How Does Dave Stack up in the Fintech Landscape?
The Rundown - Your weekly SPAC Deep Dive (01/06/22)
In 2017, Los Angeles Based Fintech Platform Dave launched with a simple suite of financial management solutions and tools to save customers from overdraft fees. Four years later, and 11 million customers strong, the company went public through a SPAC merger with VPC Impact Acquisition Corp III.
However, for Dave, the SPAC transaction could not have come at a worse time, as enthusiasm for SPACs and Fintech Companies are at a three-year low. Furthermore, Dave is set to compete in a crowded market which includes both Startups like Bakkt, Chime & Upstart, and Established Competitors like Block (Formerly Square), Sofi & PayPal, which could lead to slower growth and a weaker bottom line.
The State of Fintech & Why Dave Might Underperform
FinTech startups like Bakkt, Chime & Upstart have been some of the biggest winners of the pandemic economy, as customers were incentivized to use digital apps to transfer money, trade stocks, and borrow for purchases. The lockdowns induced by the pandemic were thus a blessing in disguise for these firms, as it accelerated digital banking trends, leading to user growth skyrocketing. However, with the economy expected to return to normalcy this year, demand for digital finance has cooled down.
If that wasn’t enough to stall growth, FinTech stocks could witness a double whammy from the anticipated interest rate hikes this year. First, a rise in the interest rates will make investors less willing to park money into growth stocks. Second, interest rate hikes are detrimental to the core business of FinTech, as it could lead to higher defaults, provisions for loans & declining margins. As a result, Dave may see softer demand for its deal now, rather than if it had gone public so a year ago (like rival SoFi). It will be interesting to see how Dave uses the proceeds from the deal, and how it distinguishes itself from rivals in a largely crowded market.
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Owning its Niche
Dave was built to eliminate many of the inconveniences that customers couldn’t stand about legacy banks, such as overdraft fees and hidden charges. The company bills itself as a Banking Service for Humans that links to consumers' checking accounts, which includes features like interest-free overdraft protection, automated budgeting by tracking spending, and the ability for users to build credit scores by reporting rent & utility payments automatically to credit bureaus.
Dave also has a banking app which it launched in 2019, brings the Dave app to its transaction account, raising the overdraft protection to $200, but also costing users $1 a year, in addition to optional tips. Dave has built a niche in the digital banking space, by offering a suite of financial products to customers Everyday Americans living paycheck to paycheck. Since its inception, Dave has helped its customers avoid over $1 billion in overdraft fees through its ExtraCash Feature, and has helped gig workers earn over $200 million from their side hustles through its job board, Side Hustle.
A Unique SPAC Proposition
Dave has employed a methodical approach to opening its doors as a digital bank, with the company focusing on deploying the necessary infrastructure first to service the demand expected, rather than blindly rolling out features. Dave has thus shied away from raising large sums of money like its peers, with only $61 million raised over the last four years before the SPAC transaction. Management should be commended for its prudent capital allocation thus far, as it has been able to limit cash burn while continuing to grow at a rapid pace.
However, this approach seems to have stalled growth over the last few quarters, as management’s conservative strategy seems to have limited customers to its own core target audience. Management has thus decided to switch up its strategy, as it will use the gross proceeds raised from the merger ($210 million in PIPE led by Tiger Global & up to $255 million from the SPAC trust) to roll out new products & features, expand its workforce, and make key acquisitions.
From David to Goliath
In the payments space, Dave aims to launch a peer-to-peer donation account that functions similar to a GoFundMe campaign. In addition, the company is also looking at peer-to-peer payments similar to Block’s Cash App or Venmo. Dave has a long way to go if it wants to catch up to its rivals, as Market Leader Venmo (75 million users) and Cash App (70 million customers) have a head start. The payments space is incredibly competitive, with Dave facing challenges from not only Block & Venmo but also from the likes of PayPal, GooglePay, and Zelle, so it’ll be interesting to see management’s strategy in the future to break out in the space.
Dave also plans to enter the cryptocurrency investing space, after Crypto exchange FTX invested $15 million in its PIPE. Here too, the landscape is quite crowded, with peers like Block, CoinBase, PayPal, SoFi, Robinhood, eToro & Bakkt all offering some type of trading/investing service. Management also hinted that Dave may move into Insurance in the future, as it could offer better prices & agreements to many of its customers who have low credit scores, and as a result need to overpay for car and renters insurance. Delving into Insurance could be a great fit for Dave, considering the company’s prior experience pricing risk when it underwrote loans.
A Note About the Valuation
Dave Debuted with a $4 billion valuation, which it termed reasonable compared to its peers last year, but a few underlying assumptions have changed since the company announced its merger. To start with, many of Dave’s peers that were previously trading at high valuations like MoneyLion, Block & SoFi have seen a selloff in recent months, with valuations across the industry essentially cut by half.
Furthermore, since Dave’s SPAC merger was delayed (due to regulatory scrutiny by the SEC), the company failed to raise the necessary growth capital, lowering guidance from $193 million in revenues in FY21 to closer to $165 million. As a result, Dave may see some weakness over the next few months, as the market re-prices risk to determine a fair valuation amidst the recent challenges.
Dave has built a $4 billion business with 11 million customer, all while having raised just $61 million, which is no small feat to achieve in 4 years. However, with enthusiasm from Growth stocks, and Fintech in particular generally subsiding, Dave could see some skepticism around its valuation, given the current market dynamics and comparable valuations. Furthermore, Dave may have its work cut out ahead, as it attempts to enter several different markets that remain highly crowded. Despite these headwinds, the company can prove its skeptics wrong if it continues to deliver, as it has done so over the last few years.