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SoFi Lives Up to Its Name

To Our Valued Investors:

Iron Edge VC has told you about SoFi many times in the past. The San Francisco fintech has a way of providing a steady stream of new material with which we can fill these newsletters and keep things interesting. Whether they are securing naming rights on the most expensive ($5 billion) sports venue ever built, applying for a national bank charter to significantly tame operating costs, or adapting to a global health crisis, the company provides plenty of discussion material. Still, SoFi doesn’t have the name recognition of some of our other offerings like SpaceX, Topgolf, and AirBnB (although the gargantuan, illuminated logo on the roof of the aforementioned SoFi stadium a couple of miles away from the runways of LAX and its 64 million annual passengers might raise awareness), so let’s begin with a primer.

Founded in 2011, SoFi started as an experiment conducted by Stanford Business School alumni Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady. They were hoping to address the seriously flawed student loan system that has buried countless young Americans in debt. SoFi’s first foray into lending connected 100 student borrowers with 40 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 program has blossomed and expanded dramatically: within four years of this initial lending exercise, SoFi was the largest student loan provider on Earth. Since then, the company has developed other types of lending programs such as personal loans, home mortgages, and mortgage refinancing. Over the past nine years, SoFi has enjoyed robust and steady growth that has been nothing short of astounding. Their inaugural student loan program in 2011 was a $2,000,000 venture benefiting 100 students. Bear that in mind as you consider SoFi’s most recent figures: as of now the company has blown past the $50 billion mark in loan volume. In the early months of the pandemic, stay-at-home restrictions kept people away from brick-and mortar banks, propelling SoFi’s member base past one million users. In fact, the number of SoFi customers has tripled since last January. Of course, SoFi is no longer a “one-trick pony: they have reached beyond lending to build 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, stock trading, 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.

It’s the stock trading part of SoFi’s bundle of services that dominated the company’s headlines this morning.

SoFi Invest is a neat little tool. It allows you to open an app on your smartphone and with a couple of clicks make an investment in a publicly traded company. You can even buy fractional shares: If you like Amazon but you don’t happen to have the $336,000 needed for a round 100-share round lot in your account, you may buy 1/8 of an AMZN share for a little over $400. This is not a unique service: Discount brokerages have been democratizing equity trading for years, and Robinhood users also have access to fractionalized shares. The overall trend is to remove the exclusivity from the practice. It really wasn’t too long ago that investing in stocks absolutely had to be conducted by brokers who charged commissions for their work, and individuals outside of the professional financial universe rarely hand-picked the companies in which they put their money.

Today, it is commonplace to put money in a company with very little effort, and without that commission. Again, SoFi is not the only enabler of total-control trading for the “little guy”. What sets them apart, as of this morning, is the very 21st-century “social” aspect of their platform. The name “SoFi” is an abbreviation of the company’s formal name, Social Finance, Inc. The “Social” part was originally meant to refer to the pairing of those well-capitalized benefactors who supplied the funds with the students who borrowed from them. Now, SoFi Invest has a truly “social media” flavor that sets it apart from E*Trade, Schwab, and Robinhood. In an interview this morning on CNBC’s “Squawk Box”, SoFi CEO Anthony Noto announced an enhancement to SoFi Invest that will provide users with the option to follow other amateur investors, to track the buying and selling strategies of members on the leaderboard, and to comment on selected transactions. The feature mirrors the trademark “like” and “comment” actions on social media behemoths Facebook, Instagram, Twitter, and many others. While it’s not a reinvention of the wheel, this innovation is the first instance of such collaboration in the expansive arena of nonprofessional investing.

“According to SoFi’s research, about 70% of SoFi Invest member respondents indicated that they regularly discuss their investments with family members, peers, or colleagues,” Noto explained. “Our new social investing features not only help us live up to our name of Social Finance, but provide ways for investors to see specifically what members on the platform are doing with their investment decisions, discover new investment ideas, and see how they stack up in their investing performance. Given the importance of investing early and consistently, we are thrilled to be able to provide a more informative, engaging, interactive mobile investing experience rooted in building better investing habits.” When queried about the potential for stock manipulation (read: “pump-and-dump schemes) from which such open discussion might emerge, Noto pointed out that the sheer numbers involved would eliminate that risk. Nobody is going to accumulate Tesla shares, talk it up in a SoFi forum, and then unload it at a profit after the price swells from excessive fractional purchases. What’s more, Noto emphasized that the company conducted a thorough regulatory study to ensure that the new feature is fully compliant and that it protects investors from bad actors. At its foundation, Social Finance’s social investing is only a sharing of ideas. While buying and selling data are voluntarily shared, the numbers related to pricing and share volume are left out.

Why does this matter? It’s about demographics. Observers from the beginning have affectionately referred to SoFi as the finance vehicle “for the millennial”. Say what you will about those born in the early 1980’s through the mid-1990’s, but these millennials are an essential target audience. The same can be said for the group right on the millennials’ heels, “Gen Z”, to whom Noto specifically referred during this morning’s discussion. The two designations represent a massive and growing portion of commercial activity, and SoFi has their number.

SoFi is a company that we believe has its best days ahead, even considering the remarkable progress they have made in less than ten years. Although talk of an IPO on the horizon persists, its 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 uptick in visibility 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.

If you have enjoyed this article, visit the Iron Edge Blog for past updates on other pre-IPO investment opportunities.

As always, shares are available on a first come, first served basis.

All Our Best,

Paul Maguire, Managing Partner and The Iron Edge Team

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Paul Maguire

Founder And Managing Partner