Porch’s merger with a blank-check company will wipe out its history of losses and set the stage for massive revenue growth, according to the startup’s chief executive.
In an interview with The Real Deal, founder and CEO Matt Ehrlichman defended Porch’s finances after an IPO filing revealed $263 million in cumulative losses as well as liquidity concerns.
Ehrlichman said the deal would give Porch $200 million in cash and no debt. “It gives us a significant war chest, which we can use to play offense,” he said. In particular, he said, acquisitions would be a “meaningful” part of Porch’s strategy going forward.
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Founded in 2011, the Seattle-based startup provides software to home-services companies in exchange for data on their customers; it then sells other home services to those customers.
In July, Porch disclosed it would go public by merging with PropTech Acquisition Corp., a special-purpose acquisition company led by Abu Dhabi Investment Authority veterans Thomas Hennessy and Joseph Beck.
Hennessy said PropTech tracked 300 companies before striking a deal with Porch, which he said has strong fundamentals, including 80 percent margins. But Porch’s accountants raised “substantial doubt” about its ability to stay in business, according to its S-4 filing. The company has been losing money each year, with $49.9 million in losses in 2018 and $103.3 million in 2019, according to the IPO filing. It is projecting a loss of $34 million in 2020.
Hennessy said that Porch’s losses are similar to any other fast-growing, VC-backed startup.
“The question is, can that business demonstrate that they have a proven revenue model?” he said. “Can they have real unit economics? Can they demonstrate they can get to EBITDA positive?”
“Porch has proven out all three of those things,” Hennessy said.
By growing its core business and adding new verticals, Porch is eyeing $1.5 billion in revenue within a few years, according to an investor presentation. The company is projecting $120 million in revenue in 2021, up from $77.6 million last year. And Ehrlichman said the company became profitable in June with $7 million in EBITDA by holding research and development expenses flat.
Porch started focusing on profitability last year as it planned a traditional IPO in 2021, according to Ehrlichman.
“I am not naturally a patient person,” he said. “The whole point in taking the company public through a SPAC versus going through a traditional IPO a year later is to be able to capitalize the business as well as we are, faster, so that we can go and be aggressive and take advantage of the M&A opportunities.”
The IPO filing also noted that without raising additional cash, Porch “will not have sufficient cash flows and liquidity to fund its planned business for the next 12 months.”
But Ehrlichman said many privately held startups are “almost always operating at less than 12 months cash.” The transaction will give Porch ample cash thanks to a $150 million PIPE — a private investment in public equity deal, which is when private investors can buy a publicly traded stock at a price below the current market value — led by Wellington Management.
In the investor presentation, Porch said it can grow its core business to generate up to $500 million in revenue in five to seven years. It outlined other revenue opportunities, including mover marketing ($200 million), insurance expansion ($400 million) and new home services ($400 million).
It’s not the first time Porch has made changes to its model. The company initially billed itself as a data-driven home services marketplace, but pivoted to a high-margin business model in 2015. “In retrospect it’s obvious, but the insight at that point was, ‘OK, people just don’t hire that many pros,’” Ehrlichman said. By providing software to home-services companies, Porch gets early access to their clients and can sell them products ranging from TV installation services to insurance.
Ehrlichman said adding verticals now is dependent on going public, so the company has “more capital and can be aggressive with M&A.” Since 2017, Porch has spent $38.2 million to acquire companies and build its platform, according to the IPO filing.
Porch is tracking 150 companies for potential M&A opportunities, and Ehrlichman said it is “deep in the negotiation phase” with seven firms representing $180 million in annual revenue.