Understanding Decision Analysis: SoFi’s Support and Success

Daniel Wu Murphy 27/08/2022

Over the United States hangs the shadow of a $1.6 Trillion student debt crisis, affecting millions of Americans across the nation. 2012 marked the year that the total amount owned surpassed $1 Trillion, and has since continued growing. In a time where technological advancements are making certain jobs obsolete, the pressure of earning a living wage without a college degree is growing, and with it the questioning of pursuing a university education at all.

Enter Figure A, which highlights the two primary pressures that are at the root of the student debt crisis. Essentially, you have the necessity of a degree rising which pushes people to pursue further education, at their own expense. Additionally, delaying typical adulthood markers such as buying property, investing and starting families.

Case study exploring the emergence of the personal financing company SoFi, and identifying the decision process that influenced their successful transition into the mass market.

Chapter 1: The Student Debt Crisis and the dream

Pressure A

Automatisation of essential jobs puts increase pressure on the need to obtain a degree.

Pressure B

High tuition fees and high-rate, regulated loans forces debt upon students, and gambles on degree of success for repayment.

After identifying the pressure-causing situations, it is up to anyone to find the solution. This time it was 6 recent college graduates, whose mission it was to help people reach financial independence, and realise their ambitions. Social Finance Inc. was founded in 2011 on an alumni-funded lending model initially connecting recent graduates with seasoned alumni, and in 2012 they were the first company to refinance both federal and private student debt.

Chapter 2: The ‘Factors' Ingredient List

  • The Initial Rubric is the vetting stage, where the company is scored/ranked on a rubric scale looking at the potential avalibale in the market, and if the company has the right vision and team to support further development; Product Analysis, Market fit/opportunity, and Team attitudes.

    SoFi established themselves in 2011, during the most drastic Year-over-Year (YoY) change the student debt experienced (12.2%). This indicated lucrative growth, and has since grown into $1.6 Trillion, showing a strong market opportunity. The team is authentic, consisting of six Stanford graduates who were inspired to make further education more accessible. Most importantly, the idea was attractive to the Total-Avaliable-Market (TAM) and was backed by strong Go-To-Market (GTM) strategies to communicate the product to the customers.

    SoFi fit the initial rubric both now, and for Ulu Ventures who provided financial support for the establishing of the company.

  • Market mapping visualises the relationship between, and effect that internal decisions and market uncertainties have on maximising the value gained from the opportunities. It is important to consider that it must also highlight the impacts and values for the firm in relation to the overall relationship.

    SoFi’s value points were identified in the intial rubric (TAM, GTM) and the market map would provide a deeper insight into the factors affecting the market such as Tuition Growth, Adjacent Markets, Market Share etc.

    On the side of the firm, market mapping would clarifly Return-on-Investments (ROI) as forecasting the Enterprise Exit Value and negotiating Ownership (%) Terms would determine the total ROI. The deciding factor here is purely the Investment Amount.

  • Adapted from Geoffrey Moore, the Lifestage Risk Assessment assesses the probability of success of the company surviving the transition phases from Early Stage to Mass Market. Within each phase the Market, Product, Team and Financial risks are covered.

    SoFi Development - Early Stage

    SoFi has a strong idea with visionary customers and compelling product reasoning. The early stage working product provided a good base to launch off. The team at SoFi were capable and experienced, and they presented a viable GTM financing business model.

    SoFi Development - Transition to Mass Market

    The student market provides pragmatic customers to a proven value proposition, and a predictable alumni sales cycle. Current stage product is whole, backed by a complete team with healthy team dynamics. In order to maintain afloat there must be healthy Gross Margins.

    Mass Market Success

    The product must be proven to work in multiple market niches (Ivy League, >1% default rates etc.) and remain scalable to reach the TAM. Mass Market Success requires a functioning board of directors to steer the ship, while maintaining healthy net margins to encourage future development.

  • Uncertainty Ranges are measurements executed to quantify the chance of individual events (Becoming Market Leader, Only Niche Market, Failing to Succeed Early etc.) occurring, leading to the estimation of an overall chance of success and failure.

    These are divided into three positions of High, Base, and Low. SoFi had particularly high ranges to success in the early (0.9) and middle stages (0.45). This deduces that SoFi will very likely make it into the Mass Market and then has a relatively uncertain (0.26) chance of finding Mass Market Success.

    When calculating Uncertainty Ranges, the general rule of thumb is that if the value is >0.20 it is considered a worthy investment. Lower values are to be weighted in comparison to other analysis method results.

  • Sensitivity Analysis entails a model representing how target variables are influenced by input variables. Essentially, a ‘what-if’ model. This is adapted from the input variables identified during the Market Mapping phase.

    Ulu Ventures produced a probabilty weighted MOIC by diving the enterprise exit value by the total invesment amount. This showed the direct change (%) that would be had on the MOIC if said input variable was to affect said target variable.

  • Risk and Return Calculations are the final step, and aim to synthesize all the data collected throughout the previous five phases.

    It looks at the Uncertainty Ranges and the MOIC Sensitivity Analysis to determine the rewards of each outcome and the risk/likelihood associated with each.

    According to Ulu Ventures, SoFi had overall 40% chance of success mainly centered around mass market success, with very little risk involved with the early stages of success due the market, product and team involved with it.

The goal of a case study is to learn, and in this case the objective is to create an outline for a functioning, repeatable successful decision making process. This not only demonstrates a clear understanding of essential phases, but critical thinking and attention to detail to find the pattern and markers of success.

Venture Investments carry associated risks whose impact depends on individual factors such as investment amount and market fit, but also the ROI usually arrives years after the initial deal is negotiated. This is because the ROI comes from market success, and it takes time to establish and find a footing in the market.

In order to minimise the impacts of uncertain variables and to properly evaluate a decision and the risks involved, there are six identified phases which each play a unique role in gauging the success rate from various angles.

Chapter 3: Reaping the Rewards

At the time of writing this case study SoFi has successfully integrated into the market for 11 years, since 2011. Initially, they started as a personal finance company with the USP of renting loans at lower rates and with better returns. One identified risk was the government policies that might force them to become a legal bank, in order for them to regulate loans. Usually that would kill a startup, however following the decision analysis process means the the impacts are minimised and solutions to the issue ready.

In 2013, SoFi had a blip in their development process as government policies had pressured them to change from a personal financing company to a bank. This being a potential risk, it was identified during the decision analysis process and SoFi were ready to adapt and implemented Mortgages and Personal Loans. This quick adaptation showed the prowess of the team behind SoFi and by 2015 became the first US-based fin-tech company to generate $1 Billion in company financing.

By 2019, SoFi enhanced their product by adding increasing its reach and impact on the TAM by including; Medical Residents and fellows, MBA Law, and Parents in the refinancing scheme. In addition as they formally transformed into a bank, they added SoFi Money and SoFi Invest which allow for SoFi to generate increased profits and to add more value for the customer.

Currently there are four million members of SoFi, ranging from students to parents. As a company, they have finanaced $73 Billion in loans (Personal and Student), with $35 Billion of the debt having been paid off. This gives them a healthy net margin of $34 Billion.

In conclusion, by using SoFi as a case study we were able to understand the decision analysis process in Venture Capital, and more or less create a framework for success. It also highlights the age old saying that “every problem has a solution” and it is usually the simplest. Student Debt has been increasing drastically over the years and all it took was a solid idea, and a strong network of support.

Venture Capital is a harsh environment, with few data points and an overall slow learning cycle as results take years to show themselves. This heuristic analysis was done to show knowledge of the general process, while remaining impartial to each opportunity and removing biases (Cognitive, Confirmation, Anchoring) between individual cases,