eToro secures $250M at a $3.5B valuation after scrapping SPAC, seeing slower growth

After calling off its plans to go public via a SPAC at a $10.4 billion valuation in 2022, trading platform eToro has secured $250 million in funding at a $3.5 billion valuation.

The money is not a typical equity round: it comes by way of an Advanced Investment Agreement (AIA), eToro founder and CEO Yoni Assia told TechCrunch. The company had secured the AIA in early 2021 as a kind of backstop from current backers in the event that its proposed SPAC fell through. Investors include ION Group, Social Leverage, SoftBank and Spark Capital.

An AIA is an agreement where an investor (or investors in this case) pay in advance for shares that will be allocated at a later date, sometimes at a discount, according to Ken Smythe, founder and CEO of Next Round Capital Partners — a capital markets and VC secondaries firm. The company came to an agreement with investors, according to eToro, that the investment would be converted two years after the signing of the agreement based on the following conditions: that it had not pursued the SPAC transaction or raised any additional capital. 

The SPAC, clearly, never took place; and the company has not raised an equity round since 2018. In fact, at the time that the SPAC agreement was terminated last July, Calcalist reported that eToro was “in advanced negotiations for a private funding round for between $800 million and $1 billion, at a $5 billion valuation.” The company denies that it tried to raise money in a traditional round last year. And, it said the shares allocated under the AIA were not applied at a discount since the last raise was several years ago and “there was no recent reference point for historical transactions where a discount could be applied.”

Nevertheless, the company had a number of setbacks around the SPAC that called higher valuations into question. In March 2021, the Tel Aviv, Israel-based company had announced it would go public via a merger with Betsy Cohen-backed FinTech Acquisition Corp. V in a $10.4 billion deal. Then in January 2022, the company’s valuation got slashed by over 15% to $8.8 billion. By early July, the two parties had mutually agreed to terminate the deal after the deadline for eToro to go public under the SPAC arrangement expired on June 30, 2022. According to Calcalist, the merger was called off in part because of “regulatory changes in regard to SPACs and companies involved in cryptocurrencies, which accounted for a large portion of eToro’s growth over recent years.” 

The company’s latest financing follows a challenging, and busy, year for the 16-year-old fintech company — which is a competitor to Robinhood in the U.S. Its funded accounts totaled 2.8 million by the end of 2022, up modestly from 2.4 million in 2021 but still significantly higher than the 1 million it had in 2020. Notably, eToro saw a significant decline in commissions, which Assia said was “similar to revenues” and totaled $631 million in 2022, down 49% versus 2021 and up just 5% from the $605 million in revenue it notched in 2020.

The steep decline was largely due to a drop in crypto commissions, according to Assia.

This effectively means that eToro has only grown slightly in terms of revenues since 2020. It also means that it is growing at a far slower pace than projected. At the time of its SPAC filing, the company projected revenue of nearly $1.2 billion in 2022.

The company struck an upbeat tone concerning its uneven growth: “At eToro we need no reminder that markets are cyclical. The diversified nature of our multi-asset product offering ensured that commissions from equities and commodities partially offset the decrease in commissions from cryptoassets in 2022,” said eToro CFO Meron Shani in a written statement. “It’s also worth noting that we were not impacted by the liquidity concerns which plagued many in the crypto industry.”

Currently, its commissions by asset class are made up of: 48% equities, 27% commodities, 19% crypto assets and 6% currencies. Today, eToro has 31.4 million registered users (a cumulative number which includes anyone who has ever opened and retained an eToro account), operates in over 100 countries and has $5.8 billion in assets under administration. eToro is currently EBITDA profitable, according to Assia, and has generated over $400 million in profits over the past five years. (For reference, the company reported $114 million worth of EBITDA in 2017, and $193 million in 2018 in its SPAC presentation.) 

During the year, eToro says it – among other things – expanded its U.S. investment offering to include U.S. stocks and ETFs, completed an expansion of eToro Money across the United Kingdom to the entire EU, acquired Gatsby – a commission-free options and stock-trading app aimed at younger traders – and portfolio management platform Bullsheet.

It also implemented a workforce reduction of about 6%, or approximately 100 people, in July and cut marketing spend. Presently, it has about 1,500 employees.

Today, over two-thirds of its clients are located in Europe and the UK, 13% in Asia-Pacific, 12% in the Americas and 4% in the Middle East and Africa. Last year, it secured an in principle approval to operate as a broker in Abu Dhabi. 

EToro’s last formal raise was in March of 2018 when it secured $100 million at a $800 million valuation. In late 2020, it was reportedly valued at $2.5 billion after an undisclosed US-based firm bought about $50 million of its shares in the secondary market from previous investors and employees. (Secondary-market transactions do not usually generate valuation marks that we use for analysis; in this particular case, however, the data point is useful.)

Despite the company’s recent struggles, Assia maintains that the company has seen its clients “HODL [hold on for dear life] around crypto,” buying and holding more crypto at the end of 2022. He added that so far this year, the company has seen “an improvement” in total commissions and profitability compared with the previous quarter “with higher engagement and trading activity” from its users.

EToro plans to use its new capital to grow the business and invest in the product globally and “in key markets,” Assia said. It also intends to scale its business in the U.S.

One thing it didn’t have to worry about? The Silicon Valley Bank crisis. EToro doesn’t have any material financing exposure to the bank, the executive said.

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eToro secures $250M at a $3.5B valuation after scrapping SPAC, seeing slower growth by Mary Ann Azevedo originally published on TechCrunch