As it prepares to go public next week, Better—the embattled mortgage company backed by SoftBank—is in dire need of cash.
It’s why the company, which has been plagued by scandal, turnover, and hundreds of millions in losses, is moving forward with a SPAC merger during the worst IPO market in three decades, one of the very few companies to try and do so.
“Cash is very important,” Better CEO Vishal Garg told Fortune in an interview about the impending blank check merger and his decision to move forward with taking the company public after a series of delays. He added: “We believe that the capital will allow us to continue to ride out the [mortgage downturn].”
As part of the deal that was initially signed before the mortgage markets soured and the company started laying off wide swaths of employees at the end of 2021, SoftBank agreed to infuse $550 million of capital in the form of convertible notes upon the close of the blank check merger. The arrangement is laced with extraordinary personal risk for Garg, as Fortune has previously reported. That’s because Garg made a highly unusual concession: to personally compensate the Japanese investment firm for potential losses depending on how the shares ultimately perform over the next five years. In the worst case, he could theoretically have to chalk up the entire $550 million sum himself.
Garg is quick to bring up how the challenging housing market has roiled Better’s loan volumes. However Better—once a prized unicorn valued at $7.7 billion just two years ago—has been struggling to regain its footing ever since Garg infamously laid off 9% of the company’s staff on Zoom, then accused those employees of “stealing” from the company on the professional site Blind. Around the time Garg returned from a temporary leave of absence at the beginning of last year, stories about old, damning lawsuits resurfaced. Three of Better’s board members have resigned since 2021, and three of Better’s executives were fired or left the company. Better’s former head of sales is in the middle of suing the company for allegedly misleading investors. Garg declined to comment on the lawsuit apart from saying: “We think her claims are baseless.” In the meantime, a pilot program with a potential commercial partner was canceled, and Barclays wound down the $500 million warehouse line it had provided to Better, according to filings.
Amid the layoffs and voluntary turnover, Better is a much smaller operation than it was just two years ago—91% smaller in terms of headcount, with 950 employees as of June, compared to the more than 10,400 it employed at its peak at the end of 2021, according to filings. Approximately 420 of Better's current employees are based in India. (Kevin Ryan, Better’s CFO, who also spoke with Fortune, said that most of the attrition was due to layoffs, but wouldn’t go into specifics.)
Garg says that Better staffed up rapidly during the pandemic to meet customer demand, and that many of those roles were no longer necessary, as Better has automated much of the underwriting determination process via One Day Mortgage, which it rolled out publicly in January. (Garg and Ryan declined to share any metrics around One Day Mortgage. Ryan said they would provide details in their third-quarter earnings report.)
“Our people are five times more productive,” Garg says, adding later: “A lot of the attrition that took place, whether through layoffs or voluntary attrition, a lot of those tasks that were being performed by people are now being performed by the machine. And volume has come down and customer demand has come down across the board in the industry.”
Company financial documents show Better’s funded loan volume has sunk enormously: In the first three months of the year, volume was $800 million, compared to $7 billion in 2022.
Garg says that moving forward he anticipates staffing levels will be “a lot less volatile” due to One Day Mortgage, and he and Ryan emphasized how overall market demand for refinancing has dropped in line with the enormous shrinking at the company. Fannie Mae's Refinance Application-Level Index is down nearly 90% from three years ago. However, competitor Rocket Mortgage, which has also been laying off staff, comparatively cut its headcount by approximately 29% in 2022, according to Housingwire.
Amid the company’s massive drop in size, regulatory filings indicate that Better has lost important talent it may need to run a public company. For one, Better says in filings it will need to fill the position of director of internal audit “in order to effectively function as a public company.” (Ryan declined to give a hiring update for the role on the record, but says that they “will get this done with plenty of time to satisfy our requirements. But yes, you're correct—we need to do that.”)
In general, the attrition among Better’s senior management team and the rest of its workforce has led to a “reduction of institutional knowledge” and capabilities in “certain key functions,” such as legal and compliance or finance and accounting, according to SEC filings. Better has disclosed that a “limited number of accounting personnel” at the company led to a “material weakness in internal control” in Better’s financial reporting. And “insufficient experience and capacity” led to a separate material weakness, according to filings.
Given all the turmoil at Better in the last two years, it’s unclear how the markets will react to Better’s public listing next week (Better is expected to list under the ticker BETR on Aug. 23). Not to mention—the company is posting enormous losses, which are especially unfavorable to investors in today’s economic environment. Better reported nearly $889 million in net losses in 2022, more than double its losses in 2021, which were $301 million. Net losses are improving, with Better reporting approximately $90 million in net losses during the first three months of 2023.
In the interview, Garg said he and his remaining executive team have cut over $1 billion dollars in annualized costs out of the business. And he says he learned from his mistake, which he describes as his lack of empathy around the layoffs.
“We blitz scaled this company from $500 million of volume to over $50 billion of volume. We grew 100x in a [span] of four years… It was our first time doing cuts. We didn't know how to do it, and we did a very poor job at it. And we learned from that,” Garg says.
He hopes that moving forward, Better will be able to use the new capital to get through the tough mortgage environment and he says he believes Better will come out “stronger than ever before.”
Garg says he agreed to the unusual agreement with SoftBank in 2021 because he “knew that the capital was important for the company” and that Better is his “life's work.”
I asked whether he has any regrets about it now.
It was the only question of mine that Garg answered in one word: “None,” he says.
