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Raised to Date: Raised: $271,790
Aggregate Commitments $
Equity - Common
Rolling Commitments $
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At the time of publication, July 19th, Worthy Financial had raised $53.4K
When it comes to investing we are always presented with the decision to pursue more risk in order to achieve potentially higher returns or lower risk in pursuit of minimizing volatility and losses. Unfortunately, the number of accessible low risk investment options with even decent returns (3 to 4%) are extremely limited.
We are also seeing two interesting trends play out amongst a new generation of millennial investors that are driving a set of challenges for innovative financial firms to figure out:
- Doing well and doing good: Gone are the days of investors being happy to just throw their money into a company like Philip Morris International, that makes cigarettes in order to have a low risk blue chip stock with a meaningful dividend yield. Investors are demanding more from the companies they back. They want their dollars to support causes and organizations that are improving society in one way or another be it through green initiatives, community program alignment or even investment in management diversity and inclusion.
- Micro-investing: The millennial generation has more student debt than any prior generation, and to put it simply a disproportionate amount of individuals leave college with more or less a monthly mortgage payment. Thus, making sizeable investments from a young age is extremely challenging. This is driving a need to find ways to provide “micro-investing” opportunities that allow millenials to make small sized investments that fit their portfolio size.
With the need to have balanced portfolios and a trend towards small investments that make positive societal impact, we have seen a plethora of micro-investing apps come to market to meet this demand at the intersection of small but impactful investments.
The Differentiated “Worthy Financial” Solution
Worthy Financial is a first of its kind solution that enables you to round up everyday purchases using your debit card, and invest into high yield (5%, 3 year term) bonds built on asset backed loans to small businesses seeking $100K or less.
Better yet, this innovative platform that allows you to invest in $10 increments is also completely liquid, meaning you can cash out at any time, with no fees. The business monetizes the platform by taking a gain on the spread between the 5% interest given to investors and the actual interest rate charged to customers.
Worthy is also monetizing the platform and providing value to the customer by providing access to personal, student, and other types of loans on the platform through referral partners like Prosper, which pay Worthy for leads. Providing ancillary financial services to customers invested in the bonds is a great way to produce more value for users while increasing the top line.
So what makes Worthy unique in comparison to any other micro-investing product on the market?
Key product differentiators:
- Access to SMB loan asset class: Worthy is only the second platform on the market that offers access for non-accredited investors to the SMB loan asset class. Streetshares, which has raised $30M in equity and $200M in debt to date is the only other platform that exist in this space. Worthy also has some key differentiators to Streetshares, which we will talk about below.
- Low volatility: Though there are several other micro-investing platforms like Stash, Acorns and Robinhood, none of them offer access to bonds, which have a much lower amount of volatility.
- Low minimums: One of the great things about Worthy is how low their minimums are to invest. With just $10 you can begin to invest in Worthy bonds. StreetShares, their most direct competitor starts at $25. Other bond / SMB loan platforms like Funding Circle and Neighborly, have much higher minimums in the $1K+ range.
- Unprecedented access: Bonds are typically the type of asset you have to hold onto for the duration of the bond length. For instance, StreetShares will charge a 1% fee if you try to withdraw your money prior to the one year mark. Though the term of the Worthy bond is 3 years, the structure of it allows the team to offer you access to your investment at any time with no fees associated with it. That makes Worthy look and feel like a 5% interest bearing savings account.
In summary, having frictionless liquidity in a high yielding, low volatility asset class with insignificant minimums gives Worthy a differentiated market position with a defensible moat based on our below analysis of alternative investment platforms.
The Market Opportunity
The alternative investment platform market has been very active over the past 2 to 3 years, and is producing signals that investment will continue in the coming months and years. VCs have poured significant capital into various alternative investment platforms that align with millennial demands.
For instance, Acorns, which enables investors to put their spare change into managed ETF products automatically has driven 2.7M investors to its platform and is expanding globally with the $152M dollars the team has raised to date.
Billion dollar unicorn, Robinhood is also capitalizing on the micro-investing wave by providing a free brokerage account, which allows investors to buy as little as 1 share of a stock at a time without the concern of stock purchase fees eating into returns. The organization, which is only a few years old is now valued at $5.6B, and has over 3 million active users on its free trading platform.
In the bond market space, Neighborly is providing access to municipal bonds that support community projects like schools and libraries through its modern public finance platform. This is a low volatility, socially minded asset class with decent returns. The team has raised $30M to date, and is expanding rapidly.
You can see that the alternative investment platform market is growing substantially, and Worthy is just the latest entrant to a dynamic space.
When we think about market size, we can put it in context by thinking about the alternative market for SMB loans, which across the top 5 largest alternative online SMB lenders has grown to $3.9B in 2017 from about $2.6B in 2015. Needless to say, there is a multi-billion market opportunity for Worthy to pursue.
These SMB lenders, such as OnDeck, and Kabbage may also present attractive candidates for Worthy to consider partnering with to increase the supply side of the business in an efficient and cost effective way.
And don’t forget that with the growth and investment in platforms like StreetShares, Neighborly, etc., you can imagine there will be some extremely attractive acquisition opportunities down the road for Worthy if the team doesn’t decide to raise significant capital on its own. However, the market is ripe for Worthy to raise a significant round of additional capital in the near term.
Why We Like it
Unique market positioning / competitive moat: The team has developed a bond product in conjunction with the SEC over the past 9 months that provides fluid liquidity in a high yield investment asset class that has really never existed. It has found its own unique market niche and will not be something that others can easily enter because of its particular product features.
Large market opportunity: Worthy is playing in the $4B+ alternative SMB loan market that is growing at 20%+ YoY, and the user base across the micro-investing landscape is in the millions with users primed to seek out investment platforms just like this.
On-trend product offering: Micro-investing as you can see above has attracted millions of investors as well as millions in capital. In addition, the team is intelligent to be offering customers access to other online loan providers, which is a growing market as well. Aligning with several tailwind markets is a way to position robust customer growth moving forward.
Efficient capital expenditures: With $300K in bond sales in its first quarter live and experiencing significant growth month over month shows that the team has found product market fit. After having raised only $600K to date to get a complex new financial product going shows management’s ability to manage cost and team efficiencies well. At the end of 2017, the team still had $297K on the books in assets, according to Edgar filings. I’d imagine part of this ability has to do with the team being based in Florida where cost of living and wages are more manageable than the valley, and the seasoned management team knows to be wise with their capital.
Market ripe for investment / acquisition: With so many millions being pumped into the micro-investing landscape, if Worthy can build a significant user base for this specific asset class, one of the other well capitalized platforms could come running to invest and own Worthy. If not, it has the opportunity to do well as a standalone offering too.
The Founding Team
Sally Outlaw has been an entrepreneur for the past 20 years. She first created a TV show focused on technology back in 98, and also ran a realty group for several years as well. Most recently she co-founded peerbackers, which was it’s own online crowdfunding portal, and has now shifted to focus on providing consultative services to help companies manage the crowdfinance world. With a background in entrepreneurship and an understanding of crowdfinance all in management positions, Sally is well seasoned to lead a fintech team in a space that is familiar to her.
The Chief Strategy Officer Alan Jacobs comes with a 40 year career in investment banking, M&A, entrepreneurship and C-level positions. Interestingly enough, he was also the founder of “As Seen On TV,” and brought it public through a reverse merger. Sally and him also spent the past 3 years working together at peerbackers.com, which means they must have a strong enough work dynamic to continue to work together in this latest endeavor.
This is clearly a management team with long tenures in their careers and a knowledge of how to run companies. The fact that they have studied and operated in the crowdfunding world for some time prior to launching Worthy, shows that they understand the space and have the knowledge base to maneuver it effectively.
Looking across the organization from efficient use of capital, to product-market fit, to unique market positioning with an experienced management team at the helm, this has all the makings of becoming a staple name in the alternative lending community. I’ve covered the alternative lending markets extensively over the past couple of years, and this is one of those companies that has all the pieces in place to win.
At a $6M valuation in a priced round offering common shares with a built product and signals of go-to-market readiness, I’d say this is a deal that is slightly undervalued. This is a space that has been raising at frothy valuations. I think being located in Florida has helped this team to keep a more grounded perspective, but I’d expect if they achieve strong growth results with this round of capital that they will have a major follow on round of capital over the next 12 to 18 months.
For these reasons, we think this is a TOP DEAL worth including in your portfolio.