Company Overview

Blend Labs, a cloud-based banking software provider, filed for a $100M placeholder IPO with Goldman Sachs leading the offering. The company plans to trade under the ticker symbol “BLND”. There has been a flood of software IPOs including recent companies like Confluent, WalkMe, Squarespace, and Monday.com. CEO and co-founder, Nima Ghamsari, started the company in 2012 with the vision of bringing “simplicity and transparency to financial services” by making the process of applying for a mortgage or opening an account as easy as buying something online. Blend offers a suite of products for their financial services customers to modernize the consumer banking journeys for mortgages, home equity loans and lines of credit, vehicle loans, personal loans, credit cards, and deposit accounts. The company mentions they will add support for commercial banking products as well. Blend made a large acquisition of a company called Title365, a title insurance agency, in March-2021 for $422.1M (more on that later). Title365 did $212.1M of revenue in 2020, more than double Blend’s revenue of $96.0M. The transaction is expected to close in the second or third quarter of this year and there’s a section later in the post showing the pro forma figures.

On a standalone basis, Blend did $96M in revenue in 2020, up 90% from 2019, and did $32M of revenue in Q1’21, accelerating growth to 104% year-over-year. Non-GAAP operating margin has gone from (142)% in 2019 to (68)% in 2020 to (73)% in the most recent quarter. Implied ARR (quarterly SaaS revenue * 4) was $124.3M last quarter, up 106% year-over-year. Given the pricing model and seasonality (consumption-based), implied ARR isn’t the best metric for Blend to look at on a quarter-over-quarter basis. Blend has $255M in cash, cash equivalents, and marketable securities as of the most recent quarter (on a pro forma-basis). According to the S-1, the company has raised $710.5M in equity capital including most recently a $310M Series G led by Tiger and Coatue at a $3.3B post-money valuation (share price of $4.61) in January of 2021. The company also raised a $225M term loan and a $25M revolving credit facility to help fund the Title365 acquisition. Blend was founded in April of 2012 and is based in San Francisco, CA, and had 577 full-time employees as of Dec-2020.

‍Product‍

Blend’s suite of out-of-the-box, white-label products currently powers digital-first consumer journeys (and soon to be commercial) for mortgages, home equity loans and lines of credit, vehicle loans, personal loans, credit cards, and deposit accounts. For example, the company mentions that the mortgage origination process, which can require hundreds of tasks and integrations with dozens of 3rd parties including other technology, data, and service providers, is all consolidated into their easy-to-use system. The products are the digital interface between the bank and the consumer, which is very valuable surface area. Blend cites that their products are built from a library of modular components which are highly configurable / low-code that can be assembled using their “Journey Builder.” These components fall under categories that include verification (identity, asset, income, credit verification), decisioning (applying rules and logic such as pre-approvals and cross-selling), workflow intelligence (manage data collection and automate tasks), and marketplaces (enables integration of 3rd party services at the time of transaction such as offering real estate agents or insurance). The company’s product modules cover the following:

• Mortgage: provides an end-to-end digital mortgage experience from application to close.
• Home Equity: modernizes home equity line of credit and home equity loan origination experiences, delivering higher application submission rates and faster closings.
• Vehicle Loan: enables rapid financing that helps consumers get into their car, boat, RV, or power sport vehicle faster.
• Credit card: increases application conversions through a configurable product selection experience, streamlined data collection, and instant approvals.
• Personal Loan: drives faster pre-approvals for unsecured and secured personal loans, lines of credit, and overdraft protection lines.‍
• Deposit Account: increases application conversion rates and reduces fraud risk with features that support financial services firms’ Bank Secrecy Act and anti-money laundering policies.

In addition, the company has created its own property and casualty insurance agency and its own title insurance agency. Blend also walks through their partner ecosystem which has more than 2,200 partners and has grown 1,300% year-over-year. It includes more than 45 technology partners, 29 data partners, more than 1,200 marketplace partners, and more than 900 settlement services partners. The company believes this produces network effects (see the graphic below) and enables these marketplace participants to reach more than 100M consumers at the precise moment in time when they need these services. As mentioned earlier, the company signed an agreement to acquire Title365, a title insurance agency that will not only expand their product suite but bring a network of 7,000 notaries as well.

‍Summary Metrics and GTM (Go-to-Market)‍

Below are a few high-level metrics on Blend’s financial performance and metrics before getting into their GTM.

• Blend did $96.0M in revenue in 2020, up 90% year-over-year and $31.9M of revenue in Q1’21, up 104% year-over-year. LTM revenue was $112.3M and the company only discloses 5 quarters of quarterly data. 
• The pro forma combined entity (with Title365) did $105.0M in revenue in Q1’21. 98% of Blend’s revenue was from their platform in Q1’21 and 2% from professional services.
• Non-GAAP gross margin was 66% last quarter and non-GAAP operating margin was (73)% last quarter, up from (127)% in Q1’20.
• Blend discloses they had 291 customers as of the end of 2020, implying the average customer pays ~$400K by taking their implied ending ARR divided by total customers.
• 18 customers paid more than $1M a year, comprising 53% of 2020 revenue ($50.1M). By dividing the $50.1M of 2020 revenue attributable to those customers by 18, it shows those customers pay $2.8M annually on average.
• Revenue from their largest customer, which they disclose as “Customer A”, was $12.5M or 13% of total revenue in 2020. By subtracting that $12.5M of revenue from the $50.1M of revenue mentioned above and dividing that figure by 17, it shows that customers paying over $1M, excluding the single largest customer, pay ~$2.3M annually on average.
• Blend’s dollar-based net retention rate was 179% in the most recent quarter.
• In Q1’21, revenue grew 104% year-over-year and existing customers drove 98% of the increase. The company’s dollar-based net retention was 179% in that period.
• For the full year of 2020, revenue from existing customers drove 83% of the increase in Blend’s revenue and dollar-based net retention was 162% as of Q4’20.
• Given the business is lumpy and subject to seasonality around home purchases, quarterly sales efficiency isn’t the best metric, but Blend’s implied months to pay back, which is the inverse of a CAC ratio (implied net new ARR multiplied by non-GAAP gross margin divided by sales and marketing spend of the prior quarter), was at a 14-month median over the past 5 quarters.
• As of March 31, 2021, Blend’s product portfolio consisted of 7 primary software products, and 61% of customers were using two or more products or marketplaces.

Blend cites that their business model is designed to align with their customers, and the company’s products are priced based on completed transactions, such as a funded loan, account openings, or a closing, and does not charge for abandoned transactions. Transaction fees are not impacted by the dollar size of transactions, but Blend does provide dollar-based discounts to customers if they complete a certain amount of transactions, and also discount for minimums. 12% of Blend’s revenue in 2019 and 2020 came from what they call “usage-based arrangements” which are the contract minimums and basically annual subscriptions. Blend also generates a small amount of revenue through commissions or service fees on their marketplaces and expects that revenue to grow in the future. 

Blend sells through direct sales and not surprisingly given the size of deals, sales cycles are long, ranging from 6-9 months for smaller customers and 12-18 months for larger customers. As they sell more products to the same customer, Blend mentions the sales cycle decreases for subsequent products. There is seasonality in the business, and revenue is the strongest during the second and third quarters given demands for mortgages and loans during the summer. All of Blend’s customers are U.S.-based and range in size from larger banks like Wells Fargo to credit unions, fintech companies, and smaller lenders with <$1B in assets.

Below are more stats on the business and industry from the S-1:

• In 2020 Blend powered $1.4T in loan applications and ended 2020 with 291 total customers. The 2019 loan number was $540B.
• Blend has seen a 166% increase in transactions on their software platform from March 2020 through December 2020 compared to the same period in 2019.
• The company processes more than $5B in loan volume per day on average.
• In 2020, financial services firms used Blend to process 1.4 million completed banking transactions, a 190% year-over-year increase relative to the 0.48 million completed banking transactions Blend helped its customers process in 2019.
• Blend has 31 of the top 100 U.S. financial services firms and 24 of the top 100 U.S. non-bank mortgage lenders as customers.
• Since 2015, Blend has invested $165M+ in research and development to build their software platform. The company delivers product updates weekly and as of Dec-2020, and 36% of full-time employees were in the R&D organization.
• Blend created its own property and casualty insurance agency with licensing in all 50 states and has signed a definitive agreement to acquire Title365, one of the largest title insurance agencies in the United States.
• As with many companies at Blend’s stage, as of March 2021, a majority of their employees have been with the company for fewer than 13 months.
• Customers of Blend’s Mortgage product are able to reduce loan cycles by an average of 7.3 days and benefit from an average of $520 in cost savings and incremental revenue per loan according to a commissioned survey conducted by MarketWise in 2020.
• When consumers rate the Blend product experience, the median rating is 9 out of 10.
• As of March 31, 2021, Blend had 1 issued patent in the U.S. and patent applications pending in the U.S., European Patent Office, Canada, and Australia.

Other industry stats:

• The COVID-19 pandemic has accelerated a shift in consumer behavior away from traditional branches and toward digital channels for banking services, resulting in a 30% increase in the use of mobile banking worldwide.
• According to Deloitte, 53% of consumers would like to be offered bundled products, such as real estate services with a home loan or car deals with a pre-approved auto loan.
• According to McKinsey, 42% of U.S. consumers use at least one fintech provider and consumers are switching financial services providers at a faster rate than in previous years.
• Blend cites Cornerstone Advisors who mentions that 48% of banks and 42% of credit unions have partnered with fintech start-ups over the past 3 years to modernize their offerings with 86% citing improving customer experience as the top priority.
• The aggregate potential cost savings for financial services firms from automated workflows is estimated to be at $447B by 2030, with back-office credit underwriting accounting for $31B of that total, according to Autonomous Research.
• According to Gartner, most large organizations will have adopted multiple low-code tools in some form by year-end 2021.‍

‍Market Opportunity‍

The software market for financial services is massive and Blend believes they address a few categories of spend in the market, including IT spend for banking software, commissions for home insurance policies, title insurance policies, and real estate transactions. More detail on those markets is below:

• Gartner estimates the global IT spend for software for banking was $72.4B in 2020 and is expected to grow at a 13% CAGR (compound annual growth rate) through 2025.
• The American Land Title Association estimates that in the U.S. $19.2B+ was spent on title insurance premiums in 2020.
• IBISWorld estimates that in the U.S. $105.7B+ was spent on home insurance premiums last year.
• Blend estimates that $123.5B was spent on realtor commissions in 2020 based on data from the National Association of Realtors, EffectiveAgents.com, and the St. Louis Federal Reserve.
  

Based on all these sources, Blend estimates their TAM (total addressable market) to be $33B+ based on the number of consumer banking transactions and home financings in the U.S. in 2020 and the company’s average revenue per transaction in each sub-sector where they operate.

Competition

Blend does not name any competitors in the S-1 and doesn’t spend much time discussing this area. They mention competition includes point solution vendors, providers of back-office software, and internally developed systems. Blend differentiates through their product offering breadth, platform flexibility, multi-product approach, ecosystem, and scale of their business and customer base. There are also tangential companies that are growing incredibly well, such as Qualia. ICE also acquired Ellie Mae for $11B just over a year after Thoma Bravo acquired them for $3.7B.

Investors and Ownership‍

Blend has raised $710.5M in equity according to the S-1. Investors include Lightspeed, Formation8, Coatue, Tiger, Greylock, General Atlantic, Temasek, Emergence, Fifth Wall, a16z, and others. 5%+ institutional investor shareholders (based on basic shares outstanding) include Lightspeed (12.5%), Formation8 (7.9%), Temasek (5.8%), Coatue (5.5%), Tiger (5.5%), General Atlantic (5.0%), Greylock (4.9%). Nima Ghamsari, CEO & co-founder, has a 8.8% pre-offering stake. The most recent round was a $310M Series G led by Tiger and Coatue at a $3.3B post-money valuation (share price of $4.61) in January of 2021. Coatue and Tiger also facilitated a tender offer in the same month to buy Series A stock at a $4.15 price per share for a total of $5.5M. Class A common stock, which is the stock the company is offering in the IPO, has one vote per share, and Class B common stock has 40 votes per share. CEO, Nima Ghamsari, owns all Class B shares so has full voting rights.

See the cap table output of major shareholders below.

Major Shareholder Value ($M)

The chart below shows the major shareholder’s dollar value of their shares at the last round preferred Series G price. The actual IPO price is most likely to be higher and this post will be updated with the final offering price when it happens. Note this only includes investors that have their shares disclosed and doesn't include other investors/individuals who own less than 5% and are not on the board.

CEO Incentive package (“Founder and Head of Blend Long-Term Performance Award”)‍

I normally don’t present performance package details in-depth, but the Head of Blend Performance Award stood out. It’s worth noting the company’s board of directors creates and approves performance-based option plans, and if Blend hits all these targets the company would likely be worth $100B or more, representing a significant gain to all shareholders (30x+ from the Series G price). Moreover, looking at the historical data from ~100 SaaS IPOs, the average ownership post-IPO for CEO/founders is ~14%, so Ghamsari at ~9% pre-offering (basic shares outstanding) is below the average for SaaS founders (and not taking into account the dilution of the IPO). Today, Ghamsari owns 54.2M shares, so this grant would over time more than double his stake and give him pro forma ownership (on basic shares, assuming no incremental dilution and not considering IPO dilution) of 19%, up from his 9% stake today.

In March 2021, the board of directors awarded him 78.2M shares of Class A common (one vote) at a $2.86 exercise price (reminder, the preferred Series G in January 2021 was at $4.61/share) with a 15-year term. The shares are awarded in tranches based on certain share price targets, which are aggressive. The first tranche is based on the IPO, though. For example, the last tranche of 23.5M options is awarded at a $139.70 share price (assuming other conditions are met such as trading above that figure for a 90-day period). There are more conditions and terms in the full description but if all conditions are met, the options would be worth $10.92B and the stock price would be 30x+ the Series G round that happened earlier this year. Assuming Ghamsari doesn’t sell any current shares and receives all the shares from the performance package, his entire stake would be worth $18.5B at the highest share price hurdle. He will have to exercise his shares and given the strike price is $2.86, it will cost $224M just to exercise the options and that does not include any tax liabilities. The net of this is that Ghamsari owns a bit less than most CEO/founders at IPO, and if all these incentives are hit, all shareholders benefit significantly and with this award, the board wanted to align the incentives for all shareholders over the long-term for the company. The following charts cut the data in a few ways.

Percentage of Grant Distribution and Share Price Hurdles

The number of shares in each tranche isn't too dissimilar post the IPO hurdle.

‍Dollar Value and Distribution ($M)

The vast majority of the dollars are in the last two tranches.

‍Dollar value of New and Existing Shares ($M)

Assuming no shares are sold, the following shows the cumulative value of shares granted at each tranche. Assuming no share sales it reaches $18.5B by tranche 5.

‍Acquisition of Title365‍

Blend has made one acquisition to date, acquiring 90.1% of Title365 for $422.1M in cash on March 12, 2021, with a call option to purchase the remaining 9.9%. Title365 will enable Blend customers to streamline the title, settlement, and closing process at scale for mortgages, home equity lines of credit, and home equity loans.  The acquisition is subject to regulatory approvals and is expected to close in the second or third quarter of 2021. In connection with the transaction, Blend raised $225M in a term loan and a $25M revolving credit facility and the term loan is expected to be funded at the closing of the deal.

Blend and Title365 Pro Forma Business Combination‍

While the Title365 acquisition has not closed yet, it is likely near closing given Blend has filed with it. The following looks at some of the pro forma financials. At a high level, Title365 is over 2x the size of Blend and growing slightly faster, but is not a SaaS/tech company (they are a title insurance agency) and does not have SaaS gross margins. However, Title365 had a 22% GAAP operating margin in 2020 vs. Blend’s (78)%. So, Blend is gaining scale and a bit of growth on the top line, losing some on gross margins, and gaining bottom-line profit. The following charts look at the combined business and there is more detail on the acquisition in the valuation section below.‍

2019 and 2020 Revenue ($M)

2020 Pro Forma GAAP Gross Margins

‍2020 Pro Forma GAAP Operating Income ($M)

Financials and Other Metrics Outputs‍

Blend is growing rapidly (understandably so given the red-hot housing market) and mentions in the risk factors that their revenue growth rate will decline over time, which is not surprising given their scale. The following metrics will look at Blend’s standalone business and there’s also a section that looks at the high-level combined entity. ‍

Historical P&L ($000's)

Quarterly Revenue ($M)

‍Platform (SaaS Revenue) and Services Revenue Mix

‍Implied ‍Ending ARR ($M)‍‍

Blend added $6.1M of implied net new ARR over the past quarter and $64.1M over the past year. While it appears that the company is slowing down, this chart reflects their seasonality so, unlike most SaaS companies, this is less relevant.

Quarterly Non-GAAP Gross Margins and Operating Expenses as a % of Revenue

GAAP and Non-GAAP Operating Margins

‍Dollar-Based Net Retention Rate and Transactions‍

Blend has highly impressive dollar-based net retention rates and is driven primarily by the increase in transaction volume and cross-sell of new products. You can see that the net dollar retention and transactions on the platform have been moving in sync.

Cohort Analysis‍

Blend releases a cohort analysis in the S-1 that shows the growth of the 2018 and 2019 cohort of customers and the 2020 cohort base. As you can see in the graphic below, the cohorts have historically expanded ~2-3x in a couple of years. 

Sales Efficiency and Payback Periods‍

Blend doesn’t release customer counts by quarter (only at the end of 2020), but the below output plots their implied months to payback using the inverse of a CAC ratio (net new implied ARR multiplied by non-GAAP gross margin divided by non-GAAP sales and marketing spend of the prior quarter). The magic number is defined as implied net new ARR divided by non-GAAP sales and marketing spend of the prior quarter. The median months-to-pay-back over the disclosure period is 14 months (5 quarters). As mentioned, this isn’t as relevant to Blend given the seasonality but we included it here for completeness given they are a SaaS company.

Cash Flows ($M)

Quarterly P&L and Metrics (000's)

‍Valuation ($M)

Blend on its own (not including Title365) would likely trade like other high-growth SaaS companies: on a multiple of forward revenue, but given the pending acquisition, valuation has a few considerations. Title365 did over 2x of Blend’s revenue in 2020, has lower gross margins, and more profits. It will be interesting to see how the company is eventually valued given Blend at its core is a fast-growing SaaS company and they are closing an acquisition of a business that has over 2x their revenue for a price of <2x LTM revenue and ~8x LTM EBITDA. As a result, the valuation for Blend is trickier than most. The net of it is that Blend will want to get some multiple arbitrage in the public markets.

A few considerations: 

1. Blend is one of the fastest-growing soon-to-be-public SaaS companies, which can trade at 30-40-50x+ NTM revenue.
2. Blend is acquiring/carving out 90.1% of Title365’s business for $422M so if it’s not even closed yet, the market is saying that 90.1% of Title365 is worth $422M. Given they have a call option for the remainder, the following analysis assumes $468.5M of total consideration ($422.1/90.1%) for the asset i.e. the other 9.9% as well.
3. Blend would not have acquired the business if they did not believe it would be worth more than the price they paid once it's closed and operating as a combined entity i.e. the pitch to Wall Street will be that the sum is much greater than the parts.
4. It appears Title365 was acquired for just under 2x LTM revenue and ~8x LTM EBITDA. Blend has a call option to buy the remaining 9.9% at 4.4x LTM EBITDA, lower than what they paid according to the numbers in the S-1 of ~8x LTM EBITDA. It’s plausible that 9.9% of Title365’s remaining stake should be worth less than what Blend valued the other 90.1% stake at given it’s a captive, minority position. Blend doesn’t have positive EBITDA -- they’re growing fast and burning money. The price was probably negotiated before Title365 appeared to have a massive Q1'21.
5. Blend will pitch to Wall Street they were the most logical acquirer of Title365 (meaning they also may have had leverage when negotiating a price) and with both of their business models together it’s worth way more than what they paid. It's possible Title365 also wanted to be a part of a pre-IPO SaaS company, which trade at high multiples.
6. Blend will want the combined entity, which together did $308.1M of revenue in 2020 and grew at almost 100% year-over-year to get something close to a high-growth SaaS multiple even though most of the revenue was acquired for <2x LTM revenue. Again, it’s about the sum being greater than the parts, which could mean significant multiple arbitrage for Blend (i.e., paying ~2x revenue and having that revenue valued at a much higher multiple in the public markets).
   

On their own, a dollar of forward Blend revenue could be worth $25-30 and a $1 of forward Title365 revenue is probably worth ~$1-2 (and/or 4.4x LTM EBITDA given the S-1 discloses that Blend has a call option at that multiple). As part of the call option to buying the remaining stake in Title365, Blend can buy it “at a purchase price equal to the greater of (1) $49.5M plus an amount of interest calculated using an interest rate of 5.0% per annum compounding annually; or (2) 4.4x the trailing 12-month EBITDA”.

Wall Street will end up being the decision-maker on all of this, but given the numbers, regardless of what Title365 is worth on its own, the combination of both seems to make sense and Blend can pitch a fully-integrated technology platform that could do $600M of NTM revenue vs. Blend stand-alone at probably <$200M (at least as a Street number) assuming both companies grow at a 70%+ forward growth rate (they grew ~100% in the past 12 months). Moreover, looking at the numbers and current multiples, standalone Blend with 100%+ year-over-year growth in the most recent period could trade well above their most recent round (even factoring in the seasonality, revenue concentration, and housing market-boom discount investors might apply).‍

Blend Standalone‍

The output below looks at Blend’s business without Title365 and implies NTM (next-twelve-months) revenue based on an illustrative range of growth rates and comparable EV (enterprise value)/NTM revenue multiples from other public, high-growth SaaS businesses. As mentioned in other posts, companies do not release projections or guidance in S-1's. Assuming these multiples, Blend would likely trade above their last round price of $3.3B on their own.

‍Blend + Title365 Sum of the Parts (SOTP) ($M)

Below is a very simple analysis that is not meant to accurately imply the value for combined Blend (which we call “WholeCo”), but rather is meant to illustrate the implied revenue multiple of WholeCo if you assumed Blend standalone traded at 30x NTM revenue and Title365 is simply worth exactly what Blend paid for it, considering no value creation / synergies (i.e., the sum is exactly equal to the individual parts). The result is that WholeCo would be worth ~10x NTM revenue, which we would guess is lower than where Blend will actually trade in its market debut. For this quick math, we assumed both businesses grow revenue 72.5% in the next twelve months. Again, Blend hasn’t released projections so this is just an assumption.

‍Blend (WholeCo) at a 50% Discount

What if you combined the companies and just assumed an arbitrary 50% discount to the multiples we assumed Blend standalone could trade at? Recall that the implied WholeCo NTM revenue multiple output in the SOTP analysis above was ~10x NTM revenue. By showing a 15x NTM revenue multiple at the midpoint of the sensitivity table below, we are effectively assuming that WholeCo is, in fact, valued greater than the sum of its parts. WholeCo gets a sort of half-SaaS high-growth multiple / half-premium high-growth title insurance agency multiple, resulting in significant value creation for Blend in combining the businesses; $9.2B in the center of the table below vs. $5.8B for Blend standalone for spending ~$500M in the acquisition.

All of this analysis and speculation might be moot. Blend as a standalone company is growing over 100% year-over-year, Title365 is also growing over 100% year-over-year, we’re in one of the hottest software and housing markets in a generation, and the combination of the two businesses makes sense. If investors see the same things and buy the combined story, Blend could see enough interest that it still trades closer to premium high growth SaaS multiples (albeit with a discount for the combined gross margin profile). Blend certainly did not need this acquisition to have a great outcome, but it appears they will be able to create significant value from it.

Final Thoughts

Blend is in the middle of some large trends in the financial services industry; financial services companies have been slow to innovate and operate with legacy infrastructure, consumers expect their banking interactions to be as easy to use as ordering on Amazon, COVID has rapidly accelerated the need for these same financial services companies to innovate, and we’re in a once-in-a-generation housing boom with low interest rates. All of this creates incredible market timing for Blend which offers a leading platform for banks to modernize and simplify the end-to-end mortgage and banking experiences for consumers. Even including some of the questions and complexity around the acquisition, the seasonality of the business (the last couple of quarter’s revenue has not grown as rapidly), and revenue concentration risks, Blend is positioning itself as the critical software layer between banks that need to modernize and offer better consumer experiences and those who want to try and do it themselves. It will also be important for Blend to show what’s in “Act II” and display traction in their non-housing market-related products and roadmap for commercial banking, and that they can make this massive acquisition work (and get it integrated!). Congrats to the Blend team on getting here, they should have an awesome IPO.

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Special thanks to Chris Gaertner and Anthony DeCamillo for the help on this post.