African neobank Kuda raised $20M at flat valuation in 2023, missed user milestone projection by 3M

Earlier this month, Kuda co-founder and CEO Babs Ogundeyi told users that the Nigerian online challenger bank had reached almost ₦56 trillion (~$60 billion) in transaction value since its 2019 launch. 

Ogundeyi also said that Kuda had achieved a notable milestone, with 7 million retail and business customers as of today. However, the figure falls short of the fintech’s projections when it saw fresh investment last year.

In February 2023, Kuda presented its investors with a pitch for new cash injection. At that time, it claimed 5 million users and predicted this figure would double by the end of 2023, as per an investor pitch deck seen by TechCrunch. Kuda eventually raised an estimated $20 million in the middle of 2023, according to people with knowledge of the fundraising efforts — however, the bridge round closed at the same $500 million valuation it achieved in 2021 when it raised a $55 million Series B round.

Amid the 2021 venture capital boom, Kuda had actually secured one of Africa’s largest Series B rounds, off the back of growth that had seen the company provide banking services to 1.4 million users in Nigeria — with plans to launch into more countries across the continent and beyond.

Five-fold growth

More than two years later, Kuda has yet to gain a foothold in any other African country — it’s still awaiting license approvals to operate in Ghana, Uganda and Tanzania. However, it has managed to grow its user base five-fold since 2021 by servicing Nigerians both at home and abroad, having expanded to the U.K. in late 2022. 

This level of growth has come with its own challenges, given that lower fees and easier account access are the primary attraction for customers. For years, U.K. neobanks such as Monzo, Revolut and Starling have run on sticky platforms that run with all the large losses associated with serving growing customer bases. And now that they’re reaching profitability — mainly due to their lending products — they have only managed to do so after raising billions of dollars in capital. Monzo, for instance, reached profitability for the first time during the first two months of 2023, but it has recorded growing net losses from £20 million in 2017 to £116 million last year.

Kuda’s reported losses, per a TechCabal report, rose from $2 million in 2020 to $14 million in 2021, aligning with the pattern seen in the global neobank sector. Most of Kuda’s spending in 2021 was allocated to operational expenses, covering brand awareness, marketing and talent acquisition. But unlike global neobanks, Kuda also hemorrhaged money through an ill-thought-out lending product whose non-performing loan (NPL) ratio of 69% significantly exceeded the industry average of less than 5% for the same year, the report said. 

In response, Kuda has had to make strategic adjustments. First, the fintech reduced its marketing spending in June 2022, per its communication to investors, and it added 1.5 million users in the following nine months. Kuda has also restructured its overdraft product and, as mentioned by Ogundeyi in his recent message, “lined up new credit features including loans for salary earners and an improved version of Kuda Overdraft.” 

Similarly, to boost its transaction volumes and revenues, Kuda recently introduced a POS terminal to business customers, placing it in the highly competitive and capital-intensive agency banking market.

Currently, Kuda’s primary revenues are generated through fees and commissions charged when its customers make airtime purchases, bill payments and investment income from fixed deposits. The company concluded 2022 with nearly $20 million in annualized revenues, recording $100 million in monthly deposits. 

Outlook for Kuda and African growth-stage ventures

At a $500 million valuation, Kuda’s revenue multiple in 2022 was 25x. The fintech forecasted $40 million in revenue for 2023, presenting a 12.5x multiple. TechCrunch reached out to Kuda to confirm if its revenue target and other projections were met, but the fintech declined to disclose, stating that “being a regulated entity, we are not permitted to share those numbers until an audit has been done and approval given by the regulator.”

The emphasis on startups, especially those in growth stages, growing into their valuations has become more pronounced, particularly amid the current venture capital slowdown. Meeting revenue targets becomes vital for these startups as they seek additional capital in follow-on funding rounds. Failure to do so can impact their ability to secure valuations at their terms, leading to flat- and down-rounds.

For Kuda, it would need about $100 million in yearly revenue to make a 5x multiple (current investment terms for public growth-stage fintech these days) work at its current valuation. Not only would it take Kuda a couple more years to achieve this, but like many African growth-stage startups whose fundraising during the venture capital boom pushed valuations to excess levels compared to current pricing, it will face major obstacles achieving this. This is partly due to external factors and economic headwinds out of its control, such as currency devaluations and inflation. 

After all, although African VC-backed startups earn revenues in local currencies, they report revenues in dollars due to their fundraising from international venture capitalists. Over the past 18 months, currencies like the Nigerian Naira, which makes up most of Kuda’s revenues, have experienced more than a 40% depreciation against the dollar. This currency devaluation can impact financial reporting, and African companies may need to double their revenue in local currency to report the same amount in dollars.

Currency devaluation also affects consumers’ spending and purchasing power, making it more challenging for these companies to increase revenues in local markets. In 2022, Kuda’s average revenue per user (ARPU) started at $1.92 and ended at $1.67 (in comparison, Monzo, with the same number of users, all in the U.K., recorded $£112 in the month of February 2023, a 70% year-over-year increase.)

On the flip side, there’s the steep cost of acquiring these users. In Q1 2021, Kuda’s implied customer acquisition cost (CAC) ranged between $4 to $5 based on marketing spending and the number of users within that period, which was 2-3x its ARPU. How much the fintech spent on marketing over the previous two years is unclear, yet achieving a $3 ARPU target by the end of 2023 as the company had communicated to investors, would require substantial spending per customer. This was always going to present a challenging scenario for Kuda’s unit economics.

Becoming profitable is one of Kuda’s main goals for the next five years, but expecting that of itself seems a tall order, considering that global digital banks serving affluent customers needed 8-10 years to reach profitability. The challenge is compounded by the fintech’s simultaneous goal of targeting global expansion, aiming to serve 50 million users across four continents and reach over $1 billion in revenues within the same time frame.

That said, realizing these objectives may hinge on a couple of factors, including finding a wedge, possibly through its revamped overdraft/microlending product, to improve stickiness and revenue growth — and its ability to secure additional venture capital to scale.

In the immediate term, though, Kuda faces the challenge of demonstrating to investors that its unit economics align with its growth objectives. As the self-proclaimed “money app for Africans,” Kuda must showcase that a VC-subsidized neobank can thrive on the continent as Brazil’s Nubank did in Latin America before looking further afield. 

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