I saw this great tweet on Twitter (which is just wild right now with Elon Musk taking over & the FTX situation), and I wanted to share it with you all!
"The sequel to the Social Network - where the Winklevii lose all their money in bitcoin, and the whole metaverse thing doesn't pan out for Zuck, so they're all classmates at Harvard Business School, grinding hard to become Sr. Product Directors at Apple - is going to be so good."
I cannot wait for the sequel of the Social Network.
Was this email forwarded to you?
Talkspace: I Was Really Wrong
Believe it or not, I have been wrong before when it comes to predictions and investments in the public & private markets – sometimes even really wrong.
With that being said, when I am wrong, I always try to be objective, critical of my thought processes, and identify where I went wrong in order to improve. What this often leads to is really interesting perspectives and lessons.
Sometimes I think I was really wrong because my process was wrong, sometimes I find I was wrong, but my process was right (but something unforeseeable happened) and sometimes I think I am just not right yet.
Off the top of my mind, I can slot individual companies into these three silos:
- My process was wrong: Talkspace (which we will be discussing today)
My process was right, but I was ultimately wrong: Invitae (debatable, but if no COVID and interest rates stayed low I think this would have been a life changing investment. Emphasis on would have been!)
- My process was right, and I think I am just not right yet: Paramount (whose Q3 results I am excited to break down soon.)
This piece will be the first of a two part series. The first piece will be on Talkspace, how wrong I was, and the lessons I learned. The second part will be on a company where I took these lessons, applied them, and crushed it (boom!).
Alright, time to roast myself.
It was in the depths of COVID and the SPAC boom, when I first came across Talkspace and wrote about them in my personal newsletter, Cruising Altitude, that you can read here (but really feel no pressure to read it because it is tough stuff.)
The piece launched on February 4, 2021 and Talkspace was trading @ just over $11 a share. For those that do not know, Talkspace is (was?) a company looking to innovate in the teletherapy space by providing a unique blend of therapy resources for consumers like mini therapy sessions, multiple times a week and the ability to message therapists whenever.
There were quite a few components to the Talkspace thesis that excited me. Here were five:
- Awareness - The rise of mental health awareness during the pandemic
Cost - Talkspace being a significantly cheaper option than classic therapy
- It Works - Peer reviewed scholarly studies showing the effectiveness of Talkspace’s approach
- Success - The fact the company achieved $75M in sales on just 46k customers
Dual revenue stream – B2B sales to corporations as well as B2C
There were others, but these were the key 5.
I also thought the endorsement deals with Michael Phelps (where you might have heard them from) and Demi Levato were good business too.
From a financial perspective, in the crazy and euphoric markets we were operating in, the valuation was not bad.
The company was going public at a $1.4B enterprise value while growing revenue from $75M in 2020 to $125M in 2021E and $205M in 2022E.
This represented the company trading at an 11x forward sales multiple (2021), which looked juicy at the time when seeing $TDOC was trading at 2x this. (As you know, using Teladoc as a barometer was not a good move.)
Also, gross margins were increasing significantly from 49% in 2019 to 51% in 2020 to a projected 63% in 2021.
63% gross margins and 65%+ revenue growth in a hot industry I really liked? I was in.
In the original piece, I did touch on a couple of concerns I had for the company. The main concerns were surrounding some shady reporting and news stories that came out regarding the culture at Talkspace and actions from management.
Specifically, the New York Times reported that the company made burner phones available for fake-reviews and there were other instances of breaches in customers' privacy. Talkspace had a strong response to the NYT piece denouncing the claims.
However, it did feel shady to me, especially, being a teletherapy company where customer privacy is of the utmost of importance.
I should not have been a little concerned about this, but rather very as these reports were a sign of things to come.
Sitting here today, Talkspace is trading @ $.74 a share – yes. 74 cents a share. This represents a more than 90% decrease in equity value in a little less than 2 years.
What the heck happened?
We won’t go too far into it, but starting things off, there were some serious misses on the top and bottom line.
Remember how the company projected $125M in sales on 63% gross margins? In 2021, they ended up doing $113.6M in revenue on 58.5% gross margins representing nearly a $12M top line miss and 5% gross margin miss.
The 2021 struggles continued into 2022 as analysts are expecting Talkspace to do only ~$119M in revenue. Representing explosive (sarcasm) 5% growth YoY and ~$85M short of the expected $205M in revenue that the company shared in their initial SPAC presentation.
Analysts also project the company to do $133M in revenue in 2023 while the company initially projected $285M.
I am not a lawyer, but these misses, like with so many other SPACS, are much closer to fraud than just misses.
There were also some serious happenings at the management level too.
On November 15, 2021, founders Roni and Oren Frank stepped down from leading the company. Just a week later, on November 22, 2021, COO & President Mark Hirschorn resigned from his post after his “conduct on a company offsite.”
Dumpster fire. Absolute disaster.
So what did I and could we all learn?
Wrapping It Up
What were some of the lessons I learned?
First and foremost, SPACS are really shady. A big part of the IPO process is the roadshows involved and getting grilled by Wall St.'s finest. It is my understanding that is not a part of the SPAC process. Many of the companies that went public via SPAC were likely looking for a quick exit and to get off easy. Talkspace fits this mold to the tee.
Another lesson I learned from this, just like private companies can make a nice hockey stick chart, public companies can too. This sounds pretty obvious when you read it back, but especially at the time, the concept of public traded entities sharing financial projections and not even coming close to achieving those was very uncommon.
Building off of the prior point, I have also become extraordinarily skeptical of any company trading at a significant multiple to either sales or earnings. In the wise words of my roommate, "no one knows anything." There is an incredible amount of uncertainty in this world and specifically the investing world. Even with a great, maybe even generational company like Snowflake, I have not pulled the trigger just because of its incredibly lofty valuation.
Finally, on the management side, where there is smoke there is fire. At the end of the day, management runs these companies and if you get a weird vibe from them, it likely isn't the best place to put your hard earned money.
I am excited for part two of this edition which will likely be sent next Friday as I have something else planned for Tuesday.
Our friends at CB Insights hooked us up with a great chart breaking down the current state of the Q3 tech landscape
- As you can see, there was a significant decrease in valuations QoQ in every category except Series A
- Also, overall deal volume shrank by 20% QoQ
- Click here to read the full 27 page report
Here are some jobs that I’m curating in finance and tech. Use this link to submit a role to be featured if you’re looking to hire.
Business Engagement Analyst @ UBER
Uber is looking for someone to spearhead their rapidly growing finance team in Dallas, Texas. For this position,Uber is looking for someone with experience leading and developing projects. Definitely worth checking out!
Accounting Manager @ Arc Technologies
Great opportunity to join Arc Technologies who are crushing it in changing the financing options for early stage startups. Arc is looking for someone with 5+ years of accounting/financial experience to support the Finance and Credit teams in the critical analysis of financial activities.
Trader @ Atomic
Atomic is a fascinating company that provides personalized investment management services that lets companies embed investment accounts into their services. Atomic is looking for someone to lead all of the trading operations at the company.
- Disney has lost $8B since on Disney+ since launching it 3 years ago
Kyrie didn't listen to Steve Nash's play call 10x in one game. Woah.
- If a man's best friend is a dog, a dog's best friend is a chicken?
Give me all of the fantasy football memes
- Weird hearing Sam Bankman-Fried testifying in front of Congress almost a year ago about how FTX has "complete transparency"
Thanks for the read! Let me know what you thought by replying back to this email.
Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.
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