“There’s a storm coming, but we’re on a good boat.” Daniel Eberhard talks about Koho’s preparedness for an economic downturn


Canadian FinTech is in the tank, but this challenger bank believes it can stay afloat with size.

Over the past two years, growth in Canada’s tech sector has been rampant as pandemic-driven demand for digitization increased across the economy. Toronto-based fintech startup Koho’s growth more or less mirrored the growth of the broader tech sector as the company continued its push to become one of Canada’s top challenger banks.

Since officially launching its checking account in 2016, Koho has attracted more than half a million users and now processes approximately $4 billion in annual transaction volume. The startup has also developed a suite of financial products, which now includes spending, savings, and loans, among others.

But the tech trendline has shifted dramatically: A mix of recession fears, inflation, geopolitical strife, and troubled public markets have stalled tech startups and their investors, prompting layoffs across the ecosystem.

“We have to prove that this economics works on a scale that makes the business profitable.”

Koho is also among the many challenger banks that aren’t yet profitable, which could be a big risk factor if the economy collapses. However, Koho CEO and founder Daniel Eberhard told BetaKit he believes the company is well positioned to weather the current economic pressures.

“We put it internally in such a way that a storm is brewing, but we’re on the right boat,” said Eberhard.

Over the past several years, Koho has built its financial stack, expanded its executive team, and raised $210 million in Series D funding. Though it’s by no means immune to tech headwinds and has recently scrambled 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.

Since its inception, Koho’s mission has been to challenge the traditional Canadian consumer banking experience. Although the startup isn’t a bank, like all other Canadian challengers, it works with state-regulated financial institutions to deliver its products.

Over the past year, the startup has continued to advance its mission by launching a credit building feature, which is a core service of a traditional financial institution. Later that year, Koho introduced its Instant Pay service, which allowed employees at participating employers to access up to 50 percent of their paycheck every day for free. “We’re seeing a real scale in things like this, and that’s really exciting,” said Eberhard.

Between the first quarters of 2021 and 2022, Koho claims it has managed to grow its subscriber base by 178 percent and currently expects to hit a $100 million run rate by the summer of 2023.

“We’ve proven we can win customers, we’ve proven we can make the economy work. Now we have to prove that this economy works on a scale that makes the business profitable,” added Eberhard.

RELATED: Koho secures $210 million to give more Canadians access to wealth creation

The current economic landscape will be a major obstacle as Koho takes its next steps.

“It would be really foolish not to pay attention to current market conditions and let that affect how I feel about the business,” Eberhard added.

So far, Koho hasn’t lost a team member to layoffs and has two-and-a-half years of runway on the bench, according to Eberhard. The CEO said he feels the startup is still growing at a healthy rate relative to its operational level.

However, Koho has significantly reduced hiring numbers in recent months — although it’s not frozen — and Eberhard expects the startup’s headcount, which ranges between 300 and 350 people, to remain flat for the rest of the year (in addition to some of the Attitude). its more expensive employee benefits to reduce spending). The startup has also reduced its marketing and branding spend, according to Eberhard, which is notable in a sector known for using flashy marketing campaigns to attract customers.

But the spending and hiring cuts follow a period of significant team growth for Koho. Between the first quarters of 2021 and 2022, Koho’s headcount grew 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, Vice President for People and Culture; Brendan O’Driscoll as Chief Product Officer; and Naomi Rozenfeld as Chief Revenue Officer. More recently, Koho has added two more to his leadership team, including Lester Chan as Chief Security Officer and Damier Xandrine as Chief Legal Officer.

These new additions to the team are notable as they bring all of the work experience from major tech companies including Marqeta, Zoom, Wayfair, Wix, Capital One Canada, Spotify and Expedia among others.

“Why are all these incredibly talented, wonderful people joining a challenger bank in Canada? I think that’s because they bring a really impressive pedigree, and I think that’s because the business is doing really well and these people are excited about the mission,” said the CEO.

While there may be fewer hires for now, Koho is still focused on expansion when it comes to its user base and suite of products. Eberhard noted that the startup “still only does a few things well, and there are a number of other things that we need to do well if we’re going to be competitive across the Canadian landscape.”

Speaking of competition, Koho’s FinTech peers have made their own gains over the past two years, but Eberhard isn’t overly concerned about the bank’s challengers. “I don’t think any of us really see ourselves as a competitor because there are six banks with a 95 percent market share,” he added.

RELATED: Bank of Canada’s Ron Morrow: FinTechs “must be ready” for upcoming retail payments regulations

In addition to the incumbents, Koho and its peers now face another common enemy: a possible recession. Economic headwinds are already threatening Canadian FinTech companies as funding has dried up.

In May, Wealthsimple, once one of the highest-rated tech companies in Canada, imposed a hiring freeze and later laid off about 13 percent of its nearly 1,300 employees, joining a tech-sector-wide trend of cost-cutting measures to lengthen its runways. A recent report by IGM Financial, which holds a Power Financial-controlled investment in Wealthsimple, also found that Wealthsimple’s user growth slowed and assets under management declined in the second quarter of 2022, and IGM’s valuation of its stake in Wealthsimple by almost 50 percent reduced to $492 million.

“As we put it internally, there’s a storm coming, but we’re on a good boat.”

While Power Financial’s Q2 financial report made little specific mention of Koho, the company has downplayed the value of funds used to invest in Koho. For the second quarter of 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 hasn’t been reassessed, but noted that “markets will tell us” when the startup plans to resume funding.

As Koho braces itself for what may come next, some industry experts believe challenger banks that are unprofitable but boast high valuations need to be held accountable. Christoph Stegmeier, a senior partner at consulting firm Simon Kucher, recently described challenger banks as “unviable,” particularly those that rely on interchange fees for their existence (Koho says it gets some of its money from interchange fees in addition to its premium earned account). If true, this prediction would be a boon for established companies looking to consolidate FinTech startups while expanding their own digital product lines.

Stegmeier predicted that three out of four challenger banks operating today will be gone five years from now as they are currently struggling to just break even. For his part, Eberhard believes that Koho’s long-term success will be measured primarily by the value it can offer Canadian consumers.

“This business is only interesting if we are proud of it,” he said. “We think if we do our jobs, millions of people will have better financial outcomes, and if people have better financial outcomes, they will have a better quality of life.”

The economic environment also offers opportunities for Koho. An impending recession could significantly affect the company’s customers and their ability to spend money as freely, but Eberhard said these circumstances could also prompt consumers to think more critically about which financial products offer them real value.

“Market conditions are real and scary, but I think there’s a good argument that Koho is the type of company that benefits from these market conditions,” Eberhard added.


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