Thread by @ronmortgageguy

VC Peeps on Fintwit: HELP

Need to understand what looks like insanity

I understand there is a ton of dumb money thrown at Fintech these days but I just cannot fathom this transaction from the mortgage space

Take a look: a VC partnership buys 50% of a mortgage brokerage

2/

It's a mortgage brokerage that told a tale of being a breakthrough in digital mortgage applications that would magically attract borrowers

Which is ludicrously false, it's precisely the same digital app 5 other app vendor's offer

So $75M for 50% of a mortgage brokerage

3/

Again, the key lie is the digital nature of the brokerage because 100% of all clients are fed into a run of the mill Call Center for completion

This fairly new brokerage (3.5 years) has done very little in mortgage origination: less than $1B and is in no way famous

4/

Revenues in a Mortgage Brokerage that operate a saleried model work like this:

$1B of mortgage origination in Triple A mortgages produces about $10M of GROSS income which nets to about $1.5 to $2M of profit

$75M for 50% = $150M value = 85 X net income as a formula

5/

I cannot emphasize enough the concept this company has a breakthrough digital app is just ridiculous, we've silent shopped their app and client journey process and it's slick but zero breakthroughs

Next is the possibility of terrible due diligence

Bad measurement timing

6/

The last 12 months have seen the biggest growth in mortgage origination in Canadian history, in essence: every brokerage is up 25% to 40% if they did nothing but tread water

If the VC investors were floored by prodigious growth at this brokerage they missed the obvious

7/

Please help me Fintwit VC folks

How could this batshit crazy valuation have ever happened?