Twitter has many problems - and one of them could boost my net worth.

That problem is the departure of its chief operating officer, Anthony Noto, to become CEO of San Francisco-based consumer lender, SoFi on March 1.

And the reason that departure could make me better off is that I invested in SoFi in December 2014 when the company was valued at $1 billion. The last time SoFi raised money - in 2017 - it was valued at $4.3 billion.

Up until November 2014, I had invested in six startups, three of which went out of business and three of which were sold for a total of more than $2 billion.

There are five reasons I invested in SoFi  -- of which these four are the most important.

1. It was targeting a huge market

Investors are inclined towards startups that seek to generate revenues from huge markets. That's because in the most optimistic scenario, the venture is likely to gain 10 percent of that market.

And since a rule of thumb is that most startups need at least $100 million in revenue to go public, an investor will be happier if the startup is targeting a market that generates at least $1 billion in revenue.

SoFi started out targeting the $1.2 trillion student loan industry and in 2014 announced an expansion into the $12 trillion mortgage market..

These are huge markets. But most investors are interested in knowing the size of a startup's addressable market--that is, the specific segments from which the company will draw revenues.

SoFi was targeting students at relatively selective schools--such as Stanford and Harvard--and my analysis of the company convinced me that student loan and mortgage demand among such schools' alumni would constitute a big market opportunity.

 2. Its management team had excellent industry knowledge

Investors seek great management teams to deal with the uncertainty involved in turning a decision to target a big market into substantial revenue.

Ideally, a CEO would be someone who knows an industry well based on previous experience, is highly intelligent and motivated and can build a team of strong executives.

When I considered SoFi, I was pleased that its CEO, Mike Cagney, had extensive industry experience--having worked as a head trader at Wells Fargo and was smart--holding a graduate degree from Stanford Business School. Moreover, he had attracted top talent--SoFi's Chief Operating Officer was previously CEO of KKR Financial and Treasurer of Wells Fargo.

 3. It knew what ailed stakeholders and provided a remedy

A startup must deliver a solution to problems that other companies are not solving. To accomplish this, an entrepreneur must know all of a venture's stakeholders--groups of people such as customers, employees, suppliers, and investors--what is ailing them, and how the venture can relieve that pain.

SoFi seemed to have pinpointed a pain point for students who borrow money--the loan rates were too high. And it saved money for the borrowers. Of the 15,500 borrowers who had taken out about $1.3 billion worth of loans in 2014, SoFi estimated that it had saved the average borrower $11,783.

In October 2014 SoFi announced its intention to raise at least $200 million in an initial public offering in 2015.

 4, It looked like it could reach $100 million in revenue

A venture is not likely to sell its shares to the public unless it is growing rapidly and reaches at least $100 million in revenues. I expected SoFi to reach this magic number in 2015.

When it comes to investing in startups, things don't always turn out the way you expect.

In the case of SoFi, the 2015 IPO did not happen and that fantastic management team departed en masse during the fall of 2017 as allegations of sexual harassment and compliance violations were leveled at Cagney and others - prompting their sudden departures in September.

This news surprised and disgusted me. And it made me wonder whether SoFi's excellent financial results were tainted.

But perhaps they were not - its most recent results indicated the company had what it takes for an IPO. In November 2017, Bloomberg reported that in the third quarter of 2017 SoFi's adjusted operating revenue rose 8.2% to $145.3 million in the third quarter while its adjusted earnings totaled $56.1 million.

Moreover, SoFi added 55,000 members in the quarter to a total of 400,000 - having completed "more than $3.52 billion in loans in the period and completed three securities offerings totaling more than $1.5 billion," according to Bloomberg.

I was hoping that SoFi would be able to hire a strong replacement for Cagney and was delighted to read on January 23 that Noto - "one of the most respected bankers at Goldman Sachs before becoming the chief financial officer of the National Football League and then Twitter," according to the New York Times, was leaving Twitter for SoFi's top job.

This is not good news for Twitter whose CEO, Jack Dorsey, has the same job at Square, a payments company. Noto had been credited with helping to staunch the outflow of talent from Twitter and finding a way for it to make money.

While Twitter's stock price "has fallen steadily over the last three years, in the last few months it has ticked upward. [On January 23], after Noto's departure was announced, the company's shares fell nearly 4% before recovering some of the loss," wrote the Times.

It is hard to imagine a better person to become CEO of SoFi. Noto has taken companies public and has expertise in "technology, consumer and financial businesses," according to Hutton.

This is Noto's first chance to apply this talent and experience to taking a company public as its CEO.

I wish him well.

Published on: Jan 24, 2018
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