Funding The Future of Finance

To investors,

Figure Technologies, one of the portfolio companies at Morgan Creek Digital, announced yesterday that we led their $103 million Series C fundraising round and I will be joining the board of directors. This news has led to a lot of inbound questions about the company and our view of the opportunity they are pursuing, so I thought that I would take today’s letter to address as many of those questions as I could.

For context, we have previously invested a number of times in Figure and Provenance (the blockchain-based settlement system that spun out of Figure earlier this year), including the Series B of Figure. Over the last year or so, we have watched the team continue to execute and have been impressed by their growth. While Figure hasn't previously touted themselves as a "blockchain startup," they are by far the furthest along in building an ecosystem where every stock, bond, currency, and commodity will eventually be digitized (this is our core investment thesis in the space).

Figure has grown from an idea approximately two years ago to become the fourth largest HELOC originator in the United States. The company has originated approximately $1 billion in loans so far and they have garnered significant interest from partners and customers like Jefferies, Franklin Templeton, Experian, Caliber Home Loans, and many others. We anticipate this will continue as they roll out new products in the lending space — so far they have also launched a digital mortgage refi product and a digital student loan refi product.

It is no secret that there has been a lot of hype surrounding blockchain technology and we think many of the companies trying to implement the tech are merely chasing a buzzword, rather than using the new piece of technology to solve a real problem. In the case of Figure, along with many of our other investments, we are intrigued by large market opportunities that have been immune to true automation because the assets in financial transactions have either been analog (ex: physical paper mortgages signed at a bank and stored in a filing cabinet) or electronic (ex: electronic CUSIPs that have multi-day settlement times).

In our opinion, you need digitally-native assets (ex: Digital HELOC) and triple entry accounting (ex: Provenance) in order to unlock the potential of true automation in these financial transactions (near instantaneous settlement, lower costs, more accurate ratings, etc). Figure has built a system that is materially better than the existing systems like DTCC and the largest financial institutions in the world are not only recognizing that, but they are making serious commitments of time, money, and resources to leverage this new way of originating, servicing, financing, and transacting lending products.

It is important to highlight the fact that Figure’s disruption of the HELOC market is not only due to blockchain technology, but rather a mix of newer technologies that give the company access to better information, in a shorter time frame, which allows them to make origination decisions with the same or better accuracy as they have done traditionally. For example, in a traditional loan origination an applicant will be asked to verify their employment, income, and banking relationship. The applicant normally submits a pay stub, employment verification letter, and some sort of documentation from their bank. Those documents are typically reviewed by a human and can sometimes require phone calls to the employer or bank to verify that the documents weren’t doctored.

In the Figure system (or other entrants into the Automated Finance market), the same applicant can simply sign into their bank account with their username and password during the application — this gives Figure access to verification of the banking relationship (you just signed in!), the bank account balance, and transaction history. This transaction history can quickly illuminate what corporation is direct depositing every two weeks (employment verification!) and the exact amount (income verification!). By utilizing these types of methodologies around data and loan underwriting, Figure is able to give an applicant notice of approval of their loan within 5 minutes of submitting the application and fund it within 5 days.

The traditional HELOC process can take 45-60 days due to the bureaucracies and lack of technology integrations, so Figure’s 5 day process to vet, approve, and fund HELOCs is incredibly disruptive to the marketplace. But don’t take my word for it, here is a satisfied customer’s tweet to me yesterday after the announcement:

Now imagine the same customer-friendly experiences coming to mortgage refi and student loan refi — the future of finance, especially lending products, is unlikely to look the same.

But remember, the advantageous origination process is only one part of the value proposition for the Figure / Provenance ecosystem. Most loan originators want to de-risk their balance sheets, so they sell the loans off the backend through the DTCC to another counter-party on Wall Street. The issue is that Figure’s digital loan products are incompatible technology with DTCC’s system that is built to settle electronic CUSIP asset transactions. Think of this as trying to jam a CD-ROM into a cassette tape player — it just doesn’t work.

So Figure had to build a new blockchain-based settlement system (Provenance) for these digital loan transactions. Provenance is a decentralized system which has 12 separate node operators validating the transactions, including Franklin Templeton, Experian, and other financial service firms. Figure does not own Provenance and it is merely one market participant in the ecosystem, which is encouraging because it solidifies the likelihood that Provenance will continue to remain decentralized.

Unfortunately, I can’t share too many nuanced details about the structure, processes, or customers of Provenance yet, but the important thing to understand is that the settlement system is a material improvement — it provides same-day settlement times, lower costs of transactions, and the rating agencies will now have access to much more real-time data which is likely to lead to higher ratings on the debt (because they won’t have to be overly conservative due to latency of information reporting on a 30, 60, 90 day period).

As the Figure team continues to iterate on the product, the cost savings is becoming fairly compelling by itself:

The idea of cutting 130 basis points out of a transaction for these Wall Street firms is something that makes them salivate. We are talking big dollars given the volume of loan origination and asset backed security transactions.

In totality, Figure was a compelling investment opportunity to my partners and I from day one, but our bullishness has only continued to deepen. The team has the rare combination of courage to be incredibly ambitious, while remaining grounded and ruthlessly executing their plans. It has allowed them to build one of the fastest growing companies in finance in recent years and we couldn’t be more excited to continue partnering with them as they work to disrupt some of the largest financial markets in the world.

-Pomp


The “Off The Chain” podcast has been downloaded in every country in the world, with more than 1,500,000 combined downloads. You can listen to the latest episode with Mark Yusko, Founder & CIO at Morgan Creek Capital Management here: Click here for Off The Chain podcast


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Ripple Files Last Bid to Dismiss XRP Securities Lawsuit Before Court Meeting: Even if XRP were a security, the investors suing Ripple brought their case far too late for it to proceed, the company said in a new filing. Further, subsequent arguments made by the plaintiffs contradict their original claims, Ripple said in the Dec. 4 filing with the U.S. District Court for the Northern District of California. It's the latest document filed in the back-and-forth since a federal court appointed Bradley Sostack the lead plaintiff in the ongoing case. Sostack filed his initial amended complaint in August 2019. The plaintiffs claim the company sold XRP as an unregistered security to retail investors. Read more.

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LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE


Ryan Leslie is the CEO of SuperPhone and a Grammy-nominated producer who has worked with the likes of Kanye West, Beyonce, Britney Spears, and more. In 2014, Leslie launched SuperPhone to help enterprise brands acquire, retain, and engage with mobile customers in a new and impactful way. Investors in Superphone include renowned VC Ben Horowitz, TechCrunch's Josh Constine, and Kanye West.

I have known Ryan for some time now and always find our conversations to be entertaining, educational, and refreshing. This one was no different. He has an unique understanding of technology, society, culture, and psychology. Highly recommend listening to this one!

In this conversation, Ryan and I discuss:

  • Attending Harvard at the age of 15

  • Becoming a world-renowned musical artist

  • What it is like to produce music for Jay-Z and Kanye

  • Great behind-the-scene stories from working with legendary artists

  • Ryan’s early Bitcoin stories

  • How he first heard about Bitcoin through Coinbase CEO Brian Armstrong

  • What the plan for SuperPhone is moving forward

  • How Ryan sees technology, culture, and society all evolving over time

I really enjoyed this conversation with Ryan. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE


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Nothing in this email is intended to serve as financial advice. Do your own research.