Mastering Capital Markets: Industry Experts Share their Winning Strategies

At the recent “Mastering Capital Markets: From Seed to Securitization” event, hosted by Setpoint and Cross River’s Capital Solutions Group, nearly 100 capital markets leaders convened to explore the evolving landscape of asset-backed lending. The discussion provided a deep dive into the current trends, challenges, and opportunities shaping the future of financial technology.  

The Imperative to Diversify Funding

David Haber, a16z General Partner and investor in Setpoint, reflected on his time running Bond Street to highlight the critical need for diversified funding. "Lending businesses are inherently cyclical," Haber noted. "We've seen margins compress due to increased costs of capital, and it's crucial for companies to have diversified funding sources and sophisticated capital market strategies."

Haber vividly recalled how managing substantial debt capital often felt like holding things together with "bubble gum and shoelaces." He recounted a particularly challenging period in 2015 when one of the leading investment banks halted facilities with many borrowers in the market (but fortunately didn't with Bond Street). "It could have been lights out for us," he said. "We were fortunate they didn't pull their capital, but it was a stark reminder of the importance of maintaining strong counterparty relationships."

This experience underscored not only the necessity of diverse funding sources but also the skill required to manage them effectively. "We had to juggle multiple relationships and constantly ensure we weren't tripping any covenants.”

"It's like insurance. You don't realize its value until you really need it,” Haber said.  

Turning Disruptions into Opportunities

Stuart Wall, CEO of Setpoint, highlighted how market disruptions can serve as catalysts for innovation. "Disruptions force a rethink, and that's where we've seen opportunities to innovate," Wall noted.

He shared the story of a power buyer that initially focused on offering bridge loans to homebuyers. "This power buyer thrived with a buyer-centric product when the market was hot," he explained. "But when the market dynamics shifted, they quickly adapted by pivoting to a seller-centric model. This allowed homeowners to sell their current property before purchasing a new one."

This strategic pivot addressed the changing market conditions and opened up new revenue streams. "By rethinking their approach and focusing on operational efficiency, they managed to maintain their growth trajectory despite the market downturn," Wall said. "It was a perfect example of how agility and foresight can turn challenges into opportunities."

Convergence of SaaS and Lending

Jason Guss, CEO of Octane Lending, highlighted the emerging trend of blending SaaS and lending models, predicting this convergence as the future of financial technology. "The next wave of FinTech will see the smartest companies offering both lending and SaaS tools," Guss stated. "Your choice to monetize through lending or SaaS will depend on your market's dynamics."

He shared their approach: "Our business opportunity, based on loan economics, makes more sense to monetize through lending while offering SaaS tools for free. This attracts more users and drives lending volume."

The convergence of SaaS and lending, as illustrated by Guss, showcases a strategic shift where blending software and financial services maximizes market impact. "Finding the right balance and leveraging both tools effectively will lead the next wave of fintech innovation," Guss concluded.

Structured Transactions: Adapting to New Capital Market Realities

Noah Cooper, CIO of Cross River Bank, discussed the evolution of capital markets towards more flexible and structured transactions. "We've seen a shift from traditional ABS issuance to more permanent, risk-aligned trades," Cooper explained. This change allows originators to retain earnings and improve profitability as traditional funding sources become less reliable.  

Cooper emphasized the need for aligning these transactions with the specific risks and needs of both investors and originators. "It's about finding structures that provide necessary liquidity while matching the risk appetite of investors," he noted.

He illustrated this trend with a recent example: "In the past 18 months, we've transitioned to bilateral deals where institutional investors can structure trades that align risks and returns. This flexibility is essential in today's market."

The Build vs. Buy Dilemma

The panelists also delved into the build vs. buy debate for technology solutions. Wall emphasized leveraging third-party platforms for non-core functions, allowing companies to focus on their primary business activities. "If you're an origination business, focus on origination," he advised. "You wouldn't build a CRM if you're a sales company; you'd use Salesforce."

Jason Guss shared a cautionary tale from his own experience of initially building technology in-house, which, while necessary at the time, proved costly and resource-intensive. "We spent millions getting the data to a place where it's perfect," he lamented. "I wish we had platforms like Setpoint back then to save us time and resources."

Practical Advice for Capital Providers and Borrowers

As the panel wrapped up, the speakers shared some practical advice for those navigating the capital markets landscape. Jason Guss stressed the importance of mastering the fundamentals. "Understand the basics of lending," he emphasized. "Revenue does not make a difference in a lending business. Focus on loss coverage, gross profit spread, and return on equity."

Noah Cooper shared stories of platforms that overengineered their first credit facility that ultimately delayed product go-to-market. “We have seen management teams spend weeks negotiating reporting covenants on their first credit facility.”  

David Haber offered a perspective on negotiating credit facilities. "Prioritize flexibility and scalability over cost," he advised. "Pick partners that will grow with you. Flexibility and scalability are more important than saving a few basis points."

Stuart Wall  wrapped it up by emphasizing the value of operational efficiency and quick adaptation to market changes. "Efficiency isn't just a buzzword; it's a necessity," he said. "Adapting quickly to market changes and maintaining strong partnerships can make all the difference."