- Vishal Garg is taking Better, a mortgage startup, public through a long-delayed SPAC deal.
- The stock dropped more than 90% at the opening bell Thursday, but Garg insists he has a plan.
- Will the CEO turn the troubled company around or go down in flames?
Online mortgage lender Better Home & Finance started trading on Thursday after merging with blank-check company Aurora Acquisition Corp. The stock, which trades on the Nasdaq stock market under the ticker symbol BETR, dropped more than 90% at the opening bell.
The stock dropped so quickly that trading was halted four times before 10:00 a.m.
But CEO Vishal Garg, known for brutally laying off hundreds of employees via Zoom, insists he has a plan.
He’d better — no pun intended. When the deal was first announced in May 2021, SPACs were all the rage, the 30-year mortgage rate was just above 3%, and Better was on its way to becoming LinkedIn’s top startup for a second year in a row. In the two years since, SPACs have fallen out of favor, mortgage rates have risen to their highest levels in decades, and Better’s reputation has taken a major tumble, thanks in part to Garg, who claimed that some of the company’s laid-off workers deserved to be canned because they barely worked.
So rather than making plans to ring the Nasdaq’s opening bell as a newly minted billionaire, Garg has been meeting with reporters in advance of trading in hopes of selling them on the IPO and his vision for the company.
What became clear during Insider’s August 17 meeting with him at Better’s World Trade Center headquarters is that this is just the latest make-or-break moment for the ambitious tech entrepreneur, whose Zoom layoffs were cited as a risk factor in an SEC filing detailing the merger plan.
Garg is moving ahead with the SPAC despite Better’s revenue dropping from $1.24 billion in 2021 to $383 million in 2022 because he sees it as a chance to turn the company’s fortunes around when interest rates start falling, which some experts say could happen as soon as next year.
The merger will give Better $565 million in fresh capital, including $550 million from Japanese investment giant Softbank through convertible notes — money that the company needs to make its one-day mortgage product the industry standard.
He’s also banking on an uptick in refinancings as soon as the Federal Reserve starts lowering rates. He pointed to Rocket Mortgage’s stock, up 48% year to date, as a sign that investors see the light at the end of the rising-rates tunnel.
One former employee told Insider that the move seems like a “Hail Mary,” both for Garg personally and for the business more broadly. This person may not be wrong. Softbank’s loan terms give Garg just five years to prove that Better should be returned to its former position as one of the most valuable mortgage companies in the world — and that he should be at the helm of it. If he succeeds, he stands to join the ranks of Silicon Valley’s vaunted startup billionaires, according to Insider’s calculations. If he fails, he will be personally responsible for paying the money back, and he risks forever being remembered as the CEO behind those cringe-worthy Zoom layoffs.
Here is what Garg said about his vision for the company and how he will spend the money Better receives from the IPO. He said he hopes to invest in existing tech, buy new tech, and be ready for when refinancings come back. Insider also asked Garg about $41 million loans he received from Better, some of which may be forgiven, and we tally what the CEO personally stands to gain — and lose — from the IPO.
Going public two years later
Better’s One Day Mortgage product was launched earlier this year to give customers a mortgage commitment letter in just one day. Garg said he expects that turnaround to become the standard in the mortgage industry. He will use the Softbank money to heavily invest in marketing of that product.
His timing couldn’t be worse. Interest rates on 30-year mortgages are at 7%, higher than they have been since the dot-com bubble burst in 2000. As a result, mortgage origination volumes have cratered to their lowest levels since 2000, down 70% from the first quarter of 2021. Mortgage refinancings are all but dead.
Better’s books reflect the downturn. The company lost nearly $1.2 billion from 2021 to 2022, and an additional $90 million in the first quarter of this, per SEC filings. That compares to 2020, when the company posted a $172 million profit amidst a wave of mortgage refinancing.
But Garg says he sees the downturn as an opportunity to acquire beaten-down mortgage rivals.
“There are 4,000 mortgage companies that are struggling out there today,” Garg said. “Some of them will throw in the towel.”
When they do, Garg hopes to be there to pick up the pieces. Better’s business has historically only offered mortgages online, finding customers that are searching the internet for a mortgage, but it now plans to acquire companies with a local business, giving them a way to sell mortgages to customers that aren’t likely to find a mortgage online.
Better has a way to go to return to its former glory. In 2021, the company was the 10th largest mortgage originator by volume according to the Scotsman Guide, but in the first quarter of this year, it’s now the 59th largest.
But Garg suggested the company’s reduction has been intentional – a way to wait out the storm and save cash. In addition to loan volumes dropping to $11.4 billion last year, down from $58 billion in 2021, the company has also slashed its workforce by 91% to roughly 950 employees.
Garg’s stake
SoftBank has already pumped $750 million in financing into the company, as well as a $500 million equity stake.
Outside investors, however, have been pulling their money out: of the $282 million SPAC sponsor Aurora held from investors at the end of December 2022, only a bit more than $20 million remains, with the vast majority of investors choosing to redeem their investments instead of receiving shares of the merged company.
Garg also has money on the line. He took the unusual step of personally indemnifying SoftBank against any losses on their most recent $550 million investment. If Better is worth less than $6.9 billion five years from when the money was lent, Garg is personally responsible for any of SoftBank’s losses.
Regulatory filings warn that shareholders stand to lose if Garg sells his stock to meet the terms of Softbank’s loan guarantee, thus driving the price down.
But he also has a lot to gain financially. Between Garg’s venture capital company 1/0 Capital, where he owns a 95% stake, and shares he has accumulated personally, Garg stands to own about 19.1% of Better’s Class B stock if he exercises his maximum redemptions when the deal closes, according to Insider’s calculation. That could give him a stake of about 15.5% of the company’s total shares and 18.2% of voting power in the company — making him the largest shareholder in the new company.
Garg told Insider that he “doesn’t know” how big his own stake is, and the company declined to comment on his behalf but said that a filing would come later this week with updated ownership figures.
If the company is able to return to its 2021 valuation of $6.9 billion (and assuming Better’s A, B, and C shares all carry the same value) he will become a billionaire on paper. Garg has also received some $41 million in loans from Better that the company has said in filings could be partially forgiven, including through an exchange of stock.
There’s a lot at stake for Garg personally, as well
He took a leave of absence following the Zoom layoffs and started working with an executive coach to address criticisms of his leadership style that emerged from the debacle, including claims that he could be overly aggressive and self-centered.
The last time Garg met with Insider, roughly 10 months after the Zoom layoffs, he still came across as a straight shooter, even if it sometimes led to him putting his foot in his mouth. During that interview, he admitted to having “blundered” the company’s downsizing, while also using the phrase “crack shack” to describe what a $400,000 home would look like in his hometown of Queens, NY.
This time around, Garg stuck to the message.
Whether this polished and, frankly, cookie-cutter version of Garg helps Better remains to be seen. The only hint of the former Garg — outspoken and refreshingly honest — came through when Insider asked him about a line in the company’s SEC filings that said that some of the $41 million in personal loans he received from Better could be forgiven in exchange for stock.
“The company has found a way to offset those loans, and so those loans won’t be forgiven,” Garg said, before asking for the statement not to be attributed to him, which Insider did not agree to. He said the details of the new loan forgiveness would soon be made known in a filing with regulators.
“It’ll be filed eventually,” Garg said.
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