Acorns SPAC Listing: Fintech Business Overview

Acorns' Public Offering: A Deep Dive

A new initial public offering (IPO) has arrived, this time from Acorns, a fintech company focused on consumer finance.

Acorns integrates saving and investing features into a product offered on a freemium basis. TechCrunch has consistently reported on the company’s journey, including its performance throughout the COVID-19 pandemic, noting both its successes and challenges.

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The Rise of Savings and Investing

Acorns benefited from the surge in savings and investment activity experienced over the past four to five quarters.

Consumers, impacted by the economic shifts caused by COVID-19, increasingly focused on accumulating cash reserves and accelerating their investment strategies.

While this trend is well-established, a comprehensive understanding of the financial dynamics within consumer fintech startups that thrived during the pandemic has been lacking.

The decision by Acorns to go public through a Special Purpose Acquisition Company (SPAC) provides a clearer view of these economics.

Analyzing the Acorns Deal

Today’s focus is on dissecting the Acorns deal and its associated investor presentation.

We will also explore the rationale behind the substantial venture capital investments in this sector and the resulting economic landscape of the funded companies.

Acorns will serve as a case study for this analysis.

We will begin with a concise summary of the SPAC-driven transaction before delving into the company’s financial performance.

Acorns and Pioneer Merger Corp: A SPAC Transaction Overview

The recent surge in Special Purpose Acquisition Company (SPAC) deals can be difficult to follow. This summary provides a concise explanation of the Acorns SPAC transaction.

• Acorns is set to merge with Pioneer Merger Corp, which is currently a publicly traded blank-check company.
• Both Acorns CEO Noah Kerner and the sponsor of Pioneer Merger Corp are allocating 10% of their respective equity holdings to a select group of customers.
• Following the merger, the combined company will be listed on the Nasdaq stock exchange under the ticker symbol OAKS.

The chosen ticker, OAKS, is a playful reference to the seed from which oak trees grow.

Below are the key financial specifics of this deal, as detailed in the company’s investor presentation:

The transaction involves $403 million in cash sourced from the SPAC. An additional $165 million is being raised through a Private Investment in Public Equity (PIPE) offering, alongside a smaller contribution from secondary sales.

This results in an equity valuation of $2.15 billion for the combined entity. The enterprise value is calculated at $1.6 billion.

Let's now examine the underlying financial data.

Financial Breakdown

The total capital injection is comprised of several components. These include funds from the SPAC, the PIPE investment, and secondary market contributions.

The equity valuation reflects the market’s assessment of Acorns’ future potential. The enterprise value considers both equity and debt obligations.

Key Metrics

• SPAC Cash: $403 million
• PIPE Investment: $165 million
• Equity Valuation: $2.15 billion
• Enterprise Value: $1.6 billion

These figures provide a clear picture of the financial structure of the Acorns and Pioneer Merger Corp deal. Understanding these details is crucial for investors and industry observers.

Evaluating the Viability of Acorns’ Business Model

The core business of Acorns demonstrates potential. However, its operational costs are notably high, presenting a complex scenario for analysis. Acorns is developing a valuable consumer-focused Software-as-a-Service (SaaS) model, characterized by relatively low customer churn and strong customer lifetime value, alongside supplementary income streams that enhance its software revenue.

The company also exhibits promising growth prospects, though it currently experiences substantial cash expenditure. Acorns’ financial standing represents a unique combination of strengths and weaknesses, but lacks any critically concerning elements. The completion of its SPAC deal will provide significant capital reserves, alleviating concerns about its ability to secure funding for continued expansion.

The following data illustrates the historical performance and projected forecasts:

Between 2019 and 2020, Acorns achieved a 61% revenue increase, rising from $44 million to $71 million. Simultaneously, its gross margin improved from 71% to 78%. While this 61% growth rate isn’t exceptionally high for a venture-backed startup operating in a growing market with revenue under $100 million, it is still significant.

A closer examination of the company’s 2019 growth reveals that Acorns’ revenue expansion has been increasing, moving from 54% in 2019 to 61% in 2020. The company projects further acceleration to 77% growth this year, representing a substantial improvement over the previous 61% figure.

Coupled with the anticipated gross margin improvement to 84% this year, the outlook appears positive – until considering the company’s losses and cash burn rate.

Acorns forecasts a $20 million increase in its operating loss this year, reaching -$85 million. While this represents an improvement as a percentage of revenue, it remains a considerable loss, exceeding two-thirds of its projected revenue. Furthermore, the company anticipates a doubling of its operating cash flow deficit, from -$35 million in 2020 to -$70 million in 2021.

(A detailed breakdown of the company’s operating expenses is unavailable, but it’s likely that investments in product development and sales & marketing contribute significantly to these costs, which is typical for startups. This factor should be considered when evaluating the company’s overall financial picture.)

According to Acorns’ projections, conditions are expected to improve after 2021. Operating income is anticipated to rise in 2022, and the company’s cash burn is expected to stabilize in absolute terms. With approximately $400 million in cash reserves anticipated upon deal closure, the company’s financial trajectory appears sustainable under its current timeline. Therefore, its short-term losses are not unduly alarming.

Acorns appears to be going public prematurely, which is often a key objective of SPAC transactions. We are currently observing the final years of Acorns’ private unicorn status, reflected in its GAAP accounting.

Therefore, it’s crucial to assess the company not as a fully established entity. The most important factors are Acorns’ growth (moderate-good, accelerating) and the quality of its revenue (good, improving). Short-term operating losses are less concerning given the company’s substantial cash reserves, which will exceed half a billion dollars after the deal is finalized.

Let’s now briefly examine how Acorns is simultaneously driving growth and improving its margins.

How Acorns Generates Revenue

The recent Acorns SPAC deck presents a remarkably clear and understandable overview of the company’s financial structure. It avoids the pitfalls of overly complex or misleading information.

Included within the deck are three informative charts. The first illustrates the increasing rate of net subscriber acquisition over time for Acorns:

It is interesting to consider how the subscriber growth observed in 2020 compares to the rate of acquisition of free users. Nevertheless, the data clearly demonstrates that Acorns is consistently accelerating the pace at which it gains new subscribers, reaching each million-subscriber milestone more quickly.

Furthermore, these customers are demonstrating a growing willingness to spend more money over time. The subsequent charts reveal that Acorns is attracting a greater number of higher-paying users through its more recent customer cohorts, who contribute more revenue than those who joined previously:

This trend is a key driver of the company’s recent revenue growth. Acorns is successfully onboarding more customers, at an increased rate, and at a higher average revenue per user. A relatively small revenue base allows for easier acceleration of growth rates using this approach.

However, what about revenue streams beyond subscriptions? Does Acorns also profit from interchange fees, deposits, and similar sources? Indeed, it does. But these sources represent a significantly smaller portion of its overall income.

The final chart provides a detailed breakdown of the company’s revenue composition:

Frankly, the degree of imbalance was unexpected. This data is from 2021, and therefore not fully representative of the entire year, but the strong emphasis on SaaS revenue within Acorns’ business model was a surprise. The company’s historical focus on savings, rather than spending, may have limited its potential interchange income.

We have reached our target word count for this analysis. The Acorns SPAC deck confirms the viability and attractiveness of a consumer SaaS model within the fintech sector. It also highlights the substantial costs associated with such a model. The market’s reaction to the valuation – approximately 17 times Acorns’ projected 2021 revenue – will be a key indicator of its success.