Launch HN: Level (YC S21) – Flexible financing for early-stage lending startups
27 comments
Cool idea! I wish you guys existed a few years ago.
What loan management systems do you integrate with? They can all be so wildly different that normalizing over all of them is a great accomplishment.
Being a marketplace for lenders to credit warehouses could be neat. You can get data from the LMS, normalize it, show a bunch of credit warehouses at the same time, and see who offers the best deal. That's a cool vision because it means you could scale with your companies.
It's also WILDLY different from Pipe because lending is so damn specialized.
That said, I would be afraid of getting cut out at scale. Not sure how to protect against that. You can't really anonymize what company it came from because high performing companies would get punished and bail out.
Hope you kick ass! Great idea.
What loan management systems do you integrate with? They can all be so wildly different that normalizing over all of them is a great accomplishment.
Being a marketplace for lenders to credit warehouses could be neat. You can get data from the LMS, normalize it, show a bunch of credit warehouses at the same time, and see who offers the best deal. That's a cool vision because it means you could scale with your companies.
It's also WILDLY different from Pipe because lending is so damn specialized.
That said, I would be afraid of getting cut out at scale. Not sure how to protect against that. You can't really anonymize what company it came from because high performing companies would get punished and bail out.
Hope you kick ass! Great idea.
You know the space well and it seems like you get the vision.
We've found little overlap between customers in terms of LMS. Most use spreadsheets or build something in house. I imagine this will change in the coming year or two.
BTW, if anyone wants to build a universal LMS or a Plaid for LMS I think it's the right moment.
We've had investors ask why Pipe doesn't just do this and we respond with, because it's a just a different beast. We currently have a fairly broad funnel but we'll be specializing more during this next growth stage.
Retaining companies as they scale will be an issue, particularly at first. Once the software and marketplace are robust, we'll be able to go much further with our customers.
We're trying to avoid lock-in mechanisms like ROFRs and warrants. The product is either efficient and founder friendly, or it is not.
We've found little overlap between customers in terms of LMS. Most use spreadsheets or build something in house. I imagine this will change in the coming year or two.
BTW, if anyone wants to build a universal LMS or a Plaid for LMS I think it's the right moment.
We've had investors ask why Pipe doesn't just do this and we respond with, because it's a just a different beast. We currently have a fairly broad funnel but we'll be specializing more during this next growth stage.
Retaining companies as they scale will be an issue, particularly at first. Once the software and marketplace are robust, we'll be able to go much further with our customers.
We're trying to avoid lock-in mechanisms like ROFRs and warrants. The product is either efficient and founder friendly, or it is not.
For LMS, we use LoanPro:
https://loanpro.simnang.com/
Canopy is a recent new entrant: https://canopyservicing.com/
Using a vendor for LMS added some complexity (integration is a pain, idempotency is a concern, etc), but it helped us focus on things that differentiate our business. We certainly wouldn't have launched five months after founding without one.
I've talked to some startups that built an in-house LMS. The moment a payment reverses or someone backdates a payment or they backdate a loan change or modify a due date... they have big problems.
> We've had investors ask why Pipe doesn't just do this and we respond with, because it's a just a different beast.
Next time they ask, ask them why Google's VC branch doesn't just take their deals :)
It's astonishing to see how some investors don't realize how deep of a field lending is.
> We're trying to avoid lock-in mechanisms like ROFRs and warrants. The product is either efficient and founder friendly, or it is not.
Nice. Godspeed!
Canopy is a recent new entrant: https://canopyservicing.com/
Using a vendor for LMS added some complexity (integration is a pain, idempotency is a concern, etc), but it helped us focus on things that differentiate our business. We certainly wouldn't have launched five months after founding without one.
I've talked to some startups that built an in-house LMS. The moment a payment reverses or someone backdates a payment or they backdate a loan change or modify a due date... they have big problems.
> We've had investors ask why Pipe doesn't just do this and we respond with, because it's a just a different beast.
Next time they ask, ask them why Google's VC branch doesn't just take their deals :)
It's astonishing to see how some investors don't realize how deep of a field lending is.
> We're trying to avoid lock-in mechanisms like ROFRs and warrants. The product is either efficient and founder friendly, or it is not.
Nice. Godspeed!
Do you think Loanpro or Canopy cater for below issues? I've worked with teams who built in house and smashed into those issues. Very complex. Ncino seems to possibly be viable, but is too generic and broad.
> I've talked to some startups that built an in-house LMS. The moment a payment reverses or someone backdates a payment or they backdate a loan change or modify a due date... they have big problems.
Edit: do you think Loanpro or Canopy are viable for larger longer term loans? +$1m +3yr type cashflow lending?
> I've talked to some startups that built an in-house LMS. The moment a payment reverses or someone backdates a payment or they backdate a loan change or modify a due date... they have big problems.
Edit: do you think Loanpro or Canopy are viable for larger longer term loans? +$1m +3yr type cashflow lending?
They're probably viable for that.
Peach Finance is another option that came out recently: https://www.peachfinance.com/
Peach Finance is another option that came out recently: https://www.peachfinance.com/
Wanted to ask this, but saw this thread on LMS:
How standardised are the loan management systems that you can track loan performance in real time? Seeing that you mention spreadsheets. Is that viable for you? In the UK most companies track using spreadsheets, which is a mess. Agree on a decent LMS being an opportunity.
Is this targeted primarily at smaller lenders? I suppose most likely smaller ticket cash flow lending?
Very interesting!
How standardised are the loan management systems that you can track loan performance in real time? Seeing that you mention spreadsheets. Is that viable for you? In the UK most companies track using spreadsheets, which is a mess. Agree on a decent LMS being an opportunity.
Is this targeted primarily at smaller lenders? I suppose most likely smaller ticket cash flow lending?
Very interesting!
Is there reason to be a lending company for other lending companies rather than just lending directly and using the innovative founder types as franchisees of a sort?
When lending to an end borrower, a lender is often focused on their ability to underwrite the borrower to understand the risk of the loan.
We think it's very unlikely that Level could become the best underwriters of all the different types of borrowers in the world by lending directly.
Instead, the most innovative founder types in the lending space are often finding creative ways of using non-traditional sources of data or underwriting techniques to be able to lend to borrowers that otherwise may be left underbanked or unbanked.
So hopefully, by lending to lending companies, Level opens the door to new ways of thinking that we ourselves may have missed.
But you make an excellent point that there could be different flavors of the Level platform that could enable the same end result of allowing innovative founders to explore new ideas.
We think it's very unlikely that Level could become the best underwriters of all the different types of borrowers in the world by lending directly.
Instead, the most innovative founder types in the lending space are often finding creative ways of using non-traditional sources of data or underwriting techniques to be able to lend to borrowers that otherwise may be left underbanked or unbanked.
So hopefully, by lending to lending companies, Level opens the door to new ways of thinking that we ourselves may have missed.
But you make an excellent point that there could be different flavors of the Level platform that could enable the same end result of allowing innovative founders to explore new ideas.
This is great I know insurers for insurers absolutely kill it and I think this will be a massive success. Question though, would you lend to new startup lending companies - i.e. those without any lending history? That's the game changer - presumably you could have contracts that give you extra oversight in this case?
Why not just sell default swaps to smaller lenders? That would probably open up that market significantly.
The solution you are presenting is overly complex.
The solution you are presenting is overly complex.
How does this become big? As soon as your customers hit ~$10M in annual lending volume, it makes much more sense for them to go direct and cut you (and your fees) out.
Good question. We’ve so far noticed that going direct can still be a painful process, where deals can take a long time to close (3-6 months) or take a lot of legal fees ($100k+). We've also seen that companies lending at a larger scale are still trying to diversify their source of capital.
This is definitely a challenge we will face as we continue to try and serve larger customers and are hopeful that by focusing on having integrations into financials and streamlining the process, we can make Level the first choice of capital even as customers hit larger lending volumes.
This is definitely a challenge we will face as we continue to try and serve larger customers and are hopeful that by focusing on having integrations into financials and streamlining the process, we can make Level the first choice of capital even as customers hit larger lending volumes.
Does this imply you expect to fund 100% of the loan book? Or dynamically assign individual loans between Level and other debt funders?
(I spent a period as CRO of a fintech lender... As our loan book grew, much of our energy went on managing the various debt covenants. They made sense for a steady-state portfolio, but were a real impediment to profitable growth... Please do reach out if you'd like to talk further; my email is in my profile).
(I spent a period as CRO of a fintech lender... As our loan book grew, much of our energy went on managing the various debt covenants. They made sense for a steady-state portfolio, but were a real impediment to profitable growth... Please do reach out if you'd like to talk further; my email is in my profile).
We buy as much or as little of the loan book that makes sense for both the customer and Level. So more on the individual loan level.
We will definitely reach out in the coming weeks.
We will definitely reach out in the coming weeks.
Cool, but who’s lending to you?
Good question. Right now we are building customer empathy feeling the challenge of starting a new lending business.
The choices for us are similar to the customers we serve. Either we: 1) lend off of our balance sheet 2) sell equity of the company to power more lending 3) prove a longer track record for traditional debt providers to do a larger debt deal 4) open up a marketplace so that debt providers can use Level to invest in alternative assets that they might not otherwise have access to
We're going to be exploring a collection of these techniques to see what can be a scalable source of capital for both Level and the customers we serve.
The choices for us are similar to the customers we serve. Either we: 1) lend off of our balance sheet 2) sell equity of the company to power more lending 3) prove a longer track record for traditional debt providers to do a larger debt deal 4) open up a marketplace so that debt providers can use Level to invest in alternative assets that they might not otherwise have access to
We're going to be exploring a collection of these techniques to see what can be a scalable source of capital for both Level and the customers we serve.
Is there a way to short such a business model? Don’t get me wrong: I wish you every success in this world, I want neither yourself, nor your business partners to go bust. Still, I think lending to lenders is a high risk business and susceptible to even the tiniest liquidity shortages in the money markets. We did not see any liquidity problems for more than 10 years, so shorting this would be a good hedge.
Good luck, though!
You can’t really short private companies…
But in a liquidity crisis, everything will get hurt. Banks will be hurting the most.
Buy puts on banks or even SP500 if you want a hedge.
But in a liquidity crisis, everything will get hurt. Banks will be hurting the most.
Buy puts on banks or even SP500 if you want a hedge.
“The stock market can remain irrational longer than you can remain solvent.” -- Keynes
I generally try to be encouraging of people putting themselves out there to create something new, but I'm worried that you're creating a pretty serious moral hazard for the founders you're trying to help.
It's the kind of situation that can lead well-intentioned people to make bad decisions.
It's the kind of situation that can lead well-intentioned people to make bad decisions.
This is simply a tool to help founders get access to non-dilutive growth options, since right now they have very few alternatives at the earliest stages. We start with a safe amount of leverage and increase it as loan performance becomes predictable.
Out of curiosity, why Level? You're the second up-front cash-flow company called Level I've heard of. Is it a market term?
Coincidence, most likely. We joined as a team and decided on the company name Level when we were working on an entirely different business.
We liked the name because it seemed very versatile, which has proved to be the case as we've refined our business.
We liked the name because it seemed very versatile, which has proved to be the case as we've refined our business.
I need this but for using prepaid debit cards. Anybody have any recommendations?
We've had a few companies reach out for support with short duration loans for various card products. We're running a pilot currently to see if it works. I don't think there is a great early stage solution for this problem yet but please let me know if you find something.
Would you mind emailing me at [email protected]?
Would you mind emailing me at [email protected]?
Building a lending company is challenging because it requires a lot of capital to get started. You need lending history to access capital, but you can’t access capital until you have a history of lending. To get around this, founders traditionally raise a large dilutive equity round and then lend off their balance sheet, or they find a family office or credit fund willing to offer a loan, which usually comes with high interest rates, warrants, and covenants. Even once your company succeeds in reaching the scale necessary to secure a traditional loan, the process takes at least 3 to 6 months and costs >$100k in legal fees to set up.
We didn’t think to work on this problem until it came to us. During a process of pivoting from a different business, a lot of fintechs were asking for help with raising debt from our CEO Vlad, who was a venture debt banker at Silicon Valley Bank (SVB). Vlad provided connections to traditional debt providers, but these startups were turned down because traditional debt providers don’t work with pre-seed or seed stage startups—the deals are just too small. Since a lot of these startups were showing solid progress, and were being turned down for reasons having nothing to do with how good their business was, we decided that this was a good problem to tackle.
Also, companies like Pipe and Capchase turn MRR receivables into upfront capital for companies with recurring revenue. It seemed to us that the same principle could be applied to the loan receivables of lending companies, where the problem is even more painful.
Our solution is to purchase loans that lending startups have originated at a discounted rate, then forward the customer’s loan payments to Level as they come in. If you are familiar with financial arrangements, it’s similar to a forward flow agreement (https://www.finleycms.com/what-is-forward-flow). It’s different, though, in that we calculate the discount of purchasing loans by integrating directly into a company's ongoing bank balance and loan performance. This enables companies to get a lower cost of capital as they become a stronger lender and more stable business.
We integrate with a startup’s banks via integrations similar to Plaid, making it possible to track the company’s cash position and burn rate. In addition, we integrate with their loan management system to watch loan performance over time. In the event of default or prepayment, the company can buy back the non-performing loan or substitute in a new one. We allow a startup to sell more loans as its loan book grows and becomes more predictable, providing a flexible alternative to costly warehouse facilities. We make money by buying loan receivables at a discount from the total value of the receivables we collect.
If lending startups get better access to capital at the earliest stages, more companies will enter the market and drive competition based on the merits of the financial services they provide. This is good for existing borrowers and opens up new finance options for the underbanked and unbanked.
We’re building Level so that innovative founders can responsibly scale up a lending business without traditional constraints. We’d love to hear the community’s ideas, experiences, and feedback so we can do our best on this problem. Thanks!