SMB Neobank Novo Powers Ahead with Fresh $90M

Novo, a Miami-based SMB-focused fintech, has just raised an attention-worthy $90 million Series B round. Novo is building its SMB focused digital banking business from the ground up. Now, with some fresh funding, the company plans to further accelerate its growth. And after looking at what Novo has accomplished since its 2016 founding, we predict another round by mid-year. 

Now valued at $700 million, the company claims to have 150,000 customers, having added 50,000 since last summer. That’s when the company completed a $40 million Series A round. With that success of growth on the customer size, yet another round shouldn’t be far behind. The company indicated that this latest round will help the company extend its product set deeper into lending and to put fuel onto an already fast-paced customer acquisition expansion. 

Of course, there are countless fintech start-ups. And many of those too are also focusing their attention on the local, small business market. Novo really isn’t fretting over other start-ups in the space. This is because it sees its primary competitor as the established, legacy banks.

“We are competing against big banks,” said Novo CEO Michel Rangel. “They are the only ones we are concerned with because they own 99% of the market. We believe our product is better value for businesses, but we’re happy to see others also pushing the charge forward.”

Heading Toward $7B in Volume

With 150,000 customers, a really significant number for the start-up, Novo claims to have now processed some $5 billion in transactions and is well on its way to process in excess of $7 billion by year’s end. Of course, we cannot measure their customer base in the same way an SMB SaaS company offering CRM and a marketing solutions stack since one requires a monthly commitment while the banking relationship is likely tied only to transaction volume. But we do see these worlds converging. And like those SaaS companies offering solutions, the banking entrants have witnessed the silver lining of the pandemic. As CEO Rangel says, “The pandemic was a catalyst for our growth”. 

When we went touring the company’s SMB facing website, we were quite struck by finding the first FAQ under the heading of “getting started” was a question that read, “Does Novo support cryptocurrency or cryptocurrency businesses? The answer was that they were not yet supporting cryptocurrency and it was not yet on the company’s roadmap. We’re intrigued that so many small businesses are asking about crypto.

Pandemic Silver Lining

Novo offers a pretty compelling argument on its website as to why the company is an easier and more valuable (cheaper) banking option for small businesses. The ease of entry and use explains the rapid growth of the company’s customer base. But for the company to really be a significant player those small businesses will need to process and transact at a significant rate. Why? Because Novo is currently relying exclusively on transaction revenue. Hence the company’s plan to evolve its offerings into the lending space. 

And guess what, yes Novo too offers a marketplace for its customers. We continue to observe this push into the marketplace by companies in the SaaS and cloud space. In Novo’s case, between their June 2020 round and this round, the company launched its version of a marketplace where it provides APIs for some 1,000 other apps and services that can be integrated into the Novo experience. Like other marketplaces, customers can find other tools and solutions outside of the core banking stuff. This includes point of sale payments, e-commerce operations, invoicing, and payroll management. 

A Fundamentally Different Approach’

Clearly, the company will be heading into the lending space with a product where the company will take and process loan applications. Novo plans to use the data they learn via its banking solutions to understand the creditworthiness of the applying small business. Think machine learning and AI.

Here’s what a partner at Stripes, one of the investing VCs, said about Novo.

“Despite being the heart of the U.S. economy, the more than 30 million small businesses in the U.S. have always struggled to access even basic financial services as they are constantly overlooked by the big banks. What sets Novo apart is a fundamentally different approach to helping small businesses succeed. Instead of opting for incremental change, Novo built its banking platform from the ground up so that it could not just deliver a great digital banking experience, but actually deliver de novo financial products to a customer base that is yearning for them. At Stripes, we only invest in companies building amazing products. And Novo’s rave reviews, strong retention, and incredible growth make it clear it has built something that small businesses love.”

Sounds like a ringing endorsement of the company. As we said, expect this company to add an even larger Series C later this year. That assumes Novo can hit key milestones during Q1 and Q2. We’ll keep an eye on this one as it, and others, continue to take share from the legacy banks. 

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