Novo, the SMB neobank, nabs $90M at a $700M valuation

Novo, the startup building a new kind of banking service from the ground up for small and medium businesses, has closed a significant round of funding to take the next step in growing its platform. It has raised $90 million, a Series B round that values the Miami-based startup at $700 million, funding that it will use to build out its infrastructure (going from 24,000 customers to 150,000 is no small feat); to add in new products, specifically around lending; and to acquire more customers.

There are a number of fintechs, some that describe themselves as challenger banks, in the market today catering to SMBs. (We’ve covered many of them; they include Brex, Rho, Juni, NorthOne, Lili, Mercury, Hatch, Anna, Tide, Viva Wallet, Open and many more; and you could argue Amazon, offering other money management and spending tools, is also in the space.) But Novo sees incumbents as the real “challenger” here.

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

The round is being led by Stripes, with Valar Ventures, Crosslink Capital, Rainfall Ventures, and BoxGroup — all of whom backed Novo in its $40 million Series A, just six months ago — also participating. The startup to date has raised just over $135 million.

A lot of startups are getting into patterns of raising large funding rounds in rapid succession to ride their respective waves of growth, and to capitalize on the huge opportunity right now to tap deep-pocketed investors looking for smart places to put their LPs’ money. That is very much the case here with Novo, too. The company has seen truly accelerated growth in the last year, and specifically the last six months, both in terms of customer numbers and in terms of how much its app is getting used.

Novo now has 150,000 SMB customers in the U.S., up by 50,000 on last June’s figures. And Novo has collectively now seen $5 billion in lifetime transactions, up by $4 billion on last June’s $1 billion. The company said that as of this month, it’s on track to see lifetime transactions for 2022 grow to $7 billion (although given it’s only January, that figure is likely to change).

“The pandemic was a catalyst for our growth,” said Rangel, who co-founded Novo with Tyler McIntylre, who is now the CTO. Rangel noted that this Series B came on the back of Stripes approaching Novo “at the tail end of its Series A” after the term sheets had already been signed. Watching its growth after that “validated” another quick round of funding, he added.

One thing that is very notable about Novo is that, unlike a number of other neobanks, it has not taken the “embedded finance” approach by porting in a number of basic services by way of APIs built by third parties that focus just on infrastructure and backend services. Instead, it decided to build its central functions from the ground up in-house. (It has a large development team, mostly based out of India, Rangel told me.)

“We say everything starting from the underlying core processor that powers the bank to what is in the hands of our 150,000 business customers has been built in house,” Rangel said. (Middlesex Federal Savings handles the banking license, FDIC insurance, and access to rails for Novo.) Rangel added that its choice to build was partly done out of necessity, since in 2016 there weren’t many banking-as-a-service platforms to provide those APIs. “That has unshackled us from someone else’s release schedule, and it means tighter margins,” he continued, but it does have its challenges, for example, in sometimes keeping product focus, and the investment needed to continue maintaining all that technology.

The company also hasn’t entirely opted out of APIs. Between its Series A and this latest round, the company launched a new Marketplace where it provides APIs for some 1,000 other apps and services that can be integrated into the Novo experience. Here, it focuses on features that sit otutside of the core functionality of a banking service, for example point of sale payments, e-commerce operations, invoice and payroll management and more. This, in fact, can also potentially provide a steer to Novo on what might be most popular and potentially worth considering as in-house products in the future, but for now it serves another couple of key purposes: it makes Novo more useful for its customers, and it provides more data sources to Novo to build future products.

Chief among those, Rangel said, will be a new lending product where loan applications will be evaluated quickly and (the hope is) more accurately by bringing in and considering a wider set of data that gives a more informed picture of how a business is operating. This is not unlike how, for example, Stripe and Shopify have built their own cash advance and credit products; the difference here is that Novo is intentionally aiming to source as much siloed data as possible to have the most complete picture of a business’s financial health.

This is not just about providing more accurate loans, but more of them overall.

“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,” said Saagar Kulkarni, a partner at Stripes, in a statement. “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.” Kulkarni is joining Novo’s board with this round.

As the company continues to grow, Rangel said one other area it will be considering is picking up potential smaller players that fit with its bigger strategy. That’s if it doesn’t get acquired itself first. Rangel said it has been approached by at least one significant player in recent years but decided to stay solo. (That may have been for the best for other reasons, too: that company has since been acquired itself, one of the byproducts of changing tides due to the pandemic.)

“We’ve done the acquisition dance,” Rangel said, “but I think we’ll be the ones doing the acquiring now.”