Rewards with a Side of Fiscal Responsibility
To our Valued Investors:
Founded in 2011, SoFi came to life as an experimental student loan program dreamed up by Stanford Business School graduates Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady. These men were hoping to address the seriously flawed student loan system that has buried countless young Americans in debt. The inaugural SoFi program connected 100 student borrowers with 40 successful Stanford alumni, who personally financed loans valued at an average of about $20,000. Everybody won. The students received funds at a reasonable rate, the alumni lenders collected a return on their investments, and SoFi retained a piece of the interest for their efforts. From there, the flagship student loan program has blossomed and expanded dramatically. Within four years of this initial $2 million exercise, SoFi was the largest student loan provider on Earth.
After a few years of dealing exclusively in student loans, SoFi seemed to recognize that it had the foundation upon which it could build something bigger. The company extended its services into home mortgages, mortgage refinancing, and personal loans. In later developments, SoFi diversified its suite of services even further, beyond lending, by building a variety of innovative financial products — Sofi Money, Sofi Invest, and Sofi Insurance. With these new ventures, SoFi provides 21st Century solutions for age-old needs ranging from debit cards and cash management, financial advisory (with robo-advisors as well as live financial advisors for those new to investing), insurance, and all-encompassing financial and budgetary planning for individuals. Simply put, SoFi has mastered the winning combination of one-stop shopping and cutting-edge technology. Increasingly, it is becoming a veritable “Swiss Army knife” of financial services.
The entire scope of how SoFi is revolutionizing the personal finance industry is too massive to squeeze into a newsletter that aims to get to the point, so if you have five minutes to spare, watch this clip from last spring’s “Disruptor 50” special on CNBC with SoFi CEO Anthony Noto explaining what the company does for its members, as well as how seriously they take their responsibility for keeping people out of financial peril. Speaking of CNBC, or any of the other major financial news networks — if you watch them, you have seen many SoFi commercials lately. Ditto for major sporting event coverage, especially for NFL games played at the brand-new SoFi Stadium in Los Angeles. Such thunderous advertising budgets do not exist for sweet little mom and pop shops with no meaningful future. SoFi is playing for keeps.
If you’re tempted to believe that SoFi is grimly determined to build a multi-headed monster that threatens to ingest all of its competitors, so be it. After all, in less than a decade, it morphed from a $2,000,000 experiment into a $5 billion juggernaut with more than one million members. If you would like to opine that SoFi has strayed from its original spirit of offering support to those who need it (read: broke recent college grads), think again. “SoFi” is a mash up of “Social Finance”, and the “social” aspect is still not there in name alone. You already know this if you managed to break away from this essay long enough to watch the above video from CNBC, but recent headlines underscore the point. Let’s take a closer look.
A couple of weeks ago, national fraternity Lambda Chi Alpha’s CEO Troy Medley and Chief Growth Officer Doug Derringer announced an interesting partnership with SoFi. Set aside, for a moment, that the two officers have names that sound like they were lifted from a raunchy 1980’s fraternity comedy. The intention of the partnership is downright wholesome. It is aimed at “dynamically transforming fraternity culture, promoting leadership, diversity, service and health for college undergraduates and graduates”. The organization has rightly identified SoFi’s knack for teaching the principles of financial well-being to a young generation and helping to free them from the debt that would otherwise obstruct the path to true independence. They’re using SoFi to offer solutions to debt issues and assisting in the quest for financial wellness. SoFi presents to Lambda Chi Alpha members an extensive suite of services, tools and education that provides information and resources for financial planning, college savings, refinancing student loans, and more. Today, about 45 million borrowers in the U.S. collectively owe nearly $1.6 trillion in student loan debt. Read that last sentence again. Now read it out loud and think about what you’re saying. Consider where much of that money is being spent, and how little of it will ultimately improve lives on a large scale. Student loan obligation is a horrendous beast that must be tamed, and it appears that one fraternity has found the right weapon with which to fight the good fight. Let’s hope many similar organizations follow suit.
In the real world (outside of college campuses), SoFi has brandished yet another bow from its quiver of fiscal responsibility. Last month, SoFi launched a new credit card, available only to its members. Like many other card issuers, SoFi offers cash back in return for purchases made on their cards. If you take even a cursory glance at the junk mail you retrieved from your mailbox today, you will likely see blaring advertisements for up to 2% in refunds on every dollar you spend. On the surface, SoFi’s offering is the same, but it comes with a twist. SoFi innovates with the best interests of its members in mind. As such, the deal they propose is that members receive an automatic 1% cash back on every purchase, but the other 1% has to be earned by the member’s demonstrations of prudent money management. The second 1%, which can be viewed as a 100% bonus added to the first 1%, kicks in if you deposit the cash into a SoFi Money account, buy shares through a SoFi Invest account, or make a payment on a SoFi student or personal loan. While some may see the qualified bonus as a restriction, perhaps it should be regarded as a helpful guide, or a trainer for those who could use an incentive to make good decisions. In any case, the majority of SoFi’s members (and cardholders) fall into the “millennial” category. Through no fault of their own, many of this demographic need to be shown the way to financial independence and will benefit from the kind of steering that is characteristic of the cash-back-boost scheme. SoFi seems to recognize this. By rewarding members for smart financing, they just might be redirecting millions of lives onto a much more beneficial path, all the while making a buck or two for SoFi shareholders along the way.
Social Finance is a company with a social conscience. At Iron Edge VC, we believe it has its best days ahead, even considering the remarkable progress SoFi made in less than ten years. Although the chatter of an IPO on the horizon grows ever louder, SoFi’s shares are not yet for sale in the public markets. Your friends at Iron Edge VC can get you in through the front door and give you access, nonetheless. Our inventory is priced at a very attractive valuation for now, but the speculation about an imminent listing could change this quickly. If you would like to learn more, or if you know of anybody else who would, please do not hesitate to contact us by clicking “Get in Touch” below.
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All Our Best,
Paul Maguire, Managing Partner and The Iron Edge Team