Judo Bank secures $230 million and unicorn status, as COVID-19 changes the tide of SME banking

SME-focused neobank Judo Bank has closed a humongous $230 million funding round, making it Australia’s latest fintech unicorn, and the first of the Aussie challenger banks to reach the coveted $1 billion valuation.

The funding follows a raise open to only existing investors, including the likes of Myer Family Investments, Bain Capital Credit, and the Abu Dhabi Capital Group.

Founded in 2015 and launched in 2018, Judo started life as an alternative lender for SMEs. It secured its full banking licence in April last year, added additional banking services, and re-branded as Judo Bank.

In July last year, the fintech raised $400 million in the biggest-ever single funding round in Australian history.

Speaking to SmartCompany, Judo Bank co-founder and chief David Hornery says he and the team have been in discussions about this round since early-February. Of course, the economic landscape in Australia and all over the world has changed a little since then.

“When COVID came along, what we saw was a great deal of uncertainty, and volatility in the markets,” Hornery says.

“That then changes the foundations of those conversations. Valuations change, markets change, and certainly, a number of prospective new investors went into a risk-off position.”

However, there was still strong support from the existing backers. The business was also already well capitalised from the last capital raise — it also recently secured $500 million in credit through the government’s SME lending scheme, plus a $350 million facility from CitiBank.

All of this led to the decision to raise only from those existing investors.

“One of the benefits we have as a company is that we have a very diverse group of sophisticated and deep-pocketed institutional investors, who know us very well, have been supporting and investing in us for some years,” Hornery explains.

“Their support was unwavering.”

Judo Bank is still in growth mode, the founder says. It has a lending pipeline of about $1 billion, and has taken $1.5 million in deposits, he says.

The business also has “close to 60” bankers on staff, supporting about 650 customers.

This funding strengthens the bank’s liquidity position, and puts it in a stronger position to provide more funding to those clients at a difficult time.

“It adds to the strength of the foundation we have, to continue to lend materially to the Australian SME sector,” Horenery says.

“It gives us plenty of firepower, if you like, for the next 12 months,” he adds.

“We’re very well positioned, coming both into this crisis, but also emerging from it.”

Relationship banking

That firepower may come in handy in servicing a customer base that’s been hard hit by the COVID-19 crisis, and the social distancing rules that have come with it.

But Judo isn’t just about offering financial support, Hornery says.

“At the centre of Judo’s proposition is going back to relationship banking for small business, as it used to be done,” he says.

He’s talking about a business owner having their own banker they can talk to, who can provide advice and support, and help them manage the challenges they’re facing. The idea is to build a real relationship, he says.

“For us, that relationship proposition really comes to the fore at times like this,” he says.

And, while Judo is often classified as a digital bank or neobank, that’s not how Hornery defines the business.

“The technology we have is an enabler of that deep relationship proposition. In many ways, we’re going back to banking as it used to be done.”

The relationship aspect of banking becomes all the more important in times of crisis. And, like we’re seeing in many other industries, COVID-19 could prove to be the breaking point that sees SMEs turn to new solutions that serve them better.

“We’re finding a huge number of customers are turning to Judo, because that’s what they want,” Hornery says.

“Relationship banking is something SMBs have cried out for for years,” he adds.

“In times like this, you get a real impetus to move away from what is fundamentally the industrialised offering of the major banks, to one that is actually very relational in its approach.”

No complacency

You can’t talk about a raise of this size without addressing the unicorn in the room. But, valuation status isn’t something Hornery is dwelling on.

It’s a label for others to use, he says.

“A whole lot of points in the evolution of a company … from inception through to lending our first dollar, to getting a banking licence, to completing our third capital raise — people will hang labels on the various points of that,” he explains.

“For us, this round is really just an underscoring of the strength of the commitment of those big, sophisticated international investors, and their fundamental belief in our proposition.”

The co-founder does, however, admit he takes pride in the business he’s built here.

The bank was founded based on a passion for small business, he says.

“SMEs are the lifeblood of the Australian economy.

“We felt, fundamentally, that they were not getting the deal they should,” Hornery says.

Now, that core belief and underlying passion is “woven through the fabric of our bank”, he adds.

“One of the absolute consistent dynamics within our bank is how genuinely passionate and purpose-driven the whole company is,” he explains.

And, taking a step back, that’s a remarkable thing for a founder to see after five years of hard graft.

“We feel very proud of the proposition that has been brought to life in Judo, and what it stands for,” Hornery says.

“But equally, there’s no complacency here.

“We’re proud of what we’ve achieved, but don’t spend a whole lot of time focusing on it.

“We spend a whole lot of time looking forward as to what we’re still yet to do,” he adds.

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