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Better: The quick mortgage company's catastrophic debut and what went wrong

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2023-08-25

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In a dramatic turn of events, Better, a swift mortgage company based in the US, experienced a devastating debut as its shares plummeted by over 93% on Thursday.

Reuters approached the unfolding catastrophe with caution in its headline: "Mortgage lender Better's shares in grim Nasdaq debut."

In retrospect, it seems that Better was a disaster in the making. The company's entry into the market was facilitated through a merger with Aurora Acquisition Corporation, a Special Purpose Acquisition Company (SPAC) supported by Japan's conglomerate SoftBank and Icelandic billionaire Thor Björgólfsson.

So, what caused this abrupt downturn? The merger with Aurora took place on Wednesday, with Aurora's shares closing at $17 that day. However, the very next day, as mortgage rates spiked to two-decade highs of 7.5% or more, Better's shares took a nosedive. Unfortunately, the timing couldn't have been worse.

Deeper investigation reveals that no one involved in the company seemed to consider the timing. The merger with Aurora occurred on Wednesday, followed by Better's debut on Thursday—precisely a day before Fed Chair Jay Powell was scheduled to speak at a Fed function in Jackson Hole, Wyoming. Investors feared Powell might convey a hawkish stance on future interest rates, potentially rattling the US interest rate structure.

Under these circumstances, it's no surprise that Better's shares closed at $1.15, having plummeted to as low as 77 cents. Investors were hesitant to hold shares in a highly speculative, mortgage rate-sensitive stock. By the close of trading on Thursday, the company's valuation had dwindled to $484 million.

This is a stark contrast to two years ago when Better initially unveiled plans to go public at a valuation of $7.7 billion. Back then, interest rates were lower, particularly for mortgages, the housing market hadn't dipped into a recession, and the company was emerging from a year in which it claimed to have garnered $500 million in profits.

Ironically, the involvement of SoftBank, and even the concept of Blank Cheque Companies or SPACs (Special Purpose Acquisition Companies), which were once seen as promising investment ideas, failed to prevent this disaster.

The Financial Times reported that Better's CEO, Vishal Garg, made international headlines for dismissing 900 employees via Zoom. He established the company in 2016 and revealed that the path to the float took two years, contrary to the original two-month estimation.

Better prided itself on offering a swifter and more economical mortgage approval process, partially achieved by eliminating conventional industry practices such as commissions for loan officers. However, the company's surge was fueled largely by existing homeowners refinancing their mortgages at lower rates. With minimal new business, the boom eventually gave way to a bust. Notably, the company commenced laying off employees in November 2021 through a highly publicized Zoom call.

Throughout 2022, as it bled cash and faced numerous high-profile missteps and negative publicity, Better continued to shed workers.

Backed by venture capitalists including Kleiner Perkins, Moderne Ventures, Goldman Sachs, Alumni Ventures, and 1/0 Capital, who relentlessly advocated for the SPAC merger, Better Mortgage's IPO proceeded only to unravel dramatically on that fateful Thursday.

As the year progresses, Better is emerging as a prominent contender for the title of 'Dog Stock' of the year when accolades are distributed early next January. Meanwhile, Nvidia, the AI chip company, already appears to have secured the winner's position.

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