (venture-backed).

This happens in any category where companies compete. Especially startups. The market has seen, for example, as more companies have been founded, more money invested, and the startups themselves have gone hunting for new signups in similar space.

Your Instagram feed is a good reminder about where some venture dollars go: , , and more. The list and creative marketing campaigns continue.

Regarding neo-banks, recall how much money they have raised in rapid succession. From our coverage from just two months ago:

Money is chasing the [neo-banks]. Chime has raised a , including  earlier this year. Robinhood has , including  last year. SoFi has , including $500 million this year. Acorns has , including .

To summarize, neo-banks are well-financed and in a hurry. Their hunger to buy new users and — hopefully — customers, is leading to more expensive CAC. And that’s dragging incumbent growth rates down.

The question now becomes can any of the wealthy neo-banks do what Green Dot already has: Grow, , and generate profit. (Green Dot had positive net income of nearly $35 million in Q2 2019. That’s more in net income than most neo-banks did in total revenue during Q2 2019, I’d reckon.)

Illustration: .

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Over the past year we’ve kept tabs on companies like , , , and as a trend we call neo-banking grows.

The collection of companies we keep in mind didn’t necessarily start life as banking startups. Indeed, Acorns started off life as a savings app before adding a debit card. Robinhood began life as a company that let you trade stocks for free. Last year it tried to create high-yield savings accounts before messing it up. SoFi was famous early for its work in student loans, now it offers “online and mobile banking” per its website.

Chime has been a neo-bank since I can recall, but as you can tell from the list, there’s a lot of action in the market for your deposits and debit transactions.

Money is chasing the trend. Chime has raised a , including earlier this year. Robinhood has , including last year. SoFi has , including $500 million this year. Acorns has , including .

All that money is going to product and teams and work and offices, of course. But I wonder if a large chunk isn’t also earmarked for customer acquisition (SoFi’s stadium deal fits here, I reckon) costs. And those, we just learned, are rising.

Here’s a chart from (our notes here):

I think that that is pretty easy to read, but here’s what I’m seeing regardless: A rising customer acquisition cost (CAC) for the type of company we’ve been tracking.

This should not surprise. If you give a lot of competing companies a lot of money, they tend to spend it trying to grow faster than their rivals. Incumbency is the ultimate cool in Silicon Valley. And if someone will pay you to buy that status, hey, why not.

As we wrote back when Chime raised its latest round:

Chime CEO  told Crunchbase News that Chime has gone through “explosive, triple-digit growth rates” since its May 2018 Series C. Last year, the startup had about 1 million accounts, and upon announcing this new round, Chime has 3 million bank accounts.

Growth is easy when your channels aren’t saturated. This can give a company a lower-than-reality view of its long-term CAC. But as you raise more, you can eat a higher CAC as you add features and tooling and the like that adds lifetime value to each customer.

But costs still go up. And as Meeker’s chart makes plain, we’re seeing the effects of that now.

Illustration: .

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This is not SoFi’s first half-billion dollar round. The company in early 2017, led by . In Autumn of 2015, . Before its new capital, SoFi had raised around $2 billion.

In a tweet announcing the news, SoFi CEO (shared as a screenshot to preserve emoji usage):

What this meant was not immediately clear, so we reached out to SoFi. Per the company, the firm has now raised $2.4 billion in total, of which it has $2.3 billion in cash. This implies a net burn of just $100 million. That’s far better than expected, given that we presume SoFi is growing revenue at a steep clip; most companies who raise as much as SoFi has needed the capital to pay the bills.

So put SoFi next to Slack in the raising-capital-while-you-can camp.

Change

While SoFi is best known for its student loan business, helping people refinance and thus possibly save money, it’s up to new tricks.

Indeed, according to Noto in the company’s release concerning the new capital, he said that the firm has “worked aggressively to grow [itself] from a desktop lending business to a broad-based, mobile-first financial” shop that can handle an array of financial needs, including the power to “borrow, save, spend, invest and protect” capital.

So SoFi is moving into a broader set of financial tooling. It’s not alone. is working to reinvent banking from a different angle. is in the mix as well, albeit from a distinct perspective. Each of these companies views themselves as a special snowflake. Whether that is fair is up for debate.

Indeed, as they each add new services to their platforms (moving, say, into investing, or checking, or loans), they sit closer and closer together. And since the neo-banking world has found a geyser of available capital to tap into, there is little stopping its players from adding more features, boosting shared competitive space and, possibly, affording consumers well-priced products at the expense of their own margins.

In the case of SoFi it found an investor looking to deploy about $15 billion into the United States. Here’s :

QIA currently has about $30 billion invested in the U.S., Mansour Ibrahim al-Mahmoud told reporters on the sidelines of a conference. “We are talking about $45 billion for the U.S. market..we are on track for this over the next two years,” he said.

Given the timeline and the capital commit, expect to see more money from the QIA invested. (Qatari , making at least some of this new capital predicated on systemic exploitation.) File this story under your mental unicorns avoiding going public, capital sourced from theocratic monarchies, and megarounds.

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The San Francisco-based fintech company has already raised, as recorded by Crunchbase, a touch over including SoftBank, Silver Lake Partners, and Third Point Ventures, among others. SoFi’s last known primary raise was announced a little over two years ago. In between that raise and the latest reports of it raising another significant round, the lending company ran into a series of problems.

A little over a month after SoFi’s Series F was raised on Feb. 24, 2017, that the startup was being sued by a former employee for wrongful termination after reporting sexual harassment. The employee also claimed, per TechCrunch, that SoFi’s managers “improperly recorded loans in order to goose their bonus pay.” The CEO of SoFi, Michael Cagney, he would step down on Sept. 15, 2017. , formerly the COO of Twitter, was recruited to be SoFi’s CEO.

Executive turnover and sexual harassment claims are not the only problems SoFi has faced.

Amid reports that its loan business was suffering, SoFi announced the first half of 2018. And just two months ago, TechCrunch reported that SoFi had settled with the FTC over claims it had misrepresented its student loan offerings. The startup, however, .

It’s a lot of baggage for a startup to carry to the negotiating table when raising a new round of funding. So what’s attracting investors? It’s worth noting that the isn’t the world’s most prolific investor, according to Crunchbase. However, it has participated in other large unicorn financings, including Uber, Compass, and FlipKart, all of which have also seen investment from SoftBank.

While SoFi has had its troubles, fintech startups focusing on loans have been a popular investment category for venture capitalists. Earlier this month, Affirm, which aims to replace credit cards for consumers, valuation.

With $2 billion in total funds raised, plus another $500 million possibly topping up its coffers, SoFi is one of the best capitalized startups focusing on the consumer lending market. The company has also expanded its offerings to home loans, and it has recently announced zero-fee exchange-traded fund, which has pressured stalwarts like Vanguard .

The funding could also be a soft confirmation of Anthony Noto’s ability to turn SoFi’s culture around. At Twitter as COO, the Noto’s calm demeanor as a notable trait as the social media company “faced significant employee turnover and doubts about its ability to make money from its enormous audience.”

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