James Sagan, founder and CEO of newly launched asset-based lender Architect Capital, said the venture capital and venture debt that these young businesses often rely upon, while valuable, doesn’t always suit the needs of digital-first business models for firms like FinTechs, digital lenders or eCommerce.
It’s a niche market that Architect Capital is looking to target in both Latin America and the U.S., and one that Sagan told PYMNTS has brought clarity to the latest wave of alternative lending and FinTech innovation beginning to seep into the market.
Understanding how emerging business models of technology startups changes the way “assets” are defined can have a profound impact on the evolving business models of the lenders themselves, noted Sagan.
Defining An Asset
Among the biggest pain points of high-growth digital startups today is that many of these firms are generating assets at earlier stages in their lifecycles, yet the venture debt and equity that these firms have historically relied upon isn’t always able to enter the fold until later.
Sagan offered the example of a digital lending company.
“Lending companies start generating assets in the form of receivables, but there isn’t anybody who was set up to finance, especially in the early stage, the assets being generated by those businesses,” he explained. “Venture debt doesn’t scale enough in the early days to provide liquidity against those assets because venture debt providers aren’t underwriting the asset itself, they’re underwriting the sponsor.”
Likewise, equity can be “prohibitively expensive” when used against a loan book, he added.
While a need in a niche market was identified, understanding how to finance these companies using the assets they generate meant embracing a fluid and evolving definition of asset. For Architect Capital, said Sagan, the assets must be resilient and, perhaps most importantly, must generate cash flow.
Having confidence that a lender’s receivables are sustainable enough to repay a company’s debt is key to financing these firms. Intellectual property, on the other hand, doesn’t generate cash flow, and thus isn’t the right fit for Architect.
“Early on, we were much more comfortable with hard assets as collateral — real estate, let’s say,” noted Sagan. “We’ve subsequently become much more comfortable with assets that have statistical properties that we can underwrite... As we keep growing this business, the definition is broadening.”
Evolving Business Models
While the U.S. has no shortage of FinTechs and eCommerce businesses generating such assets, Latin America is experiencing a rapid rise in firms embracing these business models. Buy now, pay later (BNPL), for instance, is only beginning to gain traction in the geographic market, making it a prime moment to step in, said Sagan.
As digital startups explore new business models, they’re also able to take a digital-first approach to their own back offices, using technology to manage finance, accounting and payments that creates a steady stream of digital financial data. It’s been highly valuable to alternative lending firms working with these businesses and in need of rich, transparent insight into borrowers’ cash flows.
The digital lender and eCommerce businesses that fit the profile of an Architect Capital client are also a reflection of a quickly evolving next wave of alternative finance business models.
Again, Sagan pointed to BNPL FinTechs, which offer both a payment and a financing solution, or FinTechs that can facilitate embedded financing within eCommerce portals, as novel models that create cash flow-generating assets in new ways. These companies have also seemed to take the lessons learned from the first wave of alternative lenders that flooded the market in the wake of the 2008 financial crisis, which Sagan said relied upon cheap customer acquisition strategies for growth.
This generation of lending and finance FinTechs, meanwhile, are relying on the valuable partnerships they strike and the data that they can generate and have access to as a result of their collaborations to find both customers and success in the market today.
As these FinTechs evolve, so, too, must their financiers.
Understanding new ways to underwrite and define an asset could fill the funding gap with which many FinTechs, particularly in emerging markets, are struggling. And according to Sagan, unlocking that path to capital could open up a greenfield market.
“I’m exceedingly optimistic about the market that we’re in right now,” he said. “We’re seeing a lot of growth.”
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