Why Robinhood's acquisition of X1 was a total no-brainer
The deal economics behind the $95M acquisition prove it
Original thread:
Full post:
It's like every fintech nerd is dunking on Robinhood for a bad acquisition of @x1creditcard for $95M. I think this was a no-brainer for @RobinhoodApp & I can *prove* it with a breakdown of the deal economics. It's all about the combination of (A) Platform, (B) Partnerships, (C) People & (D) Performance.
(A) Platform
Did you all actually look at this platform and not come away impressed, especially for a Series B company?
AmEx-esque consumer credit card user esperience & perks
Infinite virtual cards (similar to Privacy.com)
Cash-flow based underwriting which differs from Robinhood’s largely collateral-based underwriting (!)
Deal Economics
X1 raised $40M in July / December 2022 as part of a Series B and Series B extension (at an upround from well reputed investors in this fundraising environment!). Maybe they get 3 years of runway. So that means burn is 40/36 = ~$1.1M / month.
X1 started in 2020 so $1.1*3.5*12 = ~$46M of total burn + leftover cash = $14M (raised $60M total).
Platform Value: $60M
(B) Partnerships
X1 built many partnerships to make this credit and they all supplement Robinhood's platform. As a part of the acquisition, Robinhood gets built-in access to all of these partnerships without having to forge them separately.
New:
Bank partner with Coastal Community Bank @BankCcbx (!)
Card network with @Visa (sure to keep Mastercard on their toes) (!)
Integration with @DriveWealth (potentially will be replaced by Robinhood’s stack, but could also be a useful integration for Robinhood to understand competitive offerings
Merchant partnerships that should be able to be cross-sold on Robinhood’s existing cash program
Credit Card underwriting platform (including card issuance, underwriting, and LMS)
RIA status
The other important implicit benefit is that Robinhood conveniently gets new partners that are competitors to their existing partners, without having to go out and rock the boat themselves. Being able to pit two bank partners or two card networks against each other during negotiations is incredibly valuable to Robinhood, and as such there are normally exclusivity provisions built into existing contracts. But with a small enough “non-material” acquisition, they may not have tripped any wires there.
Deal Economics
Let's be conservative & assume zero value to partnerships other than company burn (In reality, the combination of these partnerships into a working ecosystem has significant inherent value including all of the tri-party agreements struck between the partners). But even just incentives deal from Visa at 15bps * $1B spend * 5 year deal = $7.5M.
Partnerships Value: $8M
(C) People
Robinhood isn't just buying a company, it's getting its people and a cohesive team. As of December 2022, they had 36 employees.
Deal Economics
Assuming Robinhood would normally go out and hire these engineers and now gets them as part of the acquisition, let's just value engineers and assume 60% are engineers & they get typical $1M per FTE offer so 60%*36*$1M = $22M.
And this doesn’t even include all of the incremental CX, Compliance, Business and may I say humbly, Strategic Finance folks that helped make this company successful!
People Value: $22M
(D) Performance
By almost all metrics, X1 was actually doing incredibly well:
600K waitlist, at least 50K downloads
$1B annualized spend, $10M in rewards given
$36M revenue run-rate (3x growth in 6 months)
Deal Economics
Robinhood has ~6x LTM revenue multiple today so X1 adds $36M * 6 = $216M of value to Robinhood. Said another way, if Robinhood added $36M in revenue to its business, investors would give them an additional $216M in market cap implicitly. We can haircut cautiously 50% because investors may discount interchange revenue value so $108M. To avoid double count we back out (A) (B) and (C) so $108M - $60M - $8M - $22M = $18M.
Adding it back up
Let's add this back up:
+ $60M - Platform Value
+ $08M - Partnerships Value
+ $22M - People Value
+ $18M - Performance Value (with $100M upside!)
= $108M+
Robinhood got X1 for $95M, so technically a ~13% discount on a very conservative valuation build-up. Total no-brainer.
FAQ
Thanks to the awesome folks responses on Twitter, I’ve aggregated some Q&A below.
How should we think about the credit risk of the deal? Isn’t that not included? (@chiefintern)
I think some of that is captured in the burn for the past at least but there is definitely an ongoing liability. I think credit performance is probably strong *today*, but I do think they're worried about ongoing risk. Also maybe a reason for discount on valuation and a reason to sell now.
By "captured in burn" I mean to say, if the credit was bad today, we'd see that in their burn, but we haven't really seen it yet. I'm not even sure they have a facility for the debt, only equity funded. So another reason losses probably are low.
What do you think investors got wrong here? Looks like they raised $60M, including a round late 2022. (@BenRathi_)
I was wondering the same thing - if this is a no-brainer for Robinhood, why did X1 sell?
I think it's because even if credit looks good now, X1 is staring into the abyss of potential recession and they need capital to survive and pay off potential losses. It’s tough to raise now so maybe an acquisition with ability to continue operating is the move.