SAN FRANCISCO, Nov. 19, 2020 (GLOBE NEWSWIRE) — Financial Venture Studio, a venture firm focused on early stage fintech startups in the US, today announced the final close of its inaugural fund, FVS Fund I. The Fund closed with over $13 million in commitments from an array of leading institutional investors, including pension and institutional funds, insurance companies and commercial banks, as well as family offices and notable individuals from the venture capital ecosystem.
Financial Venture Studio invests in great teams that it believes can improve the way that Americans conduct their financial lives. Selected companies receive an investment, as well as a bespoke six-month networking program, designed to help companies navigate critical elements of the financial services industry. To date, the firm has invested in 18 companies through three cohorts of its program, as well as a handful of other later-stage fintechs, including Dave, Point, Propel, and Digit.
Financial Venture Studio was founded in 2018 by Ryan Falvey and Tyler Griffin, who met through their work together at the $30 million Financial Solutions Lab, an accelerator funded by JPMorgan Chase through the nonprofit CFSI. Griffin had previously founded payments company Prism Money, which he sold to PayNearMe.
The firm has had two exits from its investments since inception: the sale of Sheltr to Hippo Insurance, and the sale of Joust Banking to ZenBusiness. Seventy-five percent of the program’s alumni have raised a total of nearly $60 million in follow-on capital from notable venture firms including QED, Valar, Andreessen Horowitz, Kleiner Perkins and Matrix, among others.
“Since selecting our first cohort of fintech startups two years ago, we have proven our program’s strength in helping early stage founders navigate some of the most critical parts of being successful in fintech,” said Ryan Falvey, co-founder and Managing Partner. “Our emphasis on building a network designed to accelerate growth has captured the attention of many top co-investors, some of whom have gone on to provide Series A funding rounds for our companies.”
“As a former fintech founder, I know all too well the difficulty in connecting with the right people, whether bank partners or influencers. I also know the importance of making early connections in the regulatory area, making the right technical architecture choices, and forging early relationships in the capital markets,” said Tyler Griffin, co-founder and Managing Partner. “Our program provides the access and insights needed in these critical areas to help fintech startups grow truly transformational companies.”
Cathrine Andersen, the Danish co-founder and CEO of Roger, selected for the first FVS cohort, found her experience in the program invaluable. “This is probably the most valuable program you can do as an early stage fintech anywhere in the world. Our participation took us where we wanted much quicker than we could have on our own,” she said. Roger has since raised a Series A led by QED Investors.
“The FVS program was hugely helpful in our journey of starting, building, and selling Sheltr,” said Andrew Wynn, co-founder and CEO of Sheltr, which was acquired by Hippo Insurance shortly after completing the FVS program. “The team’s expertise, connections and programming are all best in class. However, their willingness to spend a ton of time working with—and sometimes for—us is what really stood out to us about this program and this team.”
One of the firm’s Limited Partners is Brian Plum, CEO of Blue Ridge Bank. “As a community bank that seeks partnerships with fintech startups, we have seen a lot of companies,” Plum said, “The FVS team has an uncanny ability to pick the best of the best of them, and help make them better. I’m excited by the Fund’s strong early performance, and I can’t wait to see what’s next.”
Highlights from the FVS portfolio include:
- Agentero, a SaaS company that uses robust data to empower independent insurance agents with the information they need to boost revenue, save time, and deliver a superior customer experience
- Anvil, an end-to-end platform that automates paperwork processes using a no-code workflow builder or developer-friendly APIs, replaces endless forms with intuitive workflows that gather information once and share it wherever it needs to go, enabling digital transformation
- Copilot, a personal finance app that learns from its users and their relationships with money, delivering hyper-personalized insights that help consumers effortlessly understand and better manage how they spend, save, and invest
- Everlance, an app used by more than 1 million people to track mileage, expenses, and tax withholding; users range from the self-employed to Fortune 500 companies
- Flex, which enables people to pay rent on a schedule that works for them, alleviating costly late fees traditionally levied on late rent payments
- Harvest Platform leverages AI to increase the net worth of consumers by reducing debt and improving creditworthiness through automation; the company also helps users access the credit they need by providing lenders with alternative data
- HoneyBee, a SaaS-based solution that enables midsize employers to create a financial safety net for their teams, so employees can access financial counseling on demand, plus no-cost, 0% interest rainy day funds to cover unplanned expenses
- NestEgg, an AI property manager that makes it easy for independent landlords to manage a portfolio of properties of any size in minutes each month, offers financial services that boost cash flow and bring owners together with contractors and other professionals to provide safe, happy homes for renters
- Pillar Life, a digital platform that helps people protect and care for loved ones by making it easy to organize all important information in one place, from financial accounts to legal documents and medical records.
- Point, a mobile banking platform, has reimagined banking with a debit cards reward program that rivals the best of elite credit cards, for a new generation of card users who prefer debit
- Roger, a solution driving the next big shift in accounting and B2B payments with a SaaS platform that enables clients to automate accounts payable and other manual workflows to save time and money while cutting down on fraud
- Token Transit, a pre-COVID company building for the post-COVID future of transit, where payments are contactless, and legacy transit authorities can access robust route and rider data to dramatically increase efficiencies
- Zaam, an end-to-end SaaS solution for onboarding business customers onto financial platforms, helps financial companies improve customer onboarding, increase revenue from higher conversion rates, and reduce operational costs
About Financial Venture Studio
Financial Venture Studio invests in great early stage teams who are seeking to improve how Americans conduct their financial lives. From more efficient savings to superior investments to faster payments and better information, the promise of today’s financial products has never been greater. Learn more about the firm’s portfolio and unique approach at www.finventurestudio.com.
Photos accompanying this announcement are available at:
Media Contact:Kathy Osborne for Financial Venture Studio
(This story is for CNBC Pro subscribers only).
Alex Sacerdote’s Whale Rock Capital Management shuffled its deck of tech stocks during the third quarter, dumping one of its largest holdings and adding a stake in a top e-commerce stock, according to securities filings.
Sacerdote, one of the rising stars of the hedge fund world, started Whale Rock in 2006 and made big bets on stay-at-home stocks earlier this year. The fund has nearly $15 billion in equity assets, according to FactSet.
How hedge fund traders known as the SPAC Mafia are driving an $80 Billion investment boom with a no lose trade.
By Antoine Gara, Eliza Haverstock, and Sergei Klebnikov
In May 2018, Landcadia finally located its target: a budding online restaurant delivery service called Waitr that would merge with the SPAC in exchange for $252 million in cash. Fertitta touted the fact that the Louisiana startup, with $65 million in revenue, would now have access to 4 million loyalty members of his restaurant and casino businesses, and a new partnership with his Houston Rockets NBA franchise. Two years later, though, you very likely have never heard of Waitr. As such, its stock recently traded at $2.62, down more than 70% from its IPO price (the S&P 500 has climbed 76% over the same period).
Waitr was a disaster for pretty much anyone who bought the stock early. But the hedge funds that purchased Landcadia’s IPO units did just fine. Virtually all recouped their initial investment, with interest, and many profited by exercising warrants in the aftermarket. “SPACs are a phenomenal yield alternative,” says David Sultan, chief investment officer at Fir Tree Partners, a $3 billion hedge fund that bought into Fertitta’s Landcadia SPAC IPO—and pretty much any other it could get its hands on.
The SPAC boom of 2020 is probably the biggest Wall Street story of the year, but almost no one has noticed the quiet force driving this speculative bubble: a couple dozen obscure hedge funds like Polar Asset Management and Davidson Kempner, known by insiders as the “SPAC Mafia.” It’s an offer they can’t refuse. Some 97 percent of these hedge funds redeem or sell their IPO stock before target mergers are consummated, according to a recent study of 47 SPACs by New York University Law School professor Michael Ohlrogge and Stanford Law professor Michael Klausner. Though they’re loath to talk specifics, SPAC Mafia hedge funds say returns currently run around 20%. “The optionality to the upside is unlimited,” gushes Patrick Galley, a portfolio manager at Chicago-based RiverNorth, who manages a $200 million portfolio of SPAC investments. Adds Roy Behren of Westchester Capital Management, a fund with a $470 million portfolio of at least 40 SPACs, in clearer English: “We love the risk/reward of it.”
What’s not to love when “risk” is all but risk-free? There’s only one loser in this equation. As always, it’s the retail investor, the Robinhood novice, the good-intentions fund company like Fidelity. They all bring their pickaxes to the SPAC gold rush, failing to understand that the opportunities were mined long before they got there—by the sponsors who see an easy score, the entrepreneurs who get fat exits when their companies are acquired and the SPAC Mafia hedge funds that lubricate it all.
It’s about to get far worse for the little guy. Giant quant firms—Izzy Englander’s Millennium Management, Louis Bacon’s Moore Capital, Michael Platt’s BlueCrest Capital—have recently jumped in. Sure, they all raised billions based on algorithmic trading strategies, not by buying speculative IPOs in companies that don’t even have a product yet. But you don’t need AI to tell you the benefits of a sure thing. And that means torrents of easy cash for ever more specious acquisitions. Says NYU’s Ohlrogge: “It’s going to be a disaster for investors that hold through the merger.”
In the first 10 months or so of 2020, 178 SPACs went public, to the tune of $65 billion, according to SPACInsider—more than the last ten years’ worth of such deals combined. That’s just one indication that the current wave of blank-check companies is different from previous generations.
In the 1980s, SPACs were known as “blind pools” and were the domain of bucket-shop brokerage firms infamous for fleecing gullible investors under banners such as First Jersey Securities and The Wolf of Wall Street’s Stratton Oakmont. Blind pools circumvented regulatory scrutiny and tended to focus on seemingly promising operating companies—those whose prospects sounded amazing during a cold-calling broker’s telephone pitch. The stockbrokers, who typically owned big blocks of the shares and warrants, would “pump” prices up, trading shares among clients, and then “dump” their holdings at a profit before the stocks inevitably collapsed. Shares traded in the shadows of Wall Street for pennies, and the deal amounts were tiny, typically less than $10 million.
In 1992, a Long Island lawyer named David Nussbaum, CEO of brokerage GKN Securities, structured a new type of blank-check company, with greater investor protections including segregating IPO cash in an escrow account. He even came up with the gussied-up “special purpose acquisition company” moniker.
The basics of the new SPACs were as follows: A sponsor would pay for the underwriting and legal costs of an initial public offering in a new shell company and have two years to use the proceeds to buy an acquisition target. To entice IPO investors to park their money in these new SPACs as the sponsors hunted for a deal, the units of the IPO, which are usually priced at $10 each, included one share of common stock plus warrants to buy more shares at $11.50. Sometimes unit holders would also receive free stock in the form of “rights” convertible into common stock. If a deal wasn’t identified within two years, or the IPO investor voted no, holders could redeem their initial investment—but often only 85% of it.
GKN underwrote 13 blank-check deals in the 1990s, but ran into regulatory trouble with the National Association of Securities Dealers, which fined the brokerage $725,000 and forced it to return $1.4 million for overcharging 1,300 investors. GKN closed in 2001, but Nussbaum reemerged in 2003 running EarlyBirdCapital, which remains a big SPAC underwriter today.
SPACs fell out of favor during the dot-com bubble years, when traditional IPO issuance was booming. In the early 2000s, interest in SPACs returned with the bull market, and the deals started getting bigger. Leading up to the 2008 crisis, dealmakers Nelson Peltz and Martin Franklin both turned to SPACs for financing, raising hundreds of millions of dollars each.
Around 2015, SPACs began to offer IPO investors 100% money-back guarantees, with interest; the holder would also be entitled to keep any warrants or special rights, even if they voted against the merger and tendered their shares. Even more significantly, they could vote yes to the merger and still redeem their shares. In effect, this gave sponsors a green light on any merger partner they chose. It also made SPAC IPOs a no-lose proposition, effectively giving buyers a free call option on rising equity prices. As the Fed’s low-rate, easy-money policy propelled the stock market higher for over a decade, it was just a matter of time before SPACs came back into vogue. And so they have, with unprecedented force.
Hedge funders may be the enablers of the SPAC boom, but they certainly aren’t the only ones getting rich. In September, a billionaire-sponsored SPAC called Gores Holdings IV said it would give Pontiac, Michigan–based entrepreneur Mat Ishbia, owner of mortgage lender United Wholesale Mortgage, a $925 million capital infusion, which would value his company at $16 billion. If the deal is completed, Ishbia’s net worth will rise to $11 billion, making him one of the 50 richest people in America. “I never knew what a SPAC was,” Ishbia admits. “I felt like it was a more efficient process.”
There are also the sponsors, underwriters and lawyers who create SPACs, each taking their pound of flesh from the deals. Sponsors, who pay underwriting and legal fees to set up and merge SPACs, normally wind up with a generous shareholder gift known as the “promote”—roughly 20% of the SPAC’s common equity after the IPO.
Alec Gores, the private equity billionaire who helped take United Wholesale Mortgage public, has listed five SPACs and raised over $2 billion. In the United Wholesale deal, Gores and his partners are entitled to purchase $106 million worth of “founder shares” for $25,000, or $0.002 a share. Gores’ private equity firm hasn’t raised a new fund since 2012. With easy scores like this, why would he?
Among SPAC sponsors, few can match Chamath Palihapitiya’s frenetic pace. Palihapitiya, 44, is a former Facebook executive who founded Silicon Valley venture capital firm Social Capital in 2011. With his venture business slowing down, Palihapitiya has recently turned to the public markets. In the span of 37 months, he has raised $4.3 billion in six New York Stock Exchange–listed SPACs that go by the tickers IPOA, IPOB, IPOC, IPOD, IPOE and IPOF. The founder’s stock he has received for his “promote” will amount to no less than $1 billion, by Forbes estimates. In late 2019, Palihapitiya used one of his SPACs to take Virgin Galactic public. Two other deals have already been announced: mergers with homebuying platform Opendoor at a $5 billion valuation and with medical-insurance company Clover Health at $3.7 billion. Palihapitiya and Gores point out that they intend to invest hundreds of millions via private placements in their deals.
Of the $65 billion raised in SPAC IPOs so far in 2020, Forbes estimates that all told, sponsors like Gores and Palihapitiya should net more than $10 billion in free equity. Great for them, but terrible for the rest of the shareholders. In fact, by the time the average SPAC enters into a merger agreement, warrants afforded to hedge funds, underwriting fees and the generous sponsor’s promote eat up more than 30% of IPO proceeds. According to the study of recent SPACs by Ohlrogge and Klausner, a typical SPAC holds just $6.67 a share in cash of its original $10 IPO price by the time it enters into a merger agreement with its target company.
“The problem with the typical founder-shares arrangement is not just the outsized nature of the compensation or the inherent misalignment of incentives, but also the fact that the massively dilutive nature of founder stock makes it difficult to complete a deal on attractive terms,” says billionaire Bill Ackman.
A handful of billionaires like Ackman are structuring fairer deals with their SPACs. In July, Ackman raised a record $4 billion SPAC called Pershing Square Tontine Holdings. He’s shopping for deals, but his shareholders will face much less dilution because his SPAC has no promote.
“A handful of billionaires are structuring fairer deals with their SPACs. but most SPAC deals don’t come with benevolent billionaires attached. “
Billionaire hedge fund mogul Daniel Och, backer of unicorn startups Coinbase, Github and Stripe via his family office, recently raised $750 million in a SPAC IPO called Ajax I but reduced its promote to 10%. His investing partner in Ajax, Glenn Fuhrman, made billions in profits running Michael Dell’s family office; the SPAC’s board includes an all-star lineup of innovators: Kevin Systrom of Instagram, Anne Wojcicki of 23andMe, Jim McKelvey of Square and Steve Ells of Chipotle. The group has pledged their personal capital into Ajax’s future deal.
“We’re lowering the sponsor economics to make clear that this is not about promoting someone’s capital,” Och says. “It’s about investing our own capital, and then finding a great company that we can hold for a long period of time.”
Most SPAC deals don’t come with benevolent billionaires attached. In fact, if history is any guide, the average post-merger SPAC investor is in for a fleecing not unlike the ones dealt out in the shoddy blind-pool deals peddled by those bucket shops of the 1980s and ’90s.
According to NYU’s Ohlrogge, six months after a deal is announced, median returns for SPACs amount to a loss of 12.3%. A year after the announcement, most SPACs are down 35%. The returns are likely to get worse as the hundreds of SPACs currently searching for viable merger partners become more desperate.
Problems are already surfacing in the great SPAC gold rush of 2020.
Health-care company MultiPlan, one of the most prominent recent deals, may already be in trouble. Acquired by a SPAC called Churchill Capital Corp. III in a $1.3 billion deal, its shares plunged 25% in November after a short seller published a report questioning whether its business was deteriorating more than it let on.
The Churchill SPAC is one of five brought to market by former Citigroup banker Michael Klein, which have raised nearly $5 billion. Klein and his partners now sit on stock holdings worth hundreds of millions, thanks largely to the lucrative promotes. Klein’s investment bank, M. Klein & Co., has made tens of millions of dollars in fees advising his own SPACs on their deals. In the case of MultiPlan, Klein’s bank earned $30 million in fees to advise Churchill to inject SPAC capital into MultiPlan. IPO proceeds, however, are now worth only 70 cents on the dollar.
“Coming out of the financial crisis there was all this talk about the expected outcomes when you have all these traders who have heads-they-win-tails-they-don’t-lose incentives, because it’s somebody else’s money,” says Carson Block, the short seller who called out MultiPlan. “Those incentive structures are alive and well on Wall Street in the form of SPACs.”
Nikola Motor, the SPAC that broke the dam on electric-vehicle speculations, now faces probes from the Department of Justice over whether it misled investors when raising money. Its founder, Trevor Milton, is gone, and a much-hyped partnership with General Motors is in doubt. Shares have traded down 36% from where they stood when the SPAC merger was completed.
Electric vehicles aren’t the only overhyped SPAC sector. So far 11 cannabis SPACs have either announced a deal or are searching for one. And in online gaming, there are no fewer than 10 SPACs in the works.
Blank Checks For Billionaires
SPACs were once shunned by savvy investors. Today they’re beloved by THE WEALTHIEST.
It wasn’t long ago that fracking was all the rage on Wall Street, too, and SPAC IPOs provided quick and easy capital infusions. Energy private equity firm Riverstone Holdings issued three large SPACs—one in March 2016, for $450 million; then two more IPO’d in 2017, raising $1.7 billion—all intent on profiting from shale oil-and-gas investments.
Riverstone’s Silver Run II SPAC acquired Alta Mesa Resources in 2018, but the company quickly went bankrupt, incinerating $3.8 billion of market capitalization on oil fields in Oklahoma. Its other two SPACs completed mergers, and now both are trading below $3 per share.
Despite its dismal track record, Riverstone had no trouble raising $200 million in October for its fourth SPAC IPO, “Decarbonization Plus Acquisition.” Shale fracking is yesterday’s game, so Riverstone has moved on to clean tech.
Hope springs eternal—especially when you can count on hedge fund money to back you up.
Lately, investors have taken note of the drastic surge in the five stocks’ valuations. Since September 2, the group is down about 3% on average. Meanwhile, large-cap value stocks, judging by the Vanguard S&P 500 Value ETF (VOOV), have climbed 5.2%. Now, the so-called FAAMG group is trading at roughly 31 times earnings, compared with 20 times for the other 495 stocks.
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Many on Wall Street are wary of big tech as these multiples would seem bound to continue falling after their meteoric rise this year, and as interest rates rise when the economy starts to see a more solid recovery. Tech stocks, after all, would see less of a benefit from a firming economy. Mostly, growth stocks such as these five tend to have idiosyncratic revenue drivers that aren’t affected by changes in the economy—while the revenues of value stocks like consumer discretionary are very much tied to consumer spending trends and economic growth.
Evercore strategists recently said they only see S&P 500 gains of roughly 5% in the next year or so because they don’t expect big tech to outperform the way it has in recent history.
But David Kostin, Goldman Sachs’ chief US equity strategist, argues in a note that “fundamentals support higher valuation for FAAMG.”
Kostin noted that the near-term earnings outlook for FAAMG stocks supports the current valuations. Goldman is looking for S&P 500 companies to post a median annual earnings per share growth of 8% for the next few years. The tech group is expected to see EPS growth of about 17%.
Comparing these companies’ earnings multiples to their near-term earnings growth rates—which many analysts do to determine how fair a valuation is—further justifies Kostin’s point. Facebook’s PEG ratio—calculated by taking the stock’s forward price-to-earnings ratio and dividing by its projected earnings growth rate—is 1.2 times, roughly in line with in its five-year average of 1.1, according to data from FactSet. Amazon’s PEG ratio is 1.6 times, notably lower than its five-year average of 2.4. Alphabet’s PEG is at 1.9 against an average of 1.5, although its five-year high is above 2. Microsoft’s PEG is 2, in line with its average. Apple is the most overvalued by the metric, with a PEG of 2.6 against an average of 1.5.
With the exception of Apple, these companies are expected to see EPS compound an annual rate between the midteens in percentage terms to above 30%. If investors are willing to pay top dollar for these stocks, earnings growth could continue to take them higher.
All five have dominant platforms that create seemingly endless synergies. Amazon’s new online drug business, for example, offers perks to their roughly 70 million Prime members. This can drive adoption of the new offering, but can also drive new prime customers.
The point is tech stocks are pricey for good reason—don’t count them out.