Better.com SPAC Deal: A Deep Dive into the Digital Mortgage Lender

Better.com to Go Public via SPAC Merger

Better.com, a digitally focused mortgage lending company supported by venture capital, revealed today its plans to merge with a Special Purpose Acquisition Company (SPAC). This move will result in the company becoming publicly traded in the latter part of 2021.

This announcement from the unicorn company arrives as the U.S. initial public offering (IPO) market demonstrates renewed activity following a quieter period in April.

Recent Funding Rounds

The agreement with the SPAC follows a recent transaction where Better.com sold $500 million in existing shares to SoftBank, achieving a valuation of $6 billion. TechCrunch noted this as evidence that even industries lacking glamour can attract substantial investment.

Prior to the SoftBank investment, Better.com secured a $200 million funding round at a $4 billion valuation in November 2020.

The Exchange provides insights into startups, markets, and financial matters.

Access it daily on Extra Crunch or subscribe to The Exchange newsletter each Saturday.

Valuation and Investment Details

The SPAC merger will establish a valuation exceeding that of the April funding round, with Better.com citing a “post-money equity value of approximately $7.7 billion.”

SoftBank is further investing in Better.com, committing $1.5 billion to the public equity portion of the deal, known as a PIPE. This effectively adjusts the pricing of their previous investment.

For SoftBank, repeated investments in companies at increasing valuations is a common strategy. Therefore, this commitment shouldn’t be overanalyzed.

Analyzing the Company

As is typical with SPAC mergers, a wealth of new company data is now available. We will thoroughly examine this information.

Our objective is to determine if Better.com represents a fundamentally weak, adequately strong, or truly exceptional business. This assessment will begin with a detailed understanding of the company’s operational model.

Valuation and Market Comparison

We will then analyze its valuation in relation to its historical performance. Furthermore, we will consider its projected growth and draw comparisons to the recent Compass IPO, a company operating in a different segment of the real estate market, to refine our understanding of Better.com’s valuation.

The investor deck is available for review. Let's begin a detailed analysis.

What is Better.com?

Many have heard of Better.com, but a clear understanding of its function may be lacking. The realm of mortgage technology is quite specialized, akin to the process of applying to preschool – relevant to a specific group at a defined time. Those involved are deeply invested, yet it often remains unnoticed by the wider public.

For those unfamiliar, Better is an online mortgage lender focused on providing consumers with mortgage loans at fees lower than traditional institutions. The company’s business model, as detailed on its website, centers around generating revenue through the sale of the loans it originates.

Essentially, Better.com profits by selling consumer debt and offering related services like home and title insurance. This revenue model is straightforward in its execution.

At the core of Better’s operations is technology designed to deliver several key benefits. The company asserts its “competitive advantage” stems from its tech products, which aim to lower consumer loan prices by efficiently matching borrowers with a wide range of available “products.”

Furthermore, Better claims its technology facilitates the upselling of insurance products, contributing to a more diversified revenue stream over time. A more detailed examination of this aspect will follow.

The company has also developed a system called “Tinman,” described to investors as “the world’s first supervised learning network for consumer finance.” In essence, Tinman is a software-based approach to automating tasks, reducing the need for manual intervention, minimizing errors, and lowering per-transaction costs.

These cost savings can be passed on to consumers in the form of lower interest rates, attracting more customers while still allowing Better to profit from selling those loans. This creates a positive feedback loop, visualized by Better as a “flywheel” – more data improves the technology, leading to lower costs, attracting more customers, and generating more data.

This is a commonly employed argument within the tech industry.

Looking ahead, Better.com plans to expand its offerings beyond core mortgage services. This includes additional home loan types (“home services” and home improvement financing) slated for the latter half of the current year. A “financial network” encompassing other credit products – personal, auto, student, and credit cards – is also in development, alongside an expanded range of insurance products planned for the second half of 2022. These future initiatives should be considered when evaluating Better’s financial forecasts.

Understanding how Better.com translates these operations into actual revenue is a crucial question. Let's proceed to analyze its historical financial performance.

Evaluating the Business Potential of Better

A thorough assessment of Better’s business model requires careful examination of its financial data, particularly as presented in its SPAC combination materials. Let's begin by reviewing its historical revenue performance and future projections.

The favorable conditions within the U.S. mortgage market during 2020 significantly contributed to Better’s success, potentially explaining the anticipated deceleration in revenue growth for the current year.

A substantial increase in mortgage origination volume fueled the company’s revenue expansion in 2020. This volume experienced a nearly fivefold rise, increasing from $5 billion in 2019 to $24 billion in 2020. Simultaneously, the value of written insurance coverage grew from $1.2 billion to $9.1 billion during the same period.

The following data illustrates the company’s historical and projected growth trajectory:

Notably, Better achieved profitability in 2020, at least when considering adjusted figures. Furthermore, the company does not foresee a return to adjusted losses in the coming years, extending through 2023. Maintaining profitability is a positive indicator.

However, projected declines in growth rate, adjusted EBITDA margin, and gross adjusted EBITDA—along with adjusted net margin and adjusted net income—are areas of concern for the current year.

In summary, Better experienced considerable growth and achieved profitability in 2020. The critical question for public investors centers on the sustainability of this trajectory. A belief in the company’s continued growth could make it a worthwhile investment, while skepticism may render its current valuation unappealing.

Regarding valuation, Better is aiming for a trailing revenue multiple of less than 10x. It’s important to recognize that Better operates differently than typical software companies. It doesn’t primarily sell software licenses; instead, it facilitates loans within a cyclical market. This limits the potential for truly recurring revenue.

Like many SPAC presentations, Better highlights its perceived undervaluation relative to its peers. The company asserts that its enterprise value is approximately 2.5 times its projected 2022 revenues, a figure it claims is more favorable than that of publicly traded Rocket Mortgage.

However, it’s crucial to revisit the initial revenue projections for 2022, considering their ambitious nature compared to the expected performance for 2021. These projections underpin the argument for its attractive valuation.

A direct comparison to Compass is not particularly useful. Better focuses on direct consumer interactions, whereas Compass serves real estate agents. While both operate within the real estate market, their business models differ significantly.

The distinction between the two companies is substantial. Compass generates an average revenue per transaction that is more than ten times greater than Better’s. However, Compass also incurs significantly higher marketing and fulfillment costs. A comparison of gross profit figures would be insightful, but Better does not currently disclose this information.

The market’s valuation of the company upon its public debut later this year remains to be seen. However, when compared to other unicorn SPAC deals, Better appears to be relatively sound. Any company demonstrating both positive net income and rapid growth warrants serious consideration.