In the last two years, the Canadian tech sector’s growth has been rampant, as pandemic-fuelled demand for digitization proliferated across the economy. Toronto-based FinTech startup Koho’s growth has more or less mirrored that of the broader tech sector, as the company has continued its push to become one of Canada’s leading challenger banks.
Since officially launching its chequing account in 2016, Koho has racked up more than half a million users, and now handles approximately $4 billion in yearly transactional volume. The startup has also built out a financial product suite that now spans spending, saving, and credit, among other categories.
But the tech trend line has shifted dramatically: a mix of recession fears, inflation, geopolitical conflict, and upended public markets has given tech startups and their investors pause, leading to layoffs across the ecosystem.
“We need to prove those economics work at scale in a way that makes the business profitable.”
Koho is also among the many challenger banks that are not yet profitable, which could be a major risk factor if the economy goes belly up. However, Koho’s CEO and founder Daniel Eberhard told BetaKit he believes the company is well-positioned to ride out the current economic pressures.
“We frame it internally as ‘there’s a storm coming, but we’re on a good boat,’” Eberhard said.
In the last few years, Koho has established its financial stack, beefed up its leadership team, and raised $210 million in Series D financing. While it is in no way impervious to tech headwinds, and recently made efforts to tighten its belt, Koho is still growing its revenue by 150 percent year-over-year. All of this, Eberhard believes, puts the startup in a good position to navigate potentially rocky waters ahead.
Since its founding, Koho’s mission has been to challenge the traditional Canadian consumer banking experience. While the startup is not a bank, like all other Canadian challengers it works with federally regulated financial institutions to deliver its products.
Last year, the startup made new inroads on its mission by launching a Credit Building feature, which is a core service of a traditional financial institution. Later that year, Koho launched its Instant Pay service, allowing employees of participating employers to access up to 50 percent of their paycheque every day at no cost. “We’re seeing real scale with those kinds of things, and that’s really exciting,” Eberhard said.
Between the first quarters of 2021 and 2022, Koho claims it managed to grow its customers by 178 percent and currently expects to hit a $100 million run rate by summer 2023.
“We’ve proven that we can get customers, we’ve proven we get the economics to work. Now, we need to prove those economics work at scale in a way that makes the business profitable,” Eberhard added.
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The current economic landscape will be a key obstacle as Koho makes its next moves.
“It would be really foolish to not pay attention to the market conditions that are happening right now and have that inform how I think about business,” Eberhard added.
So far, Koho has lost no team members to layoffs and, according to Eberhard, has two and a half years of runway in the bank. The CEO said he feels the startup is still growing at a healthy rate relative to its operational level.
However, Koho has significantly decreased — though it has not frozen — hiring in recent months, and Eberhard expects the startup’s headcount, which sits between 300 and 350 people, to remain fixed for the remainder of the year (in addition to pulling back some of its more expensive employee benefits in an effort to reduce spending). The startup has also lowered its marketing and brand spend, according to Eberhard, which is notable in a sector known for using eye-catching marketing campaigns to acquire customers.
But the spending and hiring reductions follow a period of significant team growth for Koho. Between the first quarters of 2021 and 2022, Koho’s headcount grew by 83 percent, including several additions to Koho’s leadership team, which Eberhard believes is now among the strongest in Canada.
Last year, Koho was joined by Jonathan Klein as chief technology officer; Felix Wu as chief financial officer; Alexandru Otrezov as chief marketing officer; Diane Scheidler, as VP of people and culture; Brendan O’Driscoll as chief product officer; and Naomi Rozenfeld as chief revenue officer. More recently, Koho has made two more additions to its leadership team, including Lester Chan as chief security officer, as well as Damier Xandrine as chief legal officer.
These new additions to the team are notable since they all bring work histories from major tech firms, including Marqeta, Zoom, Wayfair, Wix, Capital One Canada, Spotify, and Expedia, among others.
“Why are all these incredibly talented, wonderful folks joining a challenger bank in Canada? I think it’s because they bring a really impressive pedigree, and I think it’s because the business is performing really well, and these folks are excited about the mission,” the CEO said.
While it may be trimming down on new hires for now, Koho is still focused on expansion when it comes to its user base and product suite. Eberhard noted the startup is “still only doing a few things well, and there’s a bunch of other things we need to do well if we want to be competitive across the entire Canadian landscape.”
On the subject of competition: Koho’s fellow FinTech upstarts made their own gains in the last two years, but Eberhard isn’t too worried about challenger bank challengers. “I don’t think any of us really consider each other competition because there are six banks with 95 percent market share,” he added.
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In addition to the incumbents, Koho and its peers now face another common foe: a possible recession. Already, headwinds in the economy are looming large on Canadian FinTech firms as funding has dried up.
In May, Wealthsimple, once one of the highest-valued tech firms in Canada, implemented a hiring freeze and later laid off approximately 13 percent of its nearly 1,300 employees, joining a tech sector-wide trend of cost-slashing measures to lengthen their runways. A recent report from IGM Financial, which holds an investment in Wealthsimple controlled by Power Financial, also noted that Wealthsimple’s user growth slowed and assets under management fell in the second quarter of 2022, and IGM reduced the valuation of its stake in Wealthsimple by nearly 50 percent to $492 million.
“We frame it internally as ‘there’s a storm coming, but we’re on a good boat.'”
While Power Financial’s Q2 financial report included little mention of Koho specifically, the firm did mark down the value of the funds used to invest in Koho. In Q2 2022, the fair value of Portage Fund I’s investments was $127 million (compared to $164 million in December 2021), while the fair value of Portage Fund II’s investment portfolio was $813 million (compared to $874 million in December 2021).
Eberhard said Koho’s valuation has not been repriced, but noted that “the markets will tell us” when the startup plans to raise financing again.
While Koho considers itself prepared for what might come next, some industry experts believe challenger banks that are unprofitable yet carrying lofty valuations are due for a reckoning. Christoph Stegmeier, senior partner at consulting firm Simon Kucher, recently described challenger banks as “doomed to not survive,” particularly those that stake their existence on interchange fees (Koho says it makes part of its money from interchange fees, as well as its premium account). If this prediction is correct, it would be a boon for incumbents looking to consolidate FinTech startups as they grow their own digital product lines.
Stegmeier predicted that three in four challenger banks operating today will not exist in five years, given their current struggles to merely break even. For his part, Eberhard believes Koho’s success in the long-term will be measured first and foremost by the value it can deliver to Canadian consumers.
“This business is only interesting if we’re proud of the business,” he said. “We think if we do our job, millions of folks will have a better financial outcome, and if folks have a better financial outcome, they have a higher quality of life.”
The economic environment also presents opportunities for Koho. An impending recession could significantly impact the company’s customers and their ability to spend money as freely, but Eberhard said these circumstances could also prompt consumers to think more contentiously about what financial products offer them real value.
“The market conditions are real, and they’re scary, but I think there’s a good argument to be made that Koho is the type of business that benefits from these market conditions,” Eberhard added.