Taking two deals a decade apart and in different industries is a recipe for a poor analogy but here goes.
Canada-based online retailer services platform Shopify took warrants in credit company Affirm in July. Converting them into 20 million shares cost one cent each.
After Affirm’s flotation and first day valuation pop it is a stake now worth $2bn.
At 8%, Shopify is Affirm’s third-biggest shareholder after founder and CEO Max Levchin (11%) and Jasmine Ventures, part of Singapore’s sovereign wealth fund GIC (9%) and ahead of venture capital firms Lightspeed Venture Partners, Founders Fund and Khosla Ventures.
Affirm, founded in 2012, partners with retailers to offer consumer loans to buy now, pay later for goods and gave up the warrants to become the exclusive provider or point-of-sale financing for Shop Pay, Shopify’s checkout service that has been booming through the covid-19 disease-induced changes to shopping habits.
The second example is Germany-based car maker Daimler, which acquired a 9% stake in Tesla in 2009 for $50m. Daimler sold part, was diluted when Tesla raised capital and exited the remaining 4% stake in 2014 for $780m.
At the time this was a fantastic financial win. Daimler’s market capitalisation is now $62bn; Tesla’s $801bn.
Effectively Tesla could buy Daimler, whose founder was one of the founders of the internal combustion engine (ICE) just as Elon Musk has put electric vehicles on the map this century, for about the value of the stake it gave to Daimler (assuming a premium for takeover).
In Daimler’s case it was interested in electric vehicles but misjudged how they would disrupt ICEs, let alone how quickly. Reaping a great financial return made sense given how near Tesla came to bankruptcy along the way but the strategic miss could be a death knell for a group that has now spun off its innovation unit last month.
So what could this mean for Shopify when thinking of Affirm?
As Jeremy Liew, partner at Lightspeed, in his blog on Affirm’s initial public offering said: “Money is a commodity. It’s impossible to charge higher than industry interest rates. So to build a strong business model, a fintech needs to tackle at least two of the four big cost line-items; bad debt (credit), marketing, cost of capital and servicing. Affirm chose to focus on building strength in the first two….
“Today Affirm is much more than a point-of-sale lender. It offers consumers a way to shop at virtually any retailer through its app. It offers savings accounts with no fees or minimums. It makes loans directly to existing customers. It even directs customers to deals and discounts on future purchases. It is building a beloved financial institution.”
Shopify helps retailers go online but is an intermediary. Affirm has a relationship with customers and the shops to cause more deals to happen. There could quickly be an asymmetry in power if Affirm’s model and development holds up and it turns into a superapp.
