Unpacking Chamath Palihapitiya’s SPAC deals for Latch and Sunlight Financial

This morning, investor and SPAC raconteur Chamath Palihapitiya announced two new blank-check deals involving Latch and Sunlight Financial.

Latch, an enterprise SaaS company that makes keyless entry systems, has raised $152 million in private capital, according to Crunchbase. Sunlight Financial, which offers point of sale financing for residential solar systems, has raised north of $700 million in venture capital, private equity and debt.

We’re going to chat about the two transactions.

There’s no escaping SPACs for a bit, so if you are tired of watching blind pools rip private companies into the public markets, you are not going to have a very good next few months. Why? There are nearly 300 SPACs in the market today looking for deals, and many will find one.

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Think of SPACs are increasingly hungry sharks. As a shark get hungrier while the clock winds down on its deal-making window, it may get less choosy about what it eats (take public). There are enough SPACs on the hunt today that they would be noisy even if they were not time-constrained investment vehicles. But as their timers tick, expect their dealmaking to get all the more creative.

This brings us back to Chamath’s two deals. Are they more like the Bakkt SPAC, which led us to raise a few questions? Or more akin to the Talkspace SPAC, which we found pretty reasonable? Let’s find out.

Keyless locks = Peloton for real estate

Let’s start with the Latch deal.

New York-based Latch sells “LatchOS,” a hardware and software system that works in buildings where access and amenities matter. Latch’s hardware works with doors, sensors and internet connectivity.

The company has raised a number of private rounds, including a $126 million deal in August of 2019 which valued the company at $454.3 million on a post-money basis, according to PitchBook data. The company raised another $30 million in October of 2020, though its final private valuation is not known.

As Chamath tweeted this morning, Latch is merging with TS Innovation Acquisitions Corp, or $TSIA. The SPAC is associated with Tishman Speyer, a commercial real estate investor. You can see the synergies, as Latch’s products fit into the commercial real estate space.

Up front, Latch is not a company that is only reporting future revenues. It has a history as an operating entity. Indeed, here’s its financial data per its investor presentation:

Doing some quick match, Latch grew 50.5% from 2019 to 2020. Its software revenues grew 37.1%, while its hardware top line expanded over 70% during the same period. So, the company’s revenue mix shifted more towards hardware incomes in 2020.

That could be due to strong hardware installation fees, which could later result in software revenues; the company claims an average of a six-year software deal, so hardware revenues that are attached to new software incomes could lowkey declaim long-term SaaS revenues.

While some were quick to note that the company is far from pure-SaaS — correct — I suspect that the model that will get some traction amongst investors is that this feels a bit like Peloton for real estate. How so? Peloton has large hardware incomes up-front from new users, which convert to long-term subscription revenues. Latch may prove similar, albeit for a different customer base and market.

Per the deal’s reported terms, Latch will be worth $1.56 billion after the transaction. And the combined entity will have $510 million in cash, including $190 million from a PIPE — a method of putting private money into a public entity — from “BlackRock, D1 Capital Partners, Durable Capital Partners LP, Fidelity Management & Research Company LLC, Chamath Palihapitiya, The Spruce House Partnership, Wellington Management, ArrowMark Partners, Avenir and Lux Capital.”