If you’re interested in tech platforms recapitulating finance, take a look at what Groundfloor (a Georgia company, very outside of SV circles) is doing to fund real estate loans.
It’s an interesting and retail-accessible (and legible) version of a very old model.
It’s an interesting and retail-accessible (and legible) version of a very old model.
Their basic business is being a “hard money lender”: they write mortgages secured by first lines against projects that small-scale real estate investors/developers do, which banks would be unwilling to do because of execution risk in e.g. a rehab of a single-family home.
So a typical loan might be “You lend me $200k at 11% for 12 months. I put on $50k. I buy property for $200k and sink $50k plus my labor into repairs. I intend to either resell for $350k in a year post repairs or refinance to a now-conforming easy-to-get mortgage.”
So you can probably diagram out the crowdfunding platform for that loan already, right.
Now the interesting wrinkle: when *exactly* does the loan fund relative to when the crowd commits money?
Well, adding risk/delay to project borks borrower’s ability to close the property.
Now the interesting wrinkle: when *exactly* does the loan fund relative to when the crowd commits money?
Well, adding risk/delay to project borks borrower’s ability to close the property.
So instead what they do is fund the loan to borrower as soon as they’re satisfied with it *then sell the loan on* to the crowdfunders.
(The platform makes money with an origination and servicing fee, both of which increase the implicit APR to borrower.)
(The platform makes money with an origination and servicing fee, both of which increase the implicit APR to borrower.)
This means that Groundfloor needs some source of working capital to fund loans every month prior to selling them on. How to fund *that*?
The historical answer in SFBA tech companies is “Uh, same as we fund any other expense. Revenues someday but basically equity today.”
The historical answer in SFBA tech companies is “Uh, same as we fund any other expense. Revenues someday but basically equity today.”
In a scaled mortgage origination operation, the originator would probably not fund with equity. They would probably have a credit facility with a bank and/or an arrangement with securitizers.
Groundfloor originally funded with equity but switched to debt.
Groundfloor originally funded with equity but switched to debt.
Interestingly, since they already had the technical, financial, and regulatory plumbing to do crowdfunding, rather than getting a credit facility they decided to do rolling crowdfunded debt issuance.
Which I’ve never seen before, but which is extremely amusing.
Which I’ve never seen before, but which is extremely amusing.
So people (and, if my math is right, most retail investors) crowdfund their debt (owed by a subsidiary LLC, which I’ll call DebtCo). The main company is TechCo.
TechCo originates a loan and immediately sells to DebtCo. TechCo then crowdfunds (resells) the loan.
TechCo originates a loan and immediately sells to DebtCo. TechCo then crowdfunds (resells) the loan.
DebtCo recovers the cost, services their own debt, and (in steady state) takes on very little borrower repayment risk (since they’re holding ~12 month loans for only a few weeks).
It’s a legible example of how funding works “in the real world” and a very interesting model.
It’s a legible example of how funding works “in the real world” and a very interesting model.
To state the obvious: I do not recommend or anti-recommend investing in securities issued by a hard money lender. That is a niche investment opportunity for a whole bunch of reasons; one salient one is you need a view on whether the platform will continue to service loans well.
Anyhow: this model exists in Silicon Valley as well and *you’re going to see it a lot* as tech startups try to eat various forms of finance and achieve scale/operational/etc advantages over incumbents.
*liens
