Xero to acquire Aussie SME lending startup Waddle for $80 million

Sydney-based fintech Waddle is set to be acquired by payroll and accounting tech giant Xero in an $80 million deal.

Founded in 2014 by school buddies Nathan Andrews and Simon Creighton, Waddle is a cloud-based lending platform designed to help small businesses access working capital.

The tech integrates with a business’ accountancy platforms and offers a line of credit based on their own invoices.

In 2018, the startup secured a $50 million wholesale debt facility, and in March last year, it raised $4 million in Series A funding.

At that time, Creighton told SmartCompany the business was gearing up to forge banking partnerships on a global scale.

“The time was right to scale the delivery team to ready our service for consumption by additional bank partners,” he said.

Typically, SMEs find they don’t fit a traditional credit model. Long lead times can also mean accessing capital through loans is “a non-starter”.

However, “non-bank lenders have filled this unmet demand for several years now”, Creighton explained.

“Through competition by fintechs and continual improvement of their models we have seen a reduction in the cost of finance to the SME, to the point that some fintechs can now compete with banks on pricing,” he added.

“[It’s] a great result for SMEs.”

Waddle’s point of difference is in its focus on solving “the working capital problem” for SMEs, and its offering of a “cloud-integrated accounts receivable-based credit line”, Creighton explained.

“This is in contrast to the bulk of the fintech market that offers a variant on the term loan product.”

In July 2019, just months after its Series A, Waddle announced a partnership with the Royal Bank of Scotland Group in the UK, making the bank one of the first big banks, globally, to offer clients and automated working capital solution.

The six-month pilot project alone saw more than 400 client applications in the UK, and more than £10 million ($18.2 million) in funds loaned.

As of July last year, the startup had facilitated a total of more than $200 million in loans, and had a client base in the hundreds of thousands.

An $80 million exit

Waddle has been an integrated Xero ecosystem partner since 2016.

According to an ASX release, the acquisition will allow Xero to continue exploring the best ways to help offer small businesses access to capital, and better serve their working capital and other financial needs.

The deal will include an upfront cash payment of $31 million, the release says, plus “subsequent earnout payments based on product development and revenue milestones, of up to $49 million”.

That means the total potential payout for the 100% acquisition of the business stands at $80 million.

Earnout payments are expected to be paid in 50% cash and 50% shares in Xero. So, ultimately the value of the deal could be even higher.

In the statement, Xero chief executive Steve Vamos said Waddle’s lending platform serves to help fintechs, banks and other lenders to better support small businesses’ financing needs.

The acquisition is “an important step in our strategy to help small businesses better manage cash flow and gain access to working capital”, he added.

The transaction is subject to closing conditions and is likely to be completed by the end of the year.

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