NerdWallet Takes Its Unique Business Model Public
Personal finance company, NerdWallet (NASDAQ:NRDS), filed to go public at a time when Americans have never been more engaged with financial markets. We typically think of the democratization of investing in terms of brokers like Robinhood Markets (NASDAQ:HOOD), or meme stocks, but the personal finance industry has been booming as a result of increased information and a desire by more and more Americans to improve their financial wealth. NerdWallet provides much sought after personal finance content for consumers and small-to-medium businesses (SMBs). You can think of it as operating within the same market opportunity as fintech start-ups but offering a very different service. NerdWallet will list through an initial public offering (IPO) and intends to use $29 million of the net proceeds from its IPO, to repay outstanding debt incurred through promissory notes. The residual will be spent on “general corporate purposes” such as capex, operating expenses, and working capital. According to Crunchbase data, the company has raised $105 million across its lifecycle to date. The company last raised capital when they entered the secondary market in May of this year, raising an undisclosed sum of money. The company’s last private, publicly available valuation was in 2016 when the company was valued at $520 million. The company’s valuation is expected to be $5 billion. NerdWallet did not disclose how many shares it planned on selling, nor their price, or the amount of capital it seeks to raise. These details will emerge later with amendments to the S-1 filing.
NerdWallet was founded in 2009 with a mission to give its consumers and SMB customers unbiased guidance, help them get the best credit cards for their needs, guide them through their insurance, loans, and mortgage decisions, and help them get the best possible financial advisors. The company has recently entered the Canadian markets as its business model proves a success.
The company’s revenue is largely derived from its ability to refer users to its over 400 financial services partners. This model demands that the business demonstrates that its recommendations can be trusted. Its biggest competitors are Credit Karma, Bankrate, LendingTree, and Zillow (NASDAQ:Z). Given the attractiveness of the personal finance market, it’s not surprising that Inuit (NASDAQ:INTU) bought Credit Karma, in a $8.1 billion deal in 2020.
The company has also brought about life in 2016, a financial planning business geared around the retirement segment, for an undisclosed amount.
The brand is further strengthened by its ownership of three trademarks:
TravelNerd®, registered in October 2012. This software allows people to search, view, and compare airline fees, gasoline prices, and airport information.
NerdWallet®, registered in December 2015. This trademark is organized in the financial consultation realm and is targeted at individuals.
In July 2018, NerdWallet registered Turn to the Nerds® to promote goods and services of third parties giving them a website with coupons, price-comparison information, financial products, rebates, product reviews, discount information, and links to retail websites.
Although many people think of NerdWallet as a content provider, it is in many ways a matchmaker. On one side of the two-sided model, are providers and on the other, the consumers and SMBs that consume NerdWallet’s content. NerdWallet matches providers to customers that the company describes as being, “ready to transact”. NerdWallet enjoys network effects through this underlying matchmaking model of the business. As more consumers use the company’s platform and engage with its financial guidance and tools, its database of transactions and consumer data grows, and its product recommendations become more accurate. The result is improved user satisfaction, and higher rates of conversion of users into Registered Users, and an improvement in repeat user rates. Machine learning is a vital part of the company’s approach, giving the company more predictive power, and the possibility to better match high-quality consumers with the products and services on the platform. As this happens, the value of the network grows, attracting more customers and more partners and financial products and services. This is a classic example of a platform or network effects and often goes unremarked by financial commentators.
The pandemic hit the company hard
Interestingly, the pandemic did not pour rocket fuel into the company’s model. This is interesting because, given the disruptions to income, coupled with the stimulus checks that Americans received, there would have been a massive incentive to find ways to improve a person’s financial wellbeing. Yet, this did not happen. The decline in the growth and profitability of the company has been blamed by the company on the pandemic and how it caused a decline in the number of financial services partners to market their credit cards on NerdWallet’s platform. There was a slowdown in credit-card approvals and credit-card revenue fell 30% in 2020. Added to this, customers limited their spending during the pandemic.
It was able to constrain its variable costs, so the pandemic did not prove fatal to the business model. In addition, the decline in interest rates caused the firm’s loan revenue to climb some 48%. In 2019, revenue was at $228.3 million, which grew by just 7.5% in 2020, to $245.3 million. For a mature firm, that’s sensational, for a venture-backed start-up, those are the kinds of numbers that can kill a company.
The personal finance giant’s income was also hit by the pandemic, narrowing from $24.2 million in 2019 to an anemic $5.3 million in 2020.
The Company is in recovery
The company was able to turn its bad 2020 around and 2021 has seen rising revenues, its best year in terms of profitability, and maintain its reputation as a trustworthy source of personal finance content.
Growth has picked up in 2021, with the company posting revenues of $137.3 million in the first six months of the year, 32% higher than what it made in the same period last year.
The company continues to gain in traffic. NerdWallet reported an average of 21 million monthly unique users (MUU) on its website for the first half of the year, up from 16 million in 2020. The company defines MUU as a unique user with at least one session in a given month.
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