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Hello and happy weekend! Today we’re talking insurtech, SPACs and how well direct listings can manage the IPO pricing question. But first, crypto.
The crypto beat was busy this week, with Coinbase earnings giving us a good look into just how busy trading activity was for the asset class in the third quarter. If you recall Robinhood’s earnings, what Coinbase had on offer won’t prove a surprise. After the American equity investment platform’s crypto revenues fell sharply, Coinbase also posted declines in its aggregate trading volumes and revenues compared to the second quarter of the year.
In related news, FTX’s U.S. operations disclosed some of its own performance data, indicating that growth is still possible in the crypto trading market despite a general downward trend in the three-month period wrapping up this September.
All that’s to say that the crypto market continues to evolve — molt? — rapidly. From one quarter to the next, activity surrounding major chains and smaller coins can fluctuate rather sharply. For companies like Coinbase, this means variable revenues and profits.
But as Coinbase is cash rich, near-term ups and downs aren’t that big of a deal, so long as the long-term trajectory of crypto activity remains positive.
Another set of companies betting on a long-term upward trend are crypto-gaming companies. And they have been very busy in recent months. For example, Patron raised a $90 million fund to invest in crypto-based games; Mythical Games raised $75 million this summer to build crypto games; a trading card game called Parallel raised at a $500 million valuation; and Axie Infinity raised a round earlier this year.
This week, Forte raised $725 million for its crypto-gaming infrastructure. This leads to me to wonder just how much capital the blockchain games can absorb in the near term. After all, games have historically proven to be poor venture capital investments, at least per traditional venture capital thinking. Why? Because games can prove rather hits-based, with certain titles performing well but fading in revenue terms after their launch.
Investors like strong, predictable, growing incomes. And investors like much less uneven revenues and uncertainty. The type of uncertainty that can come with new titles having the chance to flop.
And yet, slathered with crypto, gaming companies are hot? Are the economics and social risks that games have long demonstrated — the very things that made them less attractive venture wagers — improved when they are built with a blockchain backbone? I don’t see why that would be the case. But investors are putting capital into them as if they have. Let’s see how the various wagers pay out, or don’t, in time.
Insurtech, SPACs and data
We’re getting through earnings season at the moment, with all the majors behind us and smaller companies occupying much of our time and energy. From a number of calls this week, the following observations:
Insurtech is hard: On the heels of news that Metromile was selling itself to Lemonade, you would be forgiven for wondering about the fate of public insurtech companies broadly. However, Root’s earnings this week gave its share price a huge boost, after investors liked what they saw from the auto-focused insurance company.
But that doesn’t mean that it’s all clear sailing ahead for Root, even as one of its rivals finds a new corporate home. Talking with Root CEO Alex Timm this week, The Exchange got a view into how complicated it can be to time growth in the insurance space.
The CEO explained that Root has dialed back its near-term growth goals given market uncertainty regarding how to price coverage, a problem that many auto insurance companies are dealing with at the moment; this is not a Root issue, I mean to say. It turns out that inflation pressures on the cost of cars and labor are making it difficult to determine the cost of insurance, leading to more caution from the various players in the market when it comes to attracting new policies.
This doesn’t mean that Root is in any long-term trouble, but it does indicate how macro conditions can make life tough even for tech and tech-enabled businesses. Root is a bet data and smart software can better price insurance over time. But the company, right after it went public, is running into a shift in the underlying economics of its business that is effectively unprecedented, per Timm. Perhaps that complication is partially why Metromile buckled and sold its operations so quickly after its public debut.
SPACs can be ok: This week NextDoor began to trade as a public company (original notes here). The Exchange caught up with its CEO, Sarah Friar, on its first day of trading to chat about her choice of listing vehicle.
According to the executive, NextDoor had to leave some of its product plans on the cutting room floor in late 2020, giving the company a general desire to raise more capital. And as NextDoor was able to get public-market ready and raise a chunk of money via its SPAC partner at a prearranged price, the deal made sense for her company.
That’s a somewhat standard perspective, and one that details why SPACs were popular earlier in 2021. But things have changed since, with many SPAC-led combinations seeing some of their backers pulling their capital out after they announced takeover targets and moved to consummate the deals.
NextDoor showed that the redemption issue is not endemic. After stating in its first release that its SPAC partner would bring $416 million in cash to its business, the final tally was $404 million. That’s a super-low ratio of lost capital. And NextDoor shares are trading nicely in the wake of its combination. A SPAC-led debut, it appears, can still work well in certain cases.
Direct listings aren’t a pricing panacea: Amplitude debuted via a direct listing recently and reported its first set of earnings this week as a public company. The company has traded well since it listed, closing the week worth $73.86 per share, far above its $35 reference price.
Per Yahoo Finance, the company is worth just over $8 billion today. Given that the company chose a direct listing over a traditional IPO to avoid being mispriced, The Exchange was curious if the company was irked that it had raised at roughly a $4 billion valuation earlier this year, ahead of its direct listing. After all, it direct listed to avoid pricing issues, raising from private investors beforehand, similar to what Roblox executed.
Amplitude CEO Spenser Skates said that he felt good about the direct listing, arguing that a traditional IPO would have led to even greater price distortions. To which we say, maybe. But seeing private-market investors get a quick double on their money appears to be a similar cash-left-on-the-table moment as a mispriced IPO would generate, just with a different cohort of rich folks getting the lucre.
And, friends, with that, back to the weekend!
— Alex