Nada (August 2020)

Deal Abstract

https://republic.co/nada

CreditKarma/Mint.com/Zillow Offers for real estate. One team that grew from 2019 monthly revenue of $20k to $90k. Eating the lunch of mortgage originators, title companies, and insurance companies. The market is enormous and success will pend on the team being able to dominate each vertical at the right speed. Analysis requested by a reader (yes, I take requests at mail@muhanzhang.com!)

Shoutout to J.V. for the tip!

Decision

Invest.

Why Investing/Passing

  1. I Have Deep Expertise in the Real Estate Market: Real estate is so clunky and old, there are definitely fees attached left and right. I have a lot of experience in real estate, and have read many closing statements and disclosures, so if there’s a company that can unify the services and pressure lower costs, it will certainly make money.
  2. Strong Fundamentals: Providing a boring service for revenue/entering the market, then pivoting to a SaaS platform that will let them be the Mint.com for home ownership. Raising $1M max on a $12MM valuation with $200k in revenue in previous month.
  3. Eating the Right Lunch: There are infinite listing services (Zillow, Trulia, Opendoor, etc. etc.) but somehow I haven’t seen a title/insurance company. For the origination, I’ve seen OwnUp.com which is a mortgage broker and they make money the same way.

The 6 Calacanis Characteristics (91 161 18)

CheckPass/Fail
1. A startup that is based in SVFail: Dallas, TX
2. Has at least 2 founders Pass: (3)
3. Has product in the market Pass
4. 6 months of continuous user growth or 6 months of revenue.Pass: Republic doesn’t have as good financials as SeedInvest, but good. “(1) Revenue — we launched our MVP operations in late March 2019 and generated over $250k in revenue that year. Most recently, we closed June as our back-to-back record breaking revenue month at $90k in June alone. You can read more about this in our prior [Updates] “June: 143% MoM revenue growth…” update.” Monthly rev 2019 of $20k to $90k is positive.
5. Notable investors?Sort Of: UT Austin and Google Cloud for Startups.
6. Post-funding, will have 18 months of runway Fail: Raised $240k on $20k/mth burn means 12 months of burn. “(1) We operate on a very low fixed-cost basis of $20k /mo as most of our team work on commission (1099)

(2) No, if you take a look at the last chart in our [Business Model] section you can see we are projecting profitability by Q2 2021″

The 7 Thiel Questions (ETMPDDS)

  1. The Engineering question:
    • Good: If the platform definitely converges title search, mortgages, and insurance, that’s big money.
  2. The Timing question
    • Good, Maybe: Good time for digital platforms and saving money. Unsure why other firms haven’t been able to bridge this gap yet.
  3. The monopoly question
    • Good: If they can nail it, this would be an insanely good business.
  4. The people question: 
    • Good, Maybe: Took a look at the three co-founders professional experiences, nothing that I recognize. That said, you have someone with bank experience, someone with tech experience, and a designer.
  5. The distribution question
    • Good: See the timing question.
  6. The durability question
    • Good: for the same reason that distribution is good.
  7. *What is the hopeful secret?: 
    • Building a unified, digital platform to eat the lunches of mortgage origination, title services, and insurance services has high returns to scale and will give them access to the consumer. Building the CreditKarma/Mint.com and thus, referral services, for home ownership.

What has to go right for the startup to return money on investment:

  1. Scale Revenue, Not Costs: Biz model shows making money in the following way: buy-side realty service ($3600), sell-and-buy title service ($3185), mortgage service ($2040), and insurance service ($850.) This is a lot of revenue, but the company didn’t mention what accompanying costs it will have.
  2. Home Eco Becomes the Credit Karma for Home: Home Eco has ability to seamlessly record rehab and major mechanical upgrades to a home. It can suggest certain services to increase equity, then make money on the recommendation.
  3. Identify the Right Partners: I want to know more about this merger with SubZero Realty, but the point stands to identify the right real estate firms to partner with and whose lunch to eat.

What the Risks Are

  1. Regulatory: Most people don’t even know what a title service is, or mortgage origination fee. My concern is that in different states different regulations of bureaucracy will slow down the company/the historical players have been using these regulatory barriers to build a defensive moat.
  2. Distraction: Any application disrupting any of the three verticals (mortgage, insurance, and title) would be an enormous business. This combined with the fourth growth pillar of a CreditKarma for home makes me concerned that the company loses focus.
  3. Defensibility: What happens when various insurance providers, mortgage originators, and title providers realize what’s happening? Will they team up vis a vis Venmo/Cash App gaining market share, so the legion of American banks launch Zelle?

Muhan’s Bonus Notes

Just as there are categories of strong startups that aren’t for my portfolio, there are categories of startups that I’d invest even if the individual deal isn’t that great. Venture capitalists ultimately provide an extremely commodity good: capital. To differentiate ourselves, we focus on networking/understanding/investing in a specific subset. I’ve seen focuses from medical technology, labor automation, blockchain, and even operating systems for autonomous cities.

Financials (References)

  • Current Fundraised: $238k
  • Raising: $1MM
  • Valuation: $12MM

Updates

This is where I’ll post updates about the company. This way all my notes from offering to post-offering updates will be on one page.

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

Notice trends in how you think

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