$DAVE is a Garbage SPAC Cash-Out with Dwindling Economics, Rising Headwinds, and Plenty More Room to Fall

~75 percent down and up to 100 percent more to go

(A note from Eclipse: this is our first note, and it came out to be a doozy. We hope you’ll see early on why it’s worth reading till the end.)

$DAVE is a glossy, Mark Cuban and Diplo-backed fintech lender-cum-banking app that offers “members” tip-based payday advances of up to $250 and a range of other services for a $1 monthly fee. Invoking a “David vs. Goliath” narrative, the company went public through a SPAC merger that closed in January 2022 with a valuation close to $3 billion.

But despite the feel-good story of the little guy beating the big banks, the slick website, and the tidal waves of VC and other funding, a look under the hood reveals that Dave is little more than an over-inflated balloon of fintech hype. 

Our findings include the following:

• Dave is a textbook COVID-era SPAC pump laden with dismal financials, data-flavored buzzwords, and a hefty investment from Tiger Global. Dave was growing meaningfully before COVID, but a flood of hot money pushed the company to a valuation that continues to defy financial realty—even given the recent correction.

• Dave faces rapidly deteriorating unit economics, a declining macro environment that it remains completely unready to grapple with, an increasingly unfavorable competitive landscape within which it has already failed to meaningfully position itself, and a varied array of regulatory headwinds for which it appears to be wholly unprepared. 

• Management seems clueless about how grave the situation is, let alone how it will dig the company out from its current hole. But with a coming deluge of lockup expirations, insider shareholders, executives, early investors, and SPAC management are poised to trample retail shareholders on their way to the exit.

Dave stock has fallen as much as 89 percent from its post-IPO high, and the company has recently been the subject of investigations by journalists with both broad and financial audiences.

Still, we at Eclipse think that there’s still much more room for the stock to sink, and that the worst has yet to come to the surface regarding the insanity of this company’s valuation.

The following is the deepest dive yet into Dave—and why the company may soon be trading below its $1 monthly membership charge.

Dave: Just the Tip

Good UX, Bad Loans

Dave was co-founded in 2016 by John Wolanin, current CTO Paras Chitakar, and, perhaps most importantly, current CEO and general face of the company Jason Wilk. Wilk’s background is as a serial entrepreneur, having previously started a discount golf equipment site, a company that makes whiteboards, and a “video syndication platform.” Like with other tech founders, Wilk’s lack of prior expertise in the area his company operates is often framed as an asset.

After a bit of iteration, Dave now offers consumers the following:

• “Insights”: With their $1 monthly subscription, members get alerts for upcoming due dates for recurring payments like rent and utilities. Dave is also partnered with LevelCredit to report rent and bill payments to credit bureaus so that borrowers can build up a credit history.

• “ExtraCash”: This is the lending thing. Dave offers “free” overdraft protection of up to $250 without a credit check. Borrowers are offered/encouraged to pay with a “tip” ranging from 0 percent to 20 percent of the amount borrowed, and they can pay a fee ranging from $1.99 to $5.99 based on how much they take on to get their cash within eight hours. Members would otherwise have to wait one to three days for a deposit. The app defaults to setting tips at 10 percent, and it nudges borrowers toward tipping in part by noting a charity partnership wherein Dave plants a tree for every percent that the borrower tosses Dave on each transaction. (E.g., a five percent tip on a loan means five trees.) Vice reports that “If you opt to leave no tip, the app displays an unhappy avatar and reminds you that you’re not helping the charity organization the company works with,” and Business Insider reports that the default tip will snap back to 10 percent even after a borrower manually enters a lower one. Consumer advocates and journalists have noted that Dave’s “tips” can deceptively sneak in charges equal to an APR of 200 percent or more on each loan.

• “Side Hustle”: Given Dave often talks about targeting consumers living paycheck to paycheck, it’s only natural it would help people find jobs that ensure they’ll remain in that financial status. We’re kidding. Side Hustle is a platform Dave members can use to find gig work like food delivery jobs with DoorDash. Dave gets a referral fee.

• “Dave Banking”: Dave offers a virtual checking account through Evolve Bank of Arkansas that is (currently) free of overdraft and minimum balance fees. Like most fintech “neobanks,” Dave’s revenue on these accounts comes from interchange fees, out-of-network ATM fees, and the like.

Dave grew fast despite some . . . hiccups . . . after its founding, reaching unicorn status and boasting four million users before COVID. Describing his long-term vision for the company, Wilk said, “We’re not sure yet[,] we just know that people are mad about lots of different things. . . .”

Then COVID Arrived, and Things Went Insane

Dave got a first taste of the COVID-era money feast in January 2021 with the announcement of a $100 million line of credit from Victory Park Capital, a private equity firm in Chicago. Victory Park Capital had already led a $110 million debt issuance for Dave in 2019. 

Once it had a bite of COVID Cash, Dave couldn’t get enough. Victory Park next served Dave up a SPAC, VPC Impact Acquisition Holdings III (let’s call it “VPC3”), which had been looking to be paired with a fintech company that had “an enterprise value of approximately $800 million to $3.0 billion.”

(Victory Park additionally blessed public markets with VPC Impact Acquisition Holdings I, which merged with the crypto exchange/catch-all fintech thing Bakkt in October 2021, as well as VPC Impact Acquisition Holdings I. Bakkt is now trading ~70 percent below IPO value and ~95 percent below its post-IPO peak, while VPC Impact Acquisition Holdings I is still looking for a fintech partner to take to the dance after being broken up with in March by the Indonesian online lender Kredivo.)

Dave and VPC3 announced plans to merge in June 2021 at a $4 billion market cap upheld by a $210 million PIPE led by Tiger Global. Note that the implied EV of the deal was $3.6 billion, well above VPC3’s stated upper bound for its de-SPAC target, and that Tiger alone accounted for $150 million (70+ percent) of the PIPE, representing a third of the overall cash ultimately raised in the transaction. 

As we see it, when the history of Dave is written, the merger announcement will likely mark the company’s high point.

The SPAC deal dragged on for months, with Dave eventually going public in January 2022 at a market cap of slightly more than $3 billion—a quarter less in value than it was signaling only weeks before—and with an additional $15 million in PIPE support kicked in from Sam Bankman-Fried’s FTX.

What followed has mostly been carnage, even with a cash boost and associated brief rally in March 2022 after Dave announced FTX invested another $100 million through a convertible coming due in 2026 with a conversion price of $10.

Oops.

Now, Reality Bites

Comparing any SPAC’s initially projected financials to realized results is always a hoot, but Dave’s case is an outright holler. Consider the following comparison of Dave’s June 2021 investor presentation to what ultimately arose for 2021 and where guidance now sits for 2022:

• In its June 2021 presentation, Dave projected $193 million in revenue for 2021 and $377 million for 2022. 2021 revenue ultimately came in at $153 million, a more than 21 percent miss, and 2022 revenue guidance has fallen by almost half to $200 to $230 million.

• In its June 2021 presentation, Dave projected a $9 million EBITDA loss for 2021 and $12 million of positive EBITDA for 2022. 2021 EBITDA ultimately came in at a $14.7 million loss, a 63 percent greater loss than projected, while Q1 2022 EBITDA alone was a $32 million loss—leaving Dave a $44 million-ish EBITDA hole it has to dig out of before EOY to hit its target.

• In its June 2021 presentation, Dave projected it would have an average revenue per user (ARPU) of $42 for 2021 and $55 for 2022. Dave does not report ARPU directly, but it noted having 6 million members at the end of 2021 and revenues of $153 million for the year, implying an ARPU of only $25.5. Those figures represent a more than 39 percent miss. Hitting the 2022 estimate will require the company more than doubling ARPU by the year’s end.

Indeed, things are bad at Dave.

But they will also get worse.

Dave’s Corpse is Rotting

Dave’s market cap now meanders around $850 million, which places its EV at roughly $707 million, or 4.4x LTM revenue (~$161 million). Hardly the fintech multiple of yore, but even that valuation is too high.

We anticipate that Dave will see slowing revenue, rising costs, and accelerating cash burn over the next few months as it ramps up spending on an uphill battle for growth. It will be doing so against a macro, competitive, and regulatory tempest for which it barely has a poncho. And it will fail.

The results of our investigation into Dave include the following:

The future of Dave’s P&L is bleak, with its unit economics moving against it precisely as it grasps for a straw-thin narrative of shifting toward “transacting” members. 

Dave’s pitch for investors has generally involved having relatively efficient customer acquisition and a flywheel through which it would be able to cross-sell customers into a growing menu of accretive offerings. From there, execs claimed Dave would “rinse and repeat the strategy across this deeply fragmented FinTech ecosystem to get customers into other products like insurance, investing, warranty, protecting at no additional cap to our our [sic] existing customer base, which means we can do so at much better pricing and continue to disrupt this industry.”

But that story is already breaking down. By March 2022’s presentation on 2021 earnings, member acquisition costs had grown 45 percent year over year, and average revenue per member had shrunk 13 percent.

As they say, that ain’t it, chief.

Dave has recently defended its growth narrative by gesturing in the direction of “monthly transacting members,” a term for those “who have made a funding, spending, ExtraCash or subscription transaction” with the company in a given month. Transacting members bring in more than four times the revenue of the overall average user, and, to hear management tell it, Dave is on a path to grow their numbers by pushing ExtraCash and turning its higher-margin banking segment into “the primary product of Dave” (see the last link).

Dave leadership could not have been more blunt in centering its prospects for recovery and growth around these transacting consumers, drawing attention in its Q4 2021 earnings call to specific metrics it had newly begun publishing on the number of monthly transacting members it could claim and the number of transactions those members were making.

Dave really wanted you to pay attention to these metrics that would end up falling by next quarter.

But when Q1 2022 earnings arrived, it turned out that the number of monthly transacting members had fallen from 1.51 million at the end of 2021 to only 1.45 million, and that transactions per monthly transacting member dropped from 4.5 to 4.4.

From the 8-K’s, and from the bottom of our hearts.

This all reflects a failure of the first “key component” of the near-term strategy that Dave articulated in its Q4 2021 earnings call—Dave wants user growth and rising per-user utilization, but consumer acquisition is slowing, and each individual user is now less engaged. The failure of the second key component—increasing ARPU—was discussed above, but it bears repeating that per-user revenue is on a downward trajectory.

Unfortunately, the third key component also seems to be failing, as banking adoption appears to have slowed. Dave Banking launched in December 2020, and by June 2021 Dave reported that it had garnered 1.3 million members. But in his Q4 2021 earnings call, CEO Jason Wilk reported that only about “2 million people” opened accounts in 2021. This implies that Dave Banking enrollment slowed substantially in the latter half of 2021.

Even the company’s non-GAAP (read: made-up) metrics like “variable profit margin” and the more familiar adjusted EBITDA are already getting worse, all while management continues leaning into a dying narrative. 

Dave is a company on the precipice of paying more to get less, all before it has even garnered much to show for its existing user base—let alone before showing profitability.

Dave has failed to stand out in a competitive landscape and macro environment that are already becoming more difficult.

Dave operates in a crowded space that faces growing secular headwinds, and it isn't even well-positioned or differentiated within that field. 

Dave’s competitors include online cash advance companies like MoneyLion, Albert, Earnin, Klover, and Brigit, as well as fintech banks/neobanks that offer cash advances or free overdraft like Chime, Varo, and Current. That’s a lot of names, and with markets recently turning it’s likely that the most recent herd of fintechs is on the cusp of being culled. (Some of that will involve consolidation, of course, but we’re skeptical Dave will be a worthwhile M&A target—more on that below.) That bodes poorly for Dave.

Meanwhile, the big evil banks that Dave will need to win existing and new customers from have recently cut back substantially on overdraft and NSF fees. Those fees are still certainly present, particularly for some of the bigger names like Chase, but bank customers are notoriously sticky in part due to the massive headache that switching institutions can involve.

With legacy banks playing a bit nicer, it’s more than possible that the incentive to jump ship will now be lower than the hurdle to do so for many of the disgruntled bank customers that Dave needs to woo.

Perhaps that's why interest in names across the neobank and online advance sector appears to have flatlined, with Dave’s relative position among its peers also remaining stuck for at least the past year:

The flatlining pulse of the fintech industry.

What is Dave doing, then, to stand out in the crowd and prove its value to customers? What are Dave’s plans to win the public over beyond boasting, as it did in its Q4 2021 earnings call, that “Of the top 50 financial apps, Dave was the only one with a recognizable mascot, an approachable bear”? (Wilderness advice: do not approach bears.)

The answer seems to be “fumbling around aimlessly.”

Dave introduced its Side Hustles feature to fanfare in April 2020, taking what seemed to be a meaningful step toward offering more wraparound services across users’ financial lives. But by the time of its Q1 2022 earnings call, Dave management admitted it was “looking to revamp that product.”

What else is in the pipeline? Well, management has sort of been making noises in the direction of remittances (a market it ostensibly knows nothing about) and crypto (just in time!), while a recent report noted that “The company is rolling out a savings account and after that a Venmo-type product that will allow customers to send and receive cash from friends and family.” 

It’s not obvious how a company that markets to the “more than 150 million Americans [who] are financially vulnerable” plans to build a business on savings accounts, and it’s even less obvious why Dave thinks its “Venmo-type product” will be competitive against . . . Venmo (or Zelle, or Cash App).

Oh, and Dave’s CFO said the company might try to get a bank charter. Got it.

Notice that management isn’t even talking anymore about the “insurance, investing, [and] warranty” products it was touting when it announced the SPAC deal in June 2021. That’s because Dave execs don’t seem able to keep their attention on any new product add-on long enough to execute, let alone to introduce those features as part of a holistic and meaningfully plotted business strategy.

Instead, the one thing that Dave has done is change its tune on fees. 

First, the company announced in November 2021 that it would charge users its $1 monthly subscription fee regardless of whether they had a connected bank account.

Then, Dave management took a new rhetorical line on overdrafts, likely driven in part by the company’s newfound emphasis on its transacting members. 

For example, speaking at a hearing of the U.S. Senate Committee on Banking (more on this below), Dave CEO Wilk said, “Ultimately, we view overdraft as a positive product.” In written testimony for the hearing he added, “We realize that overdraft - as a short-term solution for the next tank of gas or bag of groceries - is critical to millions of Americans.”

Recall that when the SPAC merger was announced, Wilk said “We’re going up against big banks in the $30 billion of overdraft fees they collect from consumers every year. Our mission at Dave is to create financial opportunity that advances America’s collective potential. Our goal is to put that $30 billion of fees back in our consumers.”

It seems now that at best Dave wants to create a world where people still do pay billions in overdrafts, just with more of it going to Dave, and possibly with some savings happening along the way.

That could be an incremental net positive for consumers, but it is a far cry from the feel-good story Dave was telling in 2016/17. We’ll see whether the new message drives customer acquisition, particularly given that Dave’s “tips” can still amount to a hugely expensive finance charge and that competition from banks (as discussed above) is rising.

Management is stunningly unprepared for growing regulatory scrutiny, putting the entire firm at risk.

One might expect a founder entering an area as tightly regulated as the consumer financial services space to proceed with caution, to be careful in learning the rules of the road, and to take extra steps to show good faith with his or her many inevitable regulators at the state and federal level.

But the era of uberized policymaking, a hubristic white guy founder like Jason Wilk knew that the path to riches could be paved—hell, that it could be crossed even more quickly—by acting first, laws be damned, and asking for forgiveness later.

Unfortunately for Jason and for Dave shareholders, the company’s noncompliant chickens are likely about to come home to roost.

Extensive scrutiny surrounds online advance lending, including as it pertains to tip-based loans. The federal Consumer Financial Protection Bureau (CFPB) issued Dave a Civil Investigative Demand (basically a subpoena) in May 2020 inquiring about various possible areas of wrongdoing. The Bureau announced in October 2021 that it had given the company the all-clear (for now), but in the meantime CFPB went on the warpath against so-called “junk fees,” a catch-all for fees that are frustrating, confusing, hard to avoid, concealed until the last minute at checkout, or disconnected from the cost of actually delivering a service. 

Consumer advocates including Americans for Financial Reform, the Center for Responsible Lending, the National Consumer Law Center, and the Consumer Federation of America pointed specifically to many of the fees Dave relies on (such as charges for expedited loan access and loan tips) as “junk fees” in a lengthy May 2022 letter to CFPB.

Regarding fees for early loan access, the groups said, “the fees are inflated, beyond the cost to the provider of sending the money instantly.” 

On tips, they wrote: “The ‘tips models’ is [sic] evasive and deceptive; fintech companies utilize these tips as an attempt to mask finance charges, evade interest rate limits, and hide overdraft fees. Tips added by default can result in APRs that can reach 520% and create cycles of debt. Though purportedly voluntary, companies have continuously evolving ways of pressuring people into “tipping” or making it difficult not to tip. Tips are unlikely to be truly voluntary, and even if they are, the label does not change the cost to or the impact on consumers.”

The advocates also touched on many of the other assorted banking and debit card fees that Dave relies on. It’s unclear what CFPB intends to do on “junk fees,” but it’s extremely likely that the charges Dave deploys will be in the hot seat.

And CFPB isn’t the only regulator taking an interest in Dave and its friends. In fact, CFPB specifically clarified in a 2022 letter that tip-based loans are not shielded from definitions of “credit” or “loans” under state law.

This means that lenders like Dave will have to comply with state statutes such as usury caps and that state law enforcement can have the authority to investigate these companies and enforce both state consumer protections and federal consumer laws that delegate authority to states. One powerful example is the Consumer Financial Protection Act’s far-reaching move of empowering states to enforce a ban on so-called unfair, deceptive, and abusive acts and practices.

And look at that: twelve states who probably can’t agree on anything—including Texas, South Dakota, and Oklahoma alongside New York, New Jersey, and Illinois—announced a sweeping joint investigation into tip-based lending in 2019. As of this month, that investigation is still ongoing. But we can’t imagine that such a diverse set of states would have joined together if they didn’t already perceive of there being massive, blatant wrongdoing in this space.

In fact, states are already acting against tip-based lenders who skirt the law. Connecticut and Minnesota both recently went after the tip-based lender Solo Funds for operating without a license, which it claimed it did not need to have because its loans were tip-based. Minnesota has also gone after MoneyLion, one of Dave’s competitors, for unlicensed lending, while DC settled for $1.5 million with OppFi (an online payday lender) for breaking the District’s usury cap.

What is Dave doing, then, to play nice and step in line to protect its business? Management is taking the bold, proactive step of disclosing in its 2021 10-K (and reiterating in its Q1 2022 10-Q) that it is not licensed as a lender in a single state, and that it is insistent on having that remain the case. (Solo Funds would like a word . . . )

I just . . .

Dave entered into a mysterious memorandum of understanding with California’s Department of Financial Protection and Innovation, described as the Golden State’s version of the CFPB, under which it has to “provide the CA DFPI with certain information as requested by the CA DFPI and adhere to certain best practices in connection with our non-recourse cash advance product (including certain disclosures related to us not being licensed by the CA DFPI).”

The company is still not registered with the DFPI, and it’s unclear whether the memorandum provides Dave any legal cover for wrongdoing that may come to light—or who initiated the agreement in the first place. 

Meanwhile, Congress is closing in. The House’s Task Force on Financial Technology held a hearing on emerging digital loan products in November 2021, and Dave was specifically mentioned in the hearing memorandum and in testimony from consumer advocates. Then, as mentioned, the Senate Banking Committee held a hearing on overdraft where Dave CEO Jason Wilk testified, and where Senator Raphael Warnock (D-GA) described overdraft fees as “keeping people in cycles of debt and poverty,” particularly Black and Latino Americans.

The bottom line is that Dave is all but certain to face some variety of newfound compliance obligations. Whether those rules will be state or federal, and whether they will arrive through laws, notice-and-comment regulations, or enforcement (let alone enforcement against Dave) is yet to be seen.

But even despite lawmakers literally taking the step of inviting Dave to Capitol Hill, it appears the company still has its head in the sand regarding the tsunami of legal risk it has waded into. And when those waves crash, particularly given management’s ongoing denial of reality, shareholders are likely to end up even further under water.

Conclusion: Dave Can’t Be Saved

Dan Loeb recently tweeted, “Just because a stock is down does not make it cheap.” We sure do agree.

It’s hard to predict how much more of a beating Dave will take having already fallen to $2.29 on the last day before this missive, but we at Eclipse are convinced the worst is yet to come. At least one a percentage basis.

One contributor to the continued toward trend will be the upcoming flood of lockup expirations for Dave insiders. Dave has more than 323 million Class A shares outstanding, but more than 294 million of them (90+ percent) are held by “Former Dave stockholders and preferred shareholders” who agreed not to sell until at least 6 months after the de-SPAC merger closed. (Others can’t for the sooner of a year after closing or certain other events, see Investor Rights Agreement and Lock-Up Arrangements.) 

The deal closed on January 5th, 2022. Clock’s ticking. Wouldn’t want to get caught stuck in the rush out of a burning building, would you?

Of course, Dave could end up getting bought, and current shareholders could get some reward. But we don’t think it will happen, let alone at any meaningful premium. 

We mentioned above that the company has no notably differentiated products, and it also has basically nothing by way of valuable IP. Dave values its own “intangible assets,” Including internally developed software, at a paltry net book value of $9 million. The company recently mentioned having a handful of pending and registered trademarks, but it doesn’t seem there are any patents coming down the pike.

What remains is the brand and the network. As discussed above, that brand doesn’t appear to have much luster compared to competitors (friendly bear aside), and the network would likely be a hard sell.

Dave used to boast having ten million users, but it has pared back the rhetoric since its merger to mention only the “over six million” users who “have used at least one of our current products.” That implies that 40 percent of the people Dave boasted as its user base at the outset hadn’t ever used the company’s current offerings. 

Plus, as we touched on, even that more narrowly defined population of ~6 million people is seeing declining growth. For the quarter ending December 31, 2021, Dave reported adding 440,000 new members. For the next quarter, that number had slid to 330,000, with overall users clocking in at 6.4 million people. 6.4 million people definitely isn’t nothing, but at the company’s current ~$850 million market cap, buying Dave’s user base would cost more than $132 per member. That’s hardly a bargain, particularly given that any buyer would be taking on an asset whose mileage is already dropping.

One of us at Eclipse floated the idea that FTX could buy Dave in part to bail out its convertible, and possibly even as part of a rollup of Robinhood, of which Sam Bankman-Fried recently grabbed a 7.6 percent slice. A catch-all online financial supermarket could be in the works combining crypto, stocks, investment accounts, payments, and we guess also $250 in overdraft protection. But that’s just a bit too pie in the sky for us to hang our hat on—and even if that deal went down, it sure wouldn’t happen anywhere near Dave’s prior $10 per share.

Of course, we could be wrong about all of this. Tiger thinks so, but they haven’t exactly been a fount of good ideas as of late. And while we’re posting this on a Sunday night, Dave traded up ~8 percent after hours last Friday.

Only time will tell. We’ll see you on the dark side of the moon.

Eclipse Research is not an investment advisor and anything it publishes is not investment advice. Any assertions that Eclipse Research makes represent our opinions. All information Eclipse Research provides is accurate to the best of our knowledge, but Eclipse Research expressly disclaims making any express or implied warranties regarding the accuracy of the representations it makes for any purpose or usage. Nothing that Eclipse Research publishes may be considered an offer or solicitation to purchase or sell products or services, and everything Eclipse Research publishes should be considered opinions and investment ideas that are not meant to lead to any private solicitation of a product or service. We are not liable or responsible for any damage or lost opportunities resulting from the use of any information or opinions we publish. Investing is a risky activity, and anyone considering any investment should consult formally with professional financial, legal and tax advisors before making an investment.