It normally starts with an idea – it could be a new product, a better product or a better way to help borrowers with a specific financing need. It might also be solving a larger problem (think home ownership).
It generally needs a solid dose of passion plus a desire to challenge the status quo – faster time to approval, allowing larger loans, less red tape, loans for older borrowers.
Once you’ve found your North Star, the next step is getting the rocket built – licencing (if required), systems and people. Most want to build their systems, but the best probably assemble systems. You don’t build Word or Excel, so why do you need to build a Loan Management System? Great CRM systems are available, so plug this in rather than build.
Equity is always critical – it’s the fuel the rocket needs to be built. You can’t have too little that production won’t start. Given the start-up phase often takes longer and costs more than projected, raise more than you think you’ll need. You’ll also need some after the rocket launches.
Once the rocket is built and ready to launch, you need to start sourcing funding. You’re not a bank so you don’t have deposits. You need funds to lend out. Friends and family ? An Ultra High Net Worth ? A Family office ? All are viable solutions to prove your product idea and operational capability.
Whilst institutional funding is the fuel that can take you into deep space, it’s very difficult to source with no track record. Not impossible, just difficult as lenders want to see your origination history and credit performance history. Banks have a higher requirement in terms of track record and OpCo solvency, so you’ll likely start with a credit fund, a more expensive fuel in terms of margin but more willing to take risk on the OpCo and origination capability. They’ll also normally stick around for the deep space party as a mezzanine provider.
Remember, it’s all about demonstrating you can build and launch the rocket. The credit fund enables this. But the banks are the booster rockets – they kick in with the larger and cheaper funding to propel you out of the earth’s atmosphere and into deep space. But they only kick in when you’ve built the rocket and launched. You need to demonstrate capability before they come in – ability to originate, robust credit assessment, strong governance, solid loan performance, maybe even a few minor burns when the rocket wrote some sub-optimal loans.
Albeit the banks can bring cheaper fuel (the margin over BBSW) and plenty of it (facility size), don’t forget there’s so much more an originator needs to consider.
The eligible receivables criteria, portfolio parameters, funding availability period, establishment fees and undrawn fees are all key factors which must be included in the calculation of an originator’s cost of funds. Restrictions on the assets that can be originated, or incurring high transaction costs, negatively impact the rocket’s optimal speed and trajectory.
Some other tips:
Astronauts steer rockets, engineers build them. Make sure you have the right people in the right seats.
In the early days, you’re building equity value, not net interest margin (NIM). Don’t get hung up on the funding cost. You’re better to have more equity and take a slight income drag than have a better NIM but be working on a shoestring budget. So do whatever it takes to get the rocket off the launch pad.
Get advice – remain entrepreneurial but remember there’s no monopoly on wisdom. No-one in history singlehandedly built, launched and flew a rocket.
Stay the course – too many start-up CEOs want to jump into their next big idea before they’ve executed on the first one. Stick to finding your North Star, and only pivot if your marginally off course.
Hang tough – if it was easy, everyone would be doing it!
Take photos along the way. Like all rocket trips, they go fast, so don’t forget to create memories of the journey.
Good luck, and please send me a few photos when you get there.
About the author
John Powell is a Managing Director at Neu Capital. He was part of Rismark which successfully launched in 2007 but failed to breach the Earth’s atmosphere due to the GFC (Great Fuel Crisis) of 2008/9.
John’s rocket building days are long gone, but he actively assists aspiring astronauts and engineers launch their rocket and find the fuel they need to reach their North Star.
John’s email is john.p@neu.capital.