Earlier today, investor and well-known figure in the SPAC world, Chamath Palihapitiya, revealed two new agreements concerning Latch and Sunlight Financial.

Latch, a company providing keyless access systems and operating as an enterprise SaaS provider, has secured $152 million in funding from private sources, as reported by Crunchbase. Sunlight Financial, specializing in point-of-sale financing solutions for residential solar installations, has accumulated over $700 million through venture capital, private equity investments, and debt financing.

We will now discuss these two separate business arrangements.

SPAC activity is likely to continue for some time, so individuals who are weary of observing special purpose acquisition companies bringing private businesses public may find the coming months challenging. This is due to the fact that there are almost 300 SPACs currently seeking investment opportunities, and a significant number of them will successfully complete a deal.

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SPACs can be visualized as becoming increasingly eager to finalize transactions. As a SPAC faces a deadline to secure a deal, it may become less selective regarding the companies it takes public. The sheer number of SPACs currently searching for opportunities would create considerable activity even without the pressure of time constraints. However, as their deadlines approach, anticipate more innovative approaches to deal-making.

This leads us to consider Chamath’s latest two transactions. Do these agreements resemble the Bakkt SPAC deal, which prompted several inquiries from our side? Or are they more similar to the Talkspace SPAC, which we considered to be fairly sensible? Let's investigate.

Keyless locks are the real estate equivalent of Peloton

Let's begin by examining the Latch agreement.

Latch, headquartered in New York, markets “LatchOS,” a combined hardware and software solution designed for buildings prioritizing access control and amenity management. Latch’s system integrates with doors, utilizes sensors, and relies on internet connectivity.

The company successfully completed several private funding rounds, including a $126 million investment in August 2019 that established a post-money valuation of $454.3 million, as indicated by PitchBook data. An additional $30 million was raised in October 2020, although the final private valuation remains undisclosed.

As Chamath recently announced on Twitter, Latch is merging with TS Innovation Acquisitions Corp, symbolized as $TSIA. This SPAC is linked to Tishman Speyer, a significant investor in commercial real estate. The alignment is clear, as Latch’s offerings are directly applicable to the commercial real estate sector.

Importantly, Latch isn’t solely projecting future earnings; it has a demonstrated track record as an established business. Its financial performance, as presented to investors, is as follows:

A quick analysis reveals that Latch experienced a 50.5% increase in booked revenues from 2019 to 2020. Booked software revenues rose by 37.1%, while booked hardware revenue increased by over 70% during the same timeframe.

This growth in hardware may be attributed to substantial installation fees, which can subsequently generate ongoing software revenues. The company anticipates an average software contract length of six years, suggesting that hardware sales linked to new software agreements could ultimately translate into sustained SaaS revenues.

Update: To provide further clarification, the figures previously mentioned represent “booked” revenues, which has been specified for accuracy, rather than actual revenues. The company’s net revenues, or actual revenues, totaled $18 million, with $14 million derived from hardware. Therefore, the company currently relies more heavily on hardware sales than initially understood. The limitations of non-S-1 filings are apparent!

While some observers have pointed out that the company isn’t a pure-play SaaS business – a valid observation – I believe investors may find its business model comparable to Peloton within the real estate industry. Peloton generates significant upfront revenue from hardware sales to new customers, which then converts into recurring subscription income. Latch may follow a similar pattern, albeit serving a different customer base and operating in a distinct market.

According to the reported terms of the deal, Latch will have a valuation of $1.56 billion following the completion of the transaction. The combined entity will possess $510 million in cash, including $190 million from a PIPE – a mechanism for injecting private capital into a publicly traded company – sourced from “BlackRock, D1 Capital Partners, Durable Capital Partners LP, Fidelity Management & Research Company LLC, Chamath Palihapitiya, The Spruce House Partnership, Wellington Management, ArrowMark Partners, Avenir and Lux Capital.”

Given that Lux Capital led Latch’s Series A funding round, their participation is unsurprising. Furthermore, Chamath’s involvement, though not as the lead investor, is noteworthy.

As of the time of writing, shares of the SPAC that Latch will merge with had increased by approximately 66%.

Now, let’s turn our attention to Sunlight Financial.

House of the Rising EBITDA

Sunlight Financial is joining forces with Spartan Acquisition II Corp in a transaction that assigns a combined valuation of approximately $1.3 billion, as indicated by the estimated pro forma equity value at the time of closing. This represents a typical use of financial terminology.

Consistent with previous arrangements, Chamath Palihapitiya is contributing capital to the deal through a private investment in public equity (PIPE), alongside investors such as Coatue, BlackRock, and Franklin Templeton, among others.

What is the profile of this company? An analysis of its investor presentation reveals that Sunlight Financial is experiencing revenue growth and improvements in its operating expense management:

The positive trend in its operating expense to revenue ratio is resulting in a notable increase in its adjusted EBITDA margin—a financial measure that falls outside of generally accepted accounting principles:

Reviewing the financial data suggests the company could have potentially launched an initial public offering (IPO) within the next year or two. With continued growth, it would have likely reached the revenue thresholds typically required for a traditional public debut. This SPAC transaction allows for a faster path to public markets and increased capital for scaling operations, which may be the primary benefit of this deal for Sunlight.

Assuming the company achieves its projected future performance, including a 27% revenue increase from 2021 to 2022, it has the potential to succeed as a publicly traded entity. It currently demonstrates the profitability levels often associated with public companies.

Specifically, Sunlight Financial generated $16.9 million in net income and $24.7 million in adjusted EBITDA from $68.8 million in estimated full-year revenues for 2020, all achieved during the COVID-19 pandemic.

This performance is the likely source of the current enthusiasm surrounding the company.

Following the announcement of the agreement, the shares of the public company with which Sunlight will merge increased by a substantial 34%.

Taboola is also pursuing a public listing through a SPAC. Further developments in this area are anticipated.