CoVenture Credit - Esoteric Credit with Ail Hamed, Brian Harwitt, and Marc Porzecanski - [Invest Like the Best, EP.108]
Ooh. Hello and welcome everyone on Patrick Shaughnessy and this is invest like the best this show is an open, ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up-to-date and investor field guide dot com. Patrick O'Shaughnessy is the c. e. o. of Shaughnessy asset management. All opinions expressed by Patrick and podcast. Guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Shaughnessy asset management may maintain positions in the securities discussed in this podcast. I guess this week, our Ali Hamad Brian Horwitz, and Mark pours can't ski who worked together at co-venture credit. When I first had Leon. As a podcast guest, we discussed the many aspect of what his firm does ranging from venture to crypto to credit. We glossed over the lending side of the business, but having since learned a lot from them on the topic, I was excited to get a chance to talk with members of their credit team for today's longer exploration of esoteric, high yield lending. I'm always proselytizing the value of investor education. So this week we have a podcast I, the co-venture team has prepared a long series of posts that correspond to our conversation and go even deeper into the topic of credit investing. You can find them in the show notes at investor field guide dot com. Forward slash credit. This isn't tireless different from any conversation I've shared before. So I hope you learn as much as I did. Please enjoy my discussion with team co-venture credit. Thanks guys for doing this with me today. It's going to be a a much deeper conversation maybe than the Nali and I had the first time he was on the podcasts about a very specific part of co-venture and that's unique or teric credit. This is almost the exact inverse of venture in many interesting ways, but is enhanced by the fact that you guys also play in the venture world. So maybe Ali, you could just begin by framing this whole call it like a sub asset class. Why? It's so interesting and why the sort of intersection of early stage or venture and lending might represent an opportunity that most people aren't even aware of shirt. And so thank you so much for having us back on the podcast. And one of the things that we've been talking about before this is it's really easy to grease over a certain type of investment thesis, but it's a lot more fun to like really dig in deep and so hopefully that's what we're able to do today as a reminder. The way we ended up setting up our business and built co venture in the beginning was we thought we were gonna be a venture capital firm, and we were. Making equity investments in early stage startups. But some of the startups that we were most interested in were in the alternative lending space. And the reason we were interested in that space is because we sort of saw this wave of lending one point out which was lending club, ondeck prosper. So fi businesses that became really large, but primarily we're taking loans that banks used to make offline and putting them online, and there was this huge promise of these lending. One point companies, they were going to lower the cost of origination so they could decrease the loan size Len were banks no longer could, and they were going to use data that other people weren't using to decrease default rates and price loans better. Not only that they were then going to sell those loans to retail investors who for the first time we're going to have access to yield. They never had access to before the problem is almost none of that actually happened. The cost of origination didn't go down because as everyone else realized it was a good idea. I became a flooded market and there's so much competition that the cost of acquiring a borrower went up the. Thing is people would come to us and say, hey, I gather one hundred fifty data points about our borrowers, and we're using these hundred fifty data points to price are loaned and Lord fault rates, and we'd say, wow, that's really exciting of one hundred fifty data points. How many of them provide signal and they were like three. Okay. So in one of them was FICO. Okay. And the last part is the lenders on the platforms were mostly not individuals. So you ended up just going right back to institutions all over again. And this whole idea of democratising yield just didn't exist in the way that everyone thought it would to look. I would have loved to been an angel investor, a seed investor in some of these companies. Some of our partners actually personally have been because they're worth hundreds of millions of dollars to a couple of billion dollars now, but we thought the bigger opportunity in the longer-lasting opportunity was going to be new lending companies that were creating new credit products. These are credit products that had never existed before, and the way they were being invented was because you you're finding technology companies that were one using their technology to observe a data point. No one had ever observed before that could meaningfully. Drop the default rate by an order of magnitude, not just one hundred basis points and to they would have a bird entry. The thing that gets us most excited in the world is when we find technology company that's using its tech to invent any type of credit and where if everyone else in the world realize that that lender was doing what they were doing, they wouldn't be able to compete. And so you know, there's a few examples of how you can create that buried entry. One of those examples is switching costs. So imagine you are lending through appeal a system, and a lot of people have tried PS financing, but it's sort of an interesting concept in that. Let's imagine I go to a jewelry store and I say, hey, you know, Mr. jewelry, MRs, jeweler, I'm going to start lending to all your customers who can't afford this necklace at once and I'm going to lend to them at twenty percent APR if a competitor came to them and said all into your customers at eighteen percent APR we wouldn't get whipped out because we're already in the system. They said, fifteen percent APR. It would probably be the same if we went to a small business and we said, we're. Integrate with your system and we're going to lend to you at a floating rate based on how many customers came in this day because we have a lot of customers. You're a healthier business, and somebody else came and tried to rip us out of the system. They just wouldn't switch us out. So that was a big bear to enter that. We got fascinated by the second is what's data point that you can observe that no one else in the world can observe. We talked a little bit last time about produce pay, but I think it's a good example where what they've essentially done is built inventory technology that tracks shipments in real time and understands or produces any given moment to they can finance it once it's on consignment for them to get ripped out, you have to go to a distributor or a farmer and tell them replace your inventory software and he'll start financing, you no one's ever going to do it because you know if they're charging x. amount per shipment, twenty basis points isn't going to change a life as much as switch in their inventory software. So that's a chance where we can observe data that no one else can observe. And the third is if it's a platform that can affect the outcome of the borrower. So let's imagine. And this is example we haven't found yet. I kinda love it to illustrate the point if Amazon said, hey, we're gonna start lending to the vendors on Amazon dot com. And if any of our vendors ever become late, we're going to tweak our recommendation algorithm to drive more traffic to that vendor. So then suddenly make more revenue can become current on the loan. So those are are versions of the unicorn when we find a company that's using this technology to invent a new type alone and has a barrier to entry where can protect the yield. So that would happen to lending club and ondeck and all these other businesses doesn't happen to us. We're all of a sudden are yields get compressed. So that was sort of the impetus of our credit business. Maybe talk just for a couple of minutes about the importance of seeing both the equity sometimes and then also being the credit in some of these deals. So I think what's what's interesting and we'll be the focus of our conversation today is underwriting credit, not underwriting the potential for a unicorn seed stage equity investment or something like this. And as you often pointed out to me, there really are inverse of one another. There's sort of uncapped upside and one downside on the equity side on the credit side. Like, you know exactly. Your max return for the most part. So it's really all about downside risk mitigation, but it seems as though a big part of your edge advantage, if you will, to the extent there is one is seeing both sides of this. So talk about kind of the early stage component of this on top of those three things you just listed. Sure. So I'll start with a couple of things. The first is in venture capital. Your job is to make money and in credit your jobs to not lose it. One of the first things I was ever told about venture capital was from this sort of, you know, offer a successful VC and he goes to me, he goes, look, if you invest in a company, the most you can ever lose is one x. If you don't invest in a company, the most you can lose is INFINITI ex. If you missed Uber, you missed INFINITI ex that is very different than what every credit underwriter in the world would ever think about and venture capital is sort of this art, whereas credits really a science going back and forth with somebody yesterday. And they said in venture capital, rarely is a portfolio made by your structure of a deal in credit. Your portfolio is almost always made by the structure of a deal. So there's so many differences between. Those two. And the third part is the equity of the debt of a company are often inversely. Interesting. For example, if the equity of a company is to be ever interesting, it means it a built, a really, really big loan book. And traditional lenders will be able to come into the space and lend at a really, really low yield. Or if the debt stays small book stay small and your yield stays high. You never wanted to be in the equity. It's a really difficult problem for us when we're under the company to figure out, do we actually want warrants in this business or should we just ask for a higher yield? Often, it just makes sense for us to make a small equity investment the business or for no warns at all. Because what we're really trying to get is just sort of a higher bogey because we believe a lot in the asset as opposed to try to be on both sides of the trade in terms of the advantages of being both one of the things that you find for a firm like us is we face a lot more origination risk, and this is something that probably Mark talk about him Brian. We'll talk about it in a moment, but we face more origination wrist than other lenders in that. When we find a company we have to decide, are they actually going to be able to to attract borrowers. If I'm lending at twenty five percents APR to super prime borrowers. It's pretty good credit product. I just don't know if I'll ever put any money out the door. I probably won't. And so what we have to say is their product market fit here, and can we sort of think its venture capitalist in terms of Candace grow quickly? And I think that's just a different skill set than than most people are traditional lending fund would have. The final thing is our deal flows just different than everyone else. Our deal flow comes from the people. We've co invested with venture capitalists or in spaces that we've developed adventure thesis. So the people who are referring deals to us, our founders of tech companies other venture capitalists, other people were saying, all do the season series of the equity. If you do the debt, it's something that differentiates us from another credit business that might be cold inbounding to a bunch of borrowers who might be an thesis that they like before we move on and certainly try to get marketing Brian into the conversation to talk about return. Lee would be really interesting as an example, just because I think you mentioned already this potential accumulative data advantage that some of these companies can occur. Grew over time that makes it very hard for competitors to keep up. That'd be a great example just to frame this whole thing before we get into some of the deeper details on origination and sourcing and all these, these fascinating parts of this process. So maybe someone could kind of sum up what return Lee does and why. That's interesting. Sure. So return Lee is a business that is a software business focused on providing returns management software to e commerce platforms, mostly focused on middle market, ecommerce businesses in originally, would they would do just process your return help the returner print out a FedEx label and handle the logistics surrounding that return would they realize was if you offered an instant return to a shopper, you're actually able to increase the likelihood that they were going to purchase another item on that website by four times. And so what they began to do is offer instant refund at checkout, which began resembling factoring of that commerce return receivable in which as long as the bar returned the original. Item that they had purchased. Then return -ly had fronted the capital for the refund the next purchase after the refund and then gets paid back once that original item is received. And so an example here would be if I bought a hundred dollar pair of shoes, I realized they were a size too big. So I said, all right, I want to return it, but you can get instant credit instead of having to wait for your refund to be processed. I then click it. I buy the shoes. This smaller, I print out the labels and the other shoes back. And when they arrived back at the warehouse return, Lee then receives the money back that they had fronted to the the commerce platform. So in this case where they have what return Lee has an advantage of that? No, their company would is they can see the returns behavior of different individuals. So this person has shopped at ecommerce her ex, but they've also shopped at Wisey and all the other stores within the ecosystem is they could say, are they a good returner? Are they bad returner? Should we extend them the instant refund credit? Or should we not? And so that's unique advantage they have. Additionally, on the merchant side, they. Have the ability to access not only the sales information associated with the individual merchant. They have the returns data so they can say our people returning items in mass back to the store and do we really wanna be providing instant refunds to their customers when we know that it's sixty percent of the items are going to be returned. If we provide an instant refund, is that item going to be returned again? And then you know, this is just a bad store to be in business with. And so it hits on the court. These that we mentioned, which is no one has ever in the world provided ecommerce returns financing. The second thing is return Lee is the returns management systems. So it software as a service which means has switching costs, which is one of the great advantages of SAS companies to begin with. So it's never like we're gonna get ripped out. And the third is because the companies working with hundreds and hundreds of ecommerce companies, they know which customers in the world return stuff and which ones don't. I might not return something not become a bad person, but because I've just I've been to the post office. I never want to do it again in building on that. Not only as an individual basis, they can start categorizing by zip code by. Different geographies on who are good returners in who are not good returners. So they're building out data algorithms based off of the hundreds of thousands of transactions. The companies already processed of these instant refunds. These microloans essence, they've processed over two hundred thousand and so the gathered tremendous amounts of data around that in addition to all the other transactions in returns that don't flow through the instant refund, just general returns that are processed by the company. So it's a new type alone. They have data, no one else in the world has under tight switching cost so that if anyone else tried to do it, it wouldn't be compete. Let's use those features as potential bugs. So how high of a turnover do you expect? Let's say looking forward five years, you'll have to have in terms of partners like a return -ly where the yields can remain this high because classic market stuff, you see yields certainly anything that's backed by anything that has yields in the high teens or twenty, or you know, some of the numbers that we've talked about in the past and my first reaction is well, like that's going to have to come way down as it gets more stable. Do you think that that's true or do you think that some. Of these advantages. These all them lending boats or something are sufficiently strong that those kinds of returns on the credit side can can remain possible for, let's say, years to come. Yes. I think part of this is that we are getting paid for being transformational capital for these businesses. We're getting outside risk adjusted returns for being very early in a company's life cycle. So we are provider of capital where others are not. I came from more traditional larger asset managers where deals were being competed by dozens of parties, and as a result yields were compressing massively here, we're one of very few people who are competing for these deals. In many times, we're finding opportunities on our own and being kind of the single party that they're talking to. And as a result were able to command yields that we think are good on a risk adjusted basis, but that are borrowers are very excited to take because no one is providing capital to them. Does that imply then that maybe I have it wrong in terms of how long the last and it's. About how much you can actually push through. So the capacity of this style thing, because earlier stages just much smaller than a, you know, a fortress or a Blackstone or someone who's going to get involved in. So if you think about us entering on kind of day one with some of these companies, a fortress for Blackstone, probably doesn't want to be doing business with a company like this until they're at year three, four, five. So I think there is sufficient time where we can command higher yield for that. And one of the things that was interesting to us when co-venture started financing. These businesses more from the credit side than the equity side is we thought this is gonna be sort of a hobby business or side business that we would offer to our LP's. And we never seen this sort of explosion of new types of credit are bottleneck is not necessarily deal flow just we can only close so many deals at a time and do a good job of it. So I think that from deal flow perspective, we think that this could be a pretty much bigger opportunity than we ever had mentioned it, which is why we started bringing in a professional team in train this into one of the core things that we really do. And then Secondly, when we work with a company, we don't just say, hey, we're going to. To lend to you for as long as you're willing to let us line. We kind of say to Mark's point, we're transformational capital. We want to be the story of how you get built and we want to be a part of every part of your capital stack along your maturity. So in the beginning, we're probably you're only lender over time. You're going to want to erase your capital base by having multiple lenders, and so it will let what will end up doing saying, look, we're going to provide you capital. Now in the exchange, we want to go to lend to you for the next three to five years at a similar rate. And then eventually you're going to have to lenders. Regan originate assets. You're gonna put them into two TV's. We'll end to one of them. The other lender will end to the other. You're going to have a third party that sort of decide which assets go into which STV that were. There's no negative selection by each time. And then one day you're gonna raise Bank dancing, but the Bank finance is gonna have a really, really, really tight credit box, and we're going to be the one to always help you build that next product out. And if you think about a lot of the great lending companies today, they don't just do one product. They might have a different region different country, different demographic, different FICO score, and we expect Arlene companies to do the same where in ear. Four, they're going to be experimenting with a credit product that we love, but still only has one year of data and so, well, they might have Bank financing for one of their products. We now have relationship with the company. We're the preferred lender because they already know what it's like to work with us. We happen to think that we're not the worst people on earth, and so we think that we can definitely exist with these companies in the next midterm work with them extensively, even after the mature on their newer products. And from top of the funnel perspective, it's been really amazing to see it's it's just a renaissance of credit school just because this is something that's fairly unique. I wanna get as many examples as possible to illustrate some of these points who talked a little bit about produce, pay about return -ly. I remember if we could pause before getting into sort of the diligence process that you go through when you meet one of these new opportunities with maybe one more example that you think well represents some the that we've talked about? Yes. So another sector that we really like is something called payroll deduction lending. And so this is not to be confused with payday lending what it is. It's lending to employee. Jeez of large employers where the loan repayment is actually withheld from their paycheck in the same way that your health insurance premium or your taxes are. So you're top of the waterfall, so to speak on someone's paycheck before it even hits their Bank account. And what that means is that your underwriting not the credit of the person themselves, but actually the likelihood that they're going to remain employed employed, correct. So the the risk of default is that they're the leave or terminated. Its still remains alone of theirs, but you're not getting the same mechanism. And so one reason we really like this is because we see this as the leveling of the credit playing field. This is saying it doesn't matter whether you're subprime borrower as long as you're employed your loan. Repayment is coming through like clockwork. And so it allows a subprime credit to perform like a prime credit. So that's something that we really like. And we're pursuing a lot of things in that space and therefore reduces the cost of borrowing from payday loan level. One hundred percent APR. To significantly lower than that. So how might that work? Like what's the actual workflow then of the platform? So they're selling, I guess they're selling employers, the employers like it because it's like a perk that they can offer to their employees, like what's the incentive chain? Yeah, that's exactly right. So they sell it to the employer as an HR benefit, say, your employees can now have easy access to credit. They don't have to jump through many hoops. In fact, some of these guys don't even poke FICO scores or anything like that. It's just the Lendu based on the fact that you're employed there. The example makes me think that maybe one key advantage here is finding like unique types of default risk and being able to underwrite them better. And it comes from a couple of ways. In this case, it's under a new data point that other people haven't underwritten in what you're doing is you're underwriting the employer's ability or inability to lay people offer fire people as opposed to underwriting the borrower's credit score. So you're literally under any different data. L. keepdriving at home. You have the switching costs by integrating with the payroll system, said, no one's gonna ever up you out. You have the identifying different data point than anyone else was ever identifying before, which is underwriting the churn of the employer, not the credit risk of the employees, and you have a repayment mechanism that's really, really important that allows you to pull a percentage of their paycheck every couple of weeks. So it's essentially an annuity. And so you're able to lend to borrowing base that would traditionally have to take to Brian's point payday loans because it's just really hard to lend to them at that size and be at their traditional default rate and make them microloans because you have a really cheap distribution channel and a really, really low default rate relative to that bike, oh band, which is not a two hundred basis points improvement. It's an order of magnitude improvement, which is really, really powerful thing. And so we love it because it's really good for the borrower. It's good for us. We think we're getting paid for doing something interesting and it hits all of our check boxes that we always look for. So let's dive now into an again as many of these similar stories as we can conjure throughout the conversation as samples. I think makes it easier to to follow along with into the diligence and sourcing and diligence process. So maybe since we've talked in the past about the venture capital, say founder archetypes, things that you might look for in early stage like equity seed investment, use that as points of contrast to what you might instead be looking for that unique or different when evaluating a platform. So you mentioned already kind of how you see these things, which is from the venture part of the business from your LP's. I'm, you've got a lot of unique places that you might get the original look at the deal. But once you've got something on your on the table, that seems somewhat interesting. Walk me through the diligence process. What is sort of the checklist that you need to see in order for you to do deeper work on a company or a platform? So definitely around the founding team measuring team to your point. What I think we really like and has has been true for a lot of our founders is that they had previously worked in the industry that has lack of access to credit. So in the produce pay example, Pablo had came from farming family and saw how difficult it was to. Finance his farm, and he saw that as a huge problem for companies that we looking at now, they're looking at financing, healthcare insurance deductibles in they, they come from hospital administration as it were having a difficult time collecting on individual patient receivables. So people that have that sort of background, they understand the problem. They understand how to actually sell to those customers is really important in how to deliver that product and then pairing that with someone who has the expertise of credit underwriting in maybe the more traditional credit background. Yeah, I think although we're dealing with new companies or emerging companies will we're not gonna sacrifice on his credit quality in helping that company defined the credit box so we can set parameters around what they're doing and the types of loans originating. And so even though it may seem new, we're still putting kind of traditional bells and whistles around what they're doing. I think one of the toughest things to underwrite his actually their ability to scale. So one of the things where we're traditional lenders on the one hand, but we have to wear kind of. VC hat on the other hand is, can this company actually get to scale? Is it worth because to us doing a million dollar deals, the same as doing a fifty million dollar deal in the sense of time and effort and energy expended. So we need to really make sure that the what were investing in something that can grow to scale. And that's something that's really hard to underwrite. And so some of the features we work, indoor deals, for instance, like we can put a minimum utilization threshold in the deal, which means they have to be at least x percent drawn on the deal in six months or year, whatever or interest is owed is if it were and that's a way to promote growth. Another thing we might do is actually lower the interest rate with the amount of dollars that have been deployed. So another incentive to try to get someone to scale and then going back to the underwriting point. A lot of it is things at all. He has detailed before. What are the barriers gentry here? How can you maintain your yield? What is the underwriting that you're performing and how is it unique and different compared to to someone else? How are you? Are you taking advantage of borrowers? We don't wanna. Be in a situation in which we're providing financing to someone who's taking advantage bars, which is why we liked this payroll deduction model because we feel like it's providing a significant benefit over working with payday lenders or other lenders of that type. I mean, you know, I often joke and we're talking to our investors, you would you all these really complicated things to come to a pretty simple end, which is Emma going to get a mid to high teens yield and like a one percent default rate in a market that really, really need this and would be willing to borrow from the other day. That's really what we're doing. And there's a couple of ways to do it. The first is we can underwrite better with a new data point. We can originate better through a new distribution channel and never been distributed through before we can lower our costs. So we can write a really short duration receivable that a traditional under candidate, and it's got to be something with barest entry. If it hits those points, we can use all these really fancy mechanisms in the structure of the deal to Mark's point, make sure that they have to draw the capital and we get paid one way or another, or we can work with them to define their credit box. Usually when a traditional enter will come in, they'll come in three or four. Into the deal. When the credit box is already defined, we're sitting there with them defining eligible own criteria. That's a differentiator in what we do. So we're also looking for management teams that know their bar well enough to know what they'd be willing to take, but also management teams that have a season track record where we believe the eligible loan box we can come together is really collaborative and sophisticated. One of the other things that Mark sort of instilled in us from the years he's been doing this is when we underwrite a deal. We also have to say, if original goes bankrupt tomorrow the day after we've closed our, we fine. You know, the two biggest risks of new companies. One, they don't originate, which we've already addressed. The second is the originator goes bankrupt. We might be secured by all the assets they originated, that might be an SUV or in our facility or otherwise. But are we actually able to go service those ourselves if we need to or employees own, who can go service does. So there's this checklist we go to through of are we going to get a reasonable yield in a really, really low default rate, and even if our models are wrong, there's a ton of wiggle room and. And can actually originate these loans. And in a worst case scenario, gonna sweat and hopefully answers. Now, as you guys have described it kind of like when you talk to early stage venture investors, there's this rise of interest in founders who have deep familiarity with their industry like founder market fit is the term you is here now, and I think what that gets at is a deep awareness and understanding of the problem at hand. A second key component what you've kind of talked around is, I guess, answering the question like, why hasn't someone else dealt with this already? Like is they're just an insurmountable problem that it may be a problem, but we can't fix it or can't fix it right now, thinking maybe one from each of you, what is the most interesting problem specific problem that you've come across that somebody's either trying to fix or that you're just personally aware of that you have yet to do a deal in. So like sort of a wishlist, if you will of the types of problems that this setup might sol-. Yeah. So I listened to a little bit earlier, but the interest healthcare insurance deductible. Financing. So what's happened now is one hundred forty million Americans that have high deductible, health care healthcare policies, which means that they have a thousand to three thousand dollars deductible before they start receiving any benefit from their insurance with this creates is essentially a huge gap in fraud. People that are utilizing these high deductible plans is they can't afford that deductible. Now, near fifty percent of Americans can't afford a four hundred dollar emergency payment. And I think a lot of the people that are taking these high deductible healthcare plans fall in that. And so what you're seeing is there's a lot more receivables that are being service individual patients being serviced by hospital systems and healthcare providers that are use only working with insurance companies. You know, ninety percent of their receivables used to just be with insurance companies. And now with the rise of these high deductible healthcare plans, which has just been a function of being more expensive for employers to provide health insurance to their employees. You're seeing a massive defaults across these individual patient medical receivables, and then these. Patients are forced to default on their receivables today I want to do which impacts their credit. And so what we're looking at and what we're interested in is finding a solution that outside of payday lending for these individuals, which is often where they have to go to cover some of these payments. So we've seen a couple different interesting ways of approaching this problem. One is through working with hospitals as a century billing and outsourced servicing and collections department paying on day one at a certain set discount that's negotiated between this company and the hospital system or the healthcare provider, and then providing a line of credit or a very affordable financing option to the bar or the patient. And so instead of paying, you know, in seeing APR you say, I'll give, you know, no interest in what you're able to get. The economics is from negotiating a discount from the hospital and thereby lowering the potential default rates still creating an interesting attractive yield for potential investor capital provider. The other way of doing it would be more like an insurance model where in employer and employee pays a certain amount per month to have access to a credit line. That's equal to the amount of deductible and they have to, you know, if they have some sort of Bill that they have to pay, they're able to access that line of credit either no or little cost and then pay it down over, let's say six, six, twelve months eighteen months, which we see as a tremendous alternative to on people who are taking out payday loans to fill that gap. And so we've seen a number of different companies in are are looking to partner on in the space that I think is approaching it pretty creatively. Fascinating. How about you Mark? I think the access to credit for subprime borrower is still really lacking. You hear a lot about credit being freely available to folks, but it's really only prime credit. So when you think even about lending cluber prosper, which seems to be delivering loans to the masses. I mean, they still have minimum FICO score cutoffs of six sixty or six eighty. So there's large swaths the population that are being under banked and you know, you walk into a store like best buy or something, and they, you can get zero percents financing, but that's underwritten by an HSBC or synchrony or someone who's providing again, prime credit. So I think the what's still left at two to happen is kind of the disintermediation of the payday or other industries you think about payday? Right? It's about a fifty billion dollar a year industry. I think this is there's more payday loan shops, and there are McDonalds and Starbucks combined, which is just mind blowing. And so what I think there needs to be your new products. The payroll deduction is one, but for instance, point of sale financing I think is another one that's going to be very large. So this is the best buy financing for for folks who don't have access to the HSBC credit card. It's allowing them an option to purchase a refrigerator or something that they need, but at a subprime demographic until I think there's ways to address that. And I think that's going to be a huge industry because a lot of people who are taking payday loans are actually doing it to fill some sort of need. Their car broke down. The refrigerator did break. They need some sort of emergency medical expense, and I think we really need to address that. How might that happen? So it makes me think of this. Awesome line that Warren Buffett said to us, which is that prices his diligence. So if you think about payday lending as like having ridiculous yields or ridiculous, maybe they need to think less about the default risk just by pricing it appropriately with like a margin of safety, if you will, on the yield, what is going to change to allow more thoughtful underwriting of the subprime borrower like what? What might be the unique data sets data points that we've talked about as a key in all of this that that make this change from the system we have today. So I think you need an improvement in the structure of the loan to bring the default rates into something that is more normalized. So in payday, for example, default rates are really high thirty forty, fifty percent even and so will people don't like to talk about is the demographic who has taken out payday loan. Actually, you do need to charge them a high rate of interest and the average person on the street thinks that fifteen percent is a high rate of interest, and that could be appropriate to subprime borrower, you know, unfortunate. Yeah, I don't think that's the case. I think they do need to pay a higher rate of interest, but I think the way to get them off a payday level, which by the way, payday could be five hundred percent interest or more. So I think the way to get them is through a structural fix and to payroll deduction is one. That's great because it levels the playing field and introduces a mechanism that turns a subprime bar into a prime borrower. If you think about point of sale, financing or rent own structures, that's also something that get someone from regular subprime loan into a more fluid repayment mechanism that gets them normalized. So you need to actually see a structural change in the way that the the product is being done as opposed to just lower rates. You need to actually improve the the behavioral mechanism. And I think increasing financial literacy of our people in our country is also an important step here because most people walk by a store that says, get cash now, no background check required. It's great. I need. I need cash and they don't realize when they're signing a contract. Act that they're essentially signing up to be in a debt cycle for, you know, in the indefinite future. And so I think part of part of tomorrow's point is, is is training people to avoid these debt cycles which are often completely avoidable. But people don't have the resources or the knowledge to avoid them and cheat. Not us wanted to go through a few quickly and touch hunt on March five, the two weekday cycles insane. The fact that we get paid every two weeks and that eighty gets annoyed at us that we wouldn't want to take our paycheck every day. That will not be a thing at some point. And so we're really fascinated about how do we factor receivables in that period, etc. To that second point, doing short duration. Receivables is really, really interesting thing to do online because traditionally a Bank or a brick and mortar can't originate a three day loan because it'd be too expensive. That's why that's part of why payday loans are so expensive. It's not just the fault rates is that if I'm going to originate a two week loan, that's five hundred dollars. I'm paying a brick and mortar, so I have to pay somebody minimum wage, which in New York is fifteen dollars an hour, and it takes them twenty minutes to reshape the loan. It costs them five dollars just pain that person to explain something to the borrower, not including the marketing, the brick and mortar the real state, everything else. And so if I were to charge state Usery of about twenty five percent, I would make like four dollars and thirteen cents of revenue on alone that cost a minimum five dollars for originate. And so the internet's amazing at originating short duration loans where you can handle the fact that as long as to fall rates are low, the total revenue on loan a small. The other thing is we've value different things today than we used to. It used to be this common cliche in credit that you should lend again, somebody's car because the car is the first payment they'll make and still one of the first payments they make. I care a lot more about my smartphone though they do about my car. If you take my car, I'm going to be really annoyed at you. If you take my smartphone from me, I will do horrible, horrible things. And so there's a company called page ROY that we're not lenders to, but we applaud from far they're helping people finance smartphone purchases and they're secured by the smartphone. There's a genius thing to do. And then maybe the last part is tomorrow. Small businesses are different than today. Small businesses, the great small business of tomorrow. Not the drugstore on the corner. It's the Airbnb account. It's the ecommerce company. It's the Instagram handle the things that we might have talked about last time. And so we're looking at not yesterday's small businesses we're looking at tomorrow's. And so those are some of the broad themes that we like to kind of dig into. So let's let's assume now that we've got, you've identified something you're sort of comfortable with the major checkpoints. Let's call them that this might be somewhere with the capacity to put fifty million dollars of your clients money to work in, and we're further down the spectrum here. We've referenced a few times how important structure then becomes we'll come back to some of the mitigation of downside risk, but certainly structure is one way to mitigate downside risk when it comes to credit. Maybe you could touch on like the major struck structures. I'm thinking here about four flow agreements, AB l. structures, things like that. Describe what those terms even mean, which I think a lot of people won't have heard those terms before and how comes down to brass tacks, how these things are actually structured. Sure. So there's two basic types of ways you can get involved in an asset taking asset level. Risk. One is a traditional AB l. which is basically an AB l. stands for asset back lending. And all that means is that you are lending to assets as opposed to accompany. So traditional credit, you're making corporate loan to accompany in asset back lending. You are lending to the acids, the way you lend to an asset is you put it into a special purpose vehicle you make that s p bankruptcy remote and in doing so you are not taking the risk that the originating companies going to go bankrupt. You're just taking asset level risk. Another way you can get exposure to an asset is called a forward flow agreement whereby you are agreeing to purchase assets from an originator. So XYZ company makes loans. They then sell them to you on a forward flow basis. And therefore you are buying these assets and you're gonna wear the risk of the asset and the way that it's different is that in the first case in the AL your secured lender and. And you typically have what's called over collateralisation, meaning your lending ninety cents on the dollar. And so you have ten percent of cushion. Whereas in a forward flow, you're actually buying the raw asset and so there's less cushion or no cushion in some cases. And so typically the the pros and cons are you're getting paid more in a forward flow. You're just yielding more. But you have fewer kind of protections from structural perspective. What roles that we play almost as an educator of these lending platforms. Because for a lot of them, we might be the first lender they've ever had, and so we help them figure out what do they really want. And so many people, the first thing they ask is what is the rate of return then we have to give up for the money that might be like the third most important term of the deal. So in a Ford flow agreement, you're selling the assets that you originate to a lender at a high price, but at least you don't have to understand how many loans you're gonna originate. That month startups are like just notoriously bad at projections. And if you're a startup that doesn't know if it's gonna regain one hundred dollars or two hundred dollars or three hundred dollars next month. It's really good, have afford flow agreements that you can sell, take that burden of cash drag and put it on your lender. Some funds can do it. Some funds can't if you're doing it in an AB l. facility. But you do is you originate alone. You put it into Bs TV and you're usually guaranteeing some rate of return. God forbid, you don't originate as many loans as you thought you were going to you money on assets that aren't even yielding you any revenue. And so there's pluses and minuses on our side. There's also pluses on minuses on the originator side. And one of the things that we try to do is introduced the originators. We work with two other people who've built big lending companies so that we're not the only people giving them vice that way. They can kind of triangulate what other firms have done in the past and sort of the advantages. Also the the deal structure is driven also by what the originator wants to look like. So if they want to be an on balance sheet, finance company, they'll choose Nabeel structure. If they wanna be asset light fintech company, they'll choose to engage in forward flow purchase agreements because that way they don't have the assets on their balance sheet and they. Can try to look more like a technology company that the goal is to trade at a higher multiple essentially by being asset light, which is what a square is doing with their merchant cash advances. They're sighing them in Ford flow manner. One of the common teams lately and just in people I've been talking to is like home services, things having to do with the home that are critical. You mentioned refrigerator earlier, which makes me think of like h vac and like lending against in h vac installations where the acid is an ego, rip the thing out of the house of got friends who have have certainly been involved in this sort of this sort of lending before. And that seems like something that is very critical to a person's life, but also seems maybe a little bit more traditional, you know, that's that's something that maybe he's been around. I don't know. I'm curious your take on this idea of the home as an interesting playground for credit opportunities. I think that what's interesting is I don't think anyone's gonna own anything anymore. So we have to founders one thirty one forty two forty year old was talking about a car youns and at thirty year old looks at him. He goes, that's so gen-x. Have you Tony. Car. I thought that was a Kalari comment, but it's true. So I think I'm gonna like lease everything that I ever have. I don't even know if I'm ever going to own a home. Like there's all these nomadic living places where you can pay one month's rent, but have access to a place in Berlin, Miami New York and like Ali, you clearly don't have any kids. Sure. But I do think that that's sort of an interesting concept of coupon. We're gonna live in places for less time than they used to live. So I own the asset and there might be an ability to lend against them one of the problems that we've seen. So we've seen a lot of these furniture companies are saying, you should rent your furniture, not own your furniture. These companies are just basically lending companies where I give you a couch, I assume that you're going to pay me once a month for that couch, but God forbid, you don't pay the loan. I'm not going to come to your home and try and take the couch that sounds really expensive. Some lending against an eight hundred dollar asset is really hard for me to make the economics business work because what you're doing your core competency that company is actually to be a collections business under eight necessarily better. You're not able to secure against an asset in a way that structurally different. You just have to find a really, really cheap way to collect in the event of the person doesn't pay you because that's ultimately where a lot of those things will break down. We've seen a lot of these h. back borrowing business it or lending businesses in our world of what we think is niece that's like super mainstream, and I'm sure you know for many people that is nation in his free esoteric. We've just seen yields because too many people are in that space that are in the high single digits in ten eleven, which just isn't interesting enough to us if we can do fifteen sixteen seventeen percent of all rights. I think you do wanna lend to assets that have high use cases. So h is a good example refrigerators a good example things where you don't wanna lend against our things like vacations or something where once it has occurred, there's really little incentive to repay, but a refrigerator, right that you continue to use or your h. back you continue to use. I've even seen a company once that was leasing pets. So the idea being that you have such a high emotional affinity, your pet, sure that the likelihood of you defaulting is so low, right? So in love to see you run a collection. Nice guy to do that deal Mark. It's an interesting opportunity. Given your background, maybe you could you touch on what you're doing prior to co venture just to ask your opinion more generally speaking on, I guess like the macro economic situation that we're in today, maybe draw some points of contrast between working at a massive business versus a very small one and the sort of credit opportunities being pursued by huge scale organizations and kind of what that landscape looks like today. Sure. So I started at Credit Suisse and then was it Angelo Gordon, Aries and I think the well we were looking at those organizations were asset that could scale into hundreds of millions or really were starting at that at that point. And so what that lends itself to our opportunities where you're dealing with assets that have been in existence for decades and you're dealing with originating companies that have years and years of experience. And you have tons and tons of data, and you know with certainty how these assets are going to perform, what that means is you d risked a lot. As a result, your yields are going to be low because there's so many people who can then underwrite that risk. What that means is that a lot of opportunities are overlooked where it's at fledgling company, but we know what they're doing. We can still get under the hood and underwrite the credit box. And so that's what we're really looking at. A co venture are all the things that are falling through the cracks because they don't meet the criteria of you can immediately deploy fifty million bucks. You can immediately put money into an originator that has ten years of experience or that has originated tens of millions of assets. So we're looking at those opportunities where we feel like we're getting outside risk adjusted returns because we're new to to that company. How do you think about adjusting your behavior relative to like your view on the credit cyclic where we are in a credit cycle? Does that matter more. At the higher scale than it does down in what I'll call more idiosyncratic type stuff that you're dealing with. Now talk a little bit about your your view there. Yeah. So when you're lending against assets, what you really want to do is lend against the acid, you don't wanna have to take macroeconomic view. So there's two ways to do this. One is to lend against really short duration assets. So produce pay, for example, is a thirty to forty day asset return. Lee we were talking about earlier is a fourteen day asset other things that we look at our maybe a year or two tops, and so does short duration assets because there's so short duration. You don't have to take a five year view in the economy. So that's one way to deal with it. Another way is to find uncollated assets. The most uncoordinated asset I've ever seen is actually a pharmaceutical royalty. So this is a situation where you're buying a piece of a deal that's, for example, a multiple sclerosis drug or leukemia treatment drug. These drugs are medically necessary. You have to take them in order to continue your way of living. And as a result, if you look at the data through the crisis of how these drugs cell and perform, it's completely like clockwork. I mean, and so you try to find these assets that are completely market neutral. So that's the other way of taking longer duration risk. But in a way that's completely mitigated another. One of the things that we think about in terms of trying to mitigate lending against an asset and why we feel like it'd be less correlated is one if it's short duration asset, and we're pricing that asset. Let's say, thirty days before we expect to get repaid and we're lending at fifty percent LTV we're able to take the tolerance of do we believe that asset is going to crash fifty percent within thirty days and so it's someone might be thinking is okay. So I thought the mortgage crisis was lobbying against assets wise. Not not the same. You know, those were ninety five ninety seven percents on TV loans that were taking years and years and years to pay off. If we are able to finance a fifteen thirty Forty-five sixty day asset at sixty percents LTV you know it's not. Perfect orders of magnitude better than just unsecured consumer lending or auto lending, which is, you know, lend at ninety percent on TV against the car. And then as soon as you drive it off the rely because depreciation Don linear, you're suddenly underwater. So it's a lot of those also nuances that make sure you know not all asset back lending is created equal, short, duration, low LTV, all those different things are super important in terms of making sure you're actually adhering to that less correlated the economy, so I can always rely on you guys to doing interesting things. So I have to ask a little bit about the background on lending against bitcoin. Maybe you can describe what's going on there and why. That's interesting. I'm going to let Mark describe this one because you know, Mark comes from this sort of structured credit background were on his first day co-venture. He was wearing a suit. We've knocked out and we put him next in Kiel who's head of crypto, and Mark comes us and he's like, what stellar. I thought there was only bitcoin into theory of said, the idea that we've actually convinced Mark that Lenny against bitcoin is a good idea. It's really, I mean, it's huge, inflection point co ventures history. So I'll let Mark kind of pitch this because you're the biggest berry going into it is. All that is true, and I will say I would've never thought I'd find myself in a situation where we're actually going to be lending against bitcoin. So it's quite a change. But what what's interesting is it bears all the hallmarks of a good asset to lend against because you have Mark to market pricing on a twenty four hour basis, and you have the ability to custody the bitcoin in your own wallet, and then you have the ability to sell it instantaneously if there's a margin call. And so what this is essentially is margin lending against bitcoin, and so someone makes a fifty LTV loan. So if you've one hundred dollars a bitcoin, lend you fifty dollars, and then if things get so out of whack that it's now reaches a certain level, they basically will margin call you. And if you're unable to satisfy the margin, call the liquidate your position and they have the ability to do that twenty four hours a day and in that way and since they're holding physical custody of the bitcoin, you have a pretty. Impenetrable way to secure the collateral and sell it. And so like I said, I would have never thought we'd be looking at this, but it bears the hallmark of of a liquid asset. And you know, that's one of the things we've analyzed as what is the liquidity of the market? What is your -bility to get out of the asset? How much evolved Tila ty- spike? Could you sustain before suffering a loss in situation like this? And so it's a really interesting opportunity in something that we're, we're looking at closely and a lot easier to collect on the couch. Indivisible all sorts of things that make it more attractive to lend against. Yeah, it's actually really funny. So a lot of the stuff we do people look at like while there's super funky and weird, it's actually less weird unless hard. If you're trying to take a lever position to try to eke out a certain yield, that's a lot harder to do and underwrite then just lending against an asset that most LP's would look at like sort of funny, a traditional lender. They're issue is no matter how rational it is lend against bitcoin. God forbid, you ever lost money on it. They'd be like, well, of course it was bitcoin and they look at you funny even before you started doing the deal, our LP's when they talk to us like they just assume that we were going to do it from the beginning. Then the ven diagram people who have a crypto business and a asset back lending business like super narrow. And so that's part of what earns us. The yield to get is not being like waste smarter than ever now to Mark's point, it's an obvious asset of finance. It's just that we have a different l. p. at expect certain things of us. So two more questions in light of our conversation so far. The first is on the origination side. So talking a little bit about that, like who is trying to borrow again, like, where's the. Manned for this and how is that part being handled? Like what's the capacity of this idea? So the demand is coming from a mix of parties, could be an individual who has seen a rise in their bitcoin asset, and therefore they're looking to take off some liquidity, some chips off the table. But in a way that is a non taxable event, or you could see a company could be a mining company or could be a hedge fund that is basically looking to lever or again create liquidity. So those are the main main opportunities that we're seeing. What's fundamentally the belief is that the rate of return on the underlying bitcoin will be greater than the interest rate that they're paying. So they're willing to do it in Patrick. I hear you hated Jeff and bitcoin. You want to borrow from l. listen. So so talk to me about how to determine the rate of interest on something like this. So I'm just thinking about on the one. It was a week or two weeks ago when there was this like almost bug that got into the code that got could've done, you know, God knows what and they're sort of like this, this sword hanging over this whole thing that it seems to have been remarkably secure a, which is why it's so interesting, but you just don't know right it software. So how do you, how do you think about setting interest rates and price relative to sort of a weird risk profile? Let me just start all at market. The more detailed answer. We are the view, the bitcoin could be around and one of the best ways to test that is the fact that it's had a really big bounty on its head for a long time. And if it was going to break, it probably would have broken by now. There's a lot of really motivated individuals. Now. Sure there's going to be bugs, but there's enough of a developer community around it where I don't know if it's going to be twenty thousand dollars, five thousand dollars, ten thousand dollars. One hundred thousand dollars. I hope that one hundred thousand dollars because I'll have a much nicer apartment. If it does. We were of the view that it is going to be a thing. And there is enough of. I think structuring it in a way where this way for that variance with the right LTV and the right liquidation terms sorta helps with the price in. But yeah, so so I think right now it's the pricing is less sophisticated than should be because it's more a function of supply and demand is who's actually going to be on the the lending side of this transaction in what's the re rate of return that the requiring versus how many people are actually asking for this right now we're seeing is I think there's a higher amount of demand for these loans than there is supply of institutional capital actually to provide these loans in. So that's what's driven the rate of return so high at this point in time, you know, you're seeing, can you share what roughly ballpark will? Yes. So you're seeing anywhere between twelve and twenty five percent for APR's for this for this asset to me, if you off the cuff fast when you've been interest rate, pronounce it like this where there's fairly few people willing to lend against it that should be like a high teens, Reiter return. I mean, because I've heard some people say, oh yeah, bitcoin such a liquid asset. It should be like eight to ten percent. Just intuitively feels too low for something like this. Fascinating. What have we missed in terms of the key determinants of success in this style of investing? I feel you've done a pretty good job covering on the things that you look for that make what kind of we referred to as lending two point. Oh, trying to deliver on the promise of this original online platforms that that didn't really come to fruition. So we've talked a lot about, like the specific characteristics that you look for. Have we missed anything major that you think is important to cover? So one of the things that people always do when they talk about investing is every moment up until you've actually closed the transaction, but probably sixty percent of great invested. Everything that happens after you close a transaction, it's the monitoring, it's the portfolio support. It's the making sure they actually do it. They said they were going to do. We will get by somebody at some point and knowing how we're gonna get and defending against it before they try it beating control the cash. So I think Brian May make sense for you to kind of talk about when we're modeling something, how much variance we give to what we think's going to happen. What could happen before out of the money, and then also just sort of. In the portfolio the on sites that we do, the spot checks that we do, why UCSE ones are Dickey stupid things to rely on everything else? Yes. So when going back touching on our underwriting conversation, when we're looking in building out a credit model, we're really trying to understand what's the default rates within the asset base that we can incur before loss of principle loss of income. And that's that's critically important. So we do that by building out cash flows those underlying assets projecting integrative default rates building a sensitivity and then comparing that to some sort of base case assumption for default. So if there is historical data from the company will look at that if not, or if this not robust enough, we'll look at proxy data. So you other data for small business lending consumer lending within that space. And then we're able to come up with a multiple in Las coverage. We say, you know, base offer our base case of five percent default rate, and it looks like here we can sustain ten percent before loss of income. We have to ex- coverage multiple now for our deals. We typically say, you know, to to seven x, just depending on how much struggle. Data, how much volatility in the asset class we believe. And then throughout the investment period has all he's alluding to monitoring's critically important. So every month we're receiving portfolio tape from our different platforms. It says here all the different receivables we have right now, here's the performance, and then we can look at that and say, how is that compared to where we projected, we change our base case default assumptions, and we need to rethink anything about this investment. And that goes beyond just the portfolio as well. Probably point, you know, there's there's a million different ways to lose money in this business. It's about making sure that they're complying with every covenant in all e likes to say that's getting. But I think we say covenant compliances is the more appropriate word of calling it in. So making sure that everything is going well and doing consistent checkups with the businesses that we're working with doing on sites to catch anything that might slip through the cracks. Otherwise, just looking at, you know, excel file part of it's also getting smart in the very beginning of the deal via either having termination triggers based on performance. So you say, hey, look, are. Case years, five percent. We can incur a fourteen fifteen percent default rate before lose any income and thirty percent before losing any principal. I'm quoting numbers from action actual deal done on the head good enough data. We felt like that was a reasonable loss coverage ratio. As soon as they get to eight percent. Default rates, we stop funding at twelve percent. Default rates. We defaults on the loan and just start collecting receivables. So a lot of it is making sure that in the beginning of the deal we get in front of those scenarios where things are going to little bit sideways. We don't have to keep lending. And the second is also just making sure the borrowing base make sense. So there's another facility where you'll see a lot of cities where we say, look, we're gonna lend you ninety dollars, but we need a hundred dollars a good assets in the event that you know five of those dollars of assets go bad. You either need to contribute new good assets in there or put your own cash from your balance sheet. Otherwise we won't keep London. So a lot of it is having the tools in the terms. So if all you're monitoring something, things go awry, you can immediately act on it. And then a lot of it's also expectation setting venture capital is probably my favorite asset class too. Via part of, but it's also when I like to talk trash about the most VC's just don't really do a lot of monitoring support of companies and don't do just really nice guys. Everyone's were founder friendly, everyone's this fat in credit. You don't have that same luxury because you don't have the opportunity to earn at the times multiple. And so we have to tell them a head of time. This term is in the document. If you breach it, we're actually going to enforce. So just be ready ahead of time because what we don't want is supplies. One of the things that was one of my biggest learnings and investing, and I think we've all kind of learned. I used to think it was a really good thing when I knew more than the borrower about the deal. You know, in my head, I think what we've done a ton of these things and I'm able to negotiate the document better than they're able to negotiate it. And so inevitably all come out as a winner. If we negotiate a deal that the other party doesn't understand and they breach something they didn't realize breach. And then all of a sudden we screw them for it. Something's going to go wrong. And so a lot of education about it said, hey, look, these are all the covenants. This is what the gender is going to be on the onsite. You know, of course you have to surprise. On certain things because there's audits and everything else, but a lot of issues sort of having this good firm but reasonable bedside manner with the company where they understand the deal they've gotten into and understand how we're going to act when things go wrong yet. So to touch point, again, documentation, which is part of the structuring is incredibly important for all these point there in also constructing the borrowing base that all he was talking about. So making sure if you think you're collateralized by hundred dollars assets that it's actually a hundred dollars of asset. So for example, if you I'm going to lend eighty dollars against a portfolio of loans as one hundred dollars of cars in it. When you actually have to collect on those vehicles, is it really worth one hundred dollars? Or is it actually after you know, the auction value in his hiring a skip tracer to go find the cars to fifty dollars. So making sure that you're actually properly collateralized into all these point again about educating the borrowers who are early stage companies don't always have the sophistication from structured credit perspective is walking through the key terms, not trying to hide anything, making sure saying, hey, this is the this borrowing base concept. This is what I'm gonna expect from you every month. This is what. You need to report to me is this realistic in walking through like that. And we like to consider ourselves sort of training wheels before they eventually go onto a bigger and better facility where the, you know the chances of their face getting ripped off for a little bit higher. And so I think that's that's one way to look at it. And then I would just add that you need to make sure you've thought through every possible risk. So there's a lot of hidden risks in these deals. So just two examples that come to mind. One is we've seen a lot of deals where there's some really cool piece of technology requirement that's going to be and the deal sounds great, right? Is going to be leased on long term leases to investment grade companies and the technologies. Awesome. It saves them all this money and you know what could go wrong, right? Well, we'll could go wrong is that the technology actually doesn't work or conches out in your three and all of a sudden, and the leases cancelable and the whole thing just falls apart. But that's not something that maybe was obvious and day one or another example of something is of looked couple times lending against art, which sounds really cool. Like, oh, you have a fifty million dollar Picasso. Why wouldn't you lend twenty five million against it and deal. Sounds great. Will will give it to you. So you're physically holding it in a secure vault. What could go wrong? We'll we'll could actually go and it's insured. So sounds great. We'll turns out that you can't get insurance against fraud. So if it turns out that the CASA is a fake, the whole thing just blows up your classrooms worthless and there's actually no good way to verify that the art is legitimate. You can only rely on a letter from the estate of Picasso to tell you that it was authentic, but that's not really good from a chain of custody perspective or title perspective. So there's a lot of risks that seem obvious when you think about it, but when the deal is presented or just not there, it sounds like it pays to be a pessimist in many ways in this world versus the more optimistic venture capital. I am very worried mother, and so that's sort of been great positive my career you. The other thing is also like, what are the things that are either false positives, things that are assumed to be true? You know, one of the things that actually a borrower came to us a long time ago about, and we've always repeated is the is like one of the great falsities of lending. A lot of people say, oh, my security interest is perfecting WCC. That's basically self reported data from small businesses. Like how good is that? Probably going to be probably not that great. The other is Brian was bringing up earlier when we were on our way over here. Insurance policies and feels AO the assets insured. What percent of lenders are actually Rian that insurance policy all the way through hopefully most, but there's gonna be some someone out there who isn't, and then you say, oh, it's an insured product grade or wanted to get renewed, stupid, stuff like that. So there's a lot of things that people sort of take for granted and those are the things that are the easiest to overlook or you say, oh, don't worry about it if this, oh, we have a backup. Servicer is on the great one. Hey, we're letting against these assets who care if the who cares of the original goes bust. Because we have I associated with our backup servicer. Everyone has I associated with their backup servicer. And so in the next credit crisis, they're probably going to be really busy in less. Our loan book is big enough to get their attention like we're not Morgan Stanley, and so I saw two, it's probably gonna go service their biggest customers at a time of crisis. And so just stuff like that where you kinda here in every deal, don't worry. We're using this firm or this is the vendor for this kind to be critical about all the things everyone assumes are. Okay, are easy. Well, this has been awesome. You know, really great overview of something that's different from what I usually cover them such an equity person that heart that talking about credits been been really interesting. I've already done this with Alli and maybe you guys know this is coming, but I like to ask everybody at the end of these conversations for the kindest thing that anyone's ever done. We can start with whoever's ready. We, we've discussed this in the office at Lang, and we both were struggling to go outside of our parents, which is, I know cliche answer, but is that is that an acceptable? Who's the bar overpass back facet. You can do anything you like. I know this sounds incredibly cliche, but it really has to be my parents who, as I've reached my adult years, I realize how much they sacrifice and how much they they really have put me ahead of themselves. And so many scenarios in afforded me so many incredible opportunities to to put me in the place where I am today. So. I'm forever grateful for them. And then for their parents who put them in similar situations to succeed, I would say, you know, obviously my parents have helped me a lot. I was very fortunate when I started my career in investment banking to have three bosses Russ Chuck and Steve who really took the time to teach me finance, and I think that has been the greatest single learning because a lot of people go through investment banking and it's kind of a machine and you know, they don't. No one really mentors them or takes the time to teach them, you know, more than just the spreadsheet they're working on or whatever, sometimes don't even do that. So I was very fortunate to have kind of actual mentorship and people who taught me the the trade and and how everything works. I'll just just one one closing thought, which I thought was neat as we were going back and forth in preparation for this. Maybe you could just discuss this idea of how to treat people that you will definitely pass on. I thought that that was like a really interesting idea when it comes to sourcing and would be a nice place to close. Sure. So we probably see let's call when we really turn on a couple of hundred deals a month across the firm. And that means that we probably are going to talk twenty four hundred founders each year. The best marketing tool we have is okay. So the twenty four hundred. We might do twelve deals. So that means that we have two thousand three hundred and eighty eight people who are fairly annoyed at us. The best marketing tool we have is those people that we passed on. And so it's our job to no matter what happens. Creatine incredibly positive experience. One of the things that we were inspired by we have, we had a company that was pitching sequoia and sequential passing, but sequoia data's. They said, hey, sent expert all your data and send it to us and they had a team of data scientists actually go through all the data, the cohort analysis, everything else, and they sent back the investment memo to the founder and say, here's all the things that we analyzed. Here's the things that could do better. Here's things that companies in our portfolio have done that have helped them grow faster. And we think these are things that you should implement within your own business. We will always send deal sequoias. Of course, you send deals with them, but like for business, that's already that great to have that kind of experience of the founder they passed on is a really, really powerful thing. We try to have something close to that with the founders that get pitched us. You'll never hear say, oh, it's too early for us. Thanks. That's usually sort of a nice way to say. I don't want to tell you exactly why I'm passing. What we try to do is be very, very specific just like you would do and you're managing one of your employees. Patrick, if someone does something wrong, you don't say you suck. You say, this is specifically what happened in. These are ways that you can make it better. We try to do that with the founders so that no matter what happens after that, they feel excited send one of their friends to us. It's a differentiator. It's done an order of magnitude difference in terms of how we market. And I'd say probably a third of our deals come through that channel which is plotting to us and exciting. In specifically this week, we saw three deals that had come from previous founders that we had passed on in just literally just this week in a lot of what we like to do is we say, hey, if this is not a right opportunity for us, we're happy to help advise you as you raise capital in say, we'll look at your. Term feet will help you think this through just because we feel like it's all you mentioned. It's really important to build out our reputation within this ecosystem, and we consistently see deals coming back from different founders. There's a high return on goodwill and you have the same thing when you meet somebody. Interesting. You also you feel like you have this internal obligation to connect them with someone else they get along with and you probably have this little spark in your head. You're like, wow, that's really fun on these two people meet and I don't need to have anything to do with it. It's just gonna be interesting when we meet a borrower who we think actually is a regime interesting type of credit. It just doesn't fit within our credit box. It almost feels like our obligation to tell one of our friends in the credit community who has a lending fund. They should meet the founder because it'll come back around like all the. I think that's the Jewish mother Gill. Well, thanks again guys. This has been informative as always thanks for your time. Thank. Hey, everyone, Patrick you again to find more episodes of invest like the best go to investor field guide dot com forward slash podcast. If you're a book lover, you can also sign up for my book club at investor field guide dot com. Forward slash book club after you sign up to receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick. Underscore Osieck o. s. h. g. if you enjoy the show, please leave a quick review for us on I tunes, which will help more people discover invest like the best. Thanks so much for listening.