Leading With Software When Building A Lending Business

As I reflect upon my experience building Bond Street (an SMB lending startup we sold to Goldman Sachs in 2017), one of the biggest challenges we faced was in scaling customer acquisition. In retrospect, there were two critical insights that would have significantly improved our ability to grow effectively. These are qualities we now look for when evaluating prospective investments at a16z.

First, we lacked visibility into the “transactional intent” of our customers. That is to say, we had no proprietary understanding if or when our customers might need a loan. Instead, we would spend money to acquire customers in the ether with the hopes that we could get in front of them in the narrow window when they were looking for financing. This reliance on third-party acquisition channels had a significant impact on our funnel and unit economics.

Second, we had no visibility into the “approvability” of our customers. Even when we were able to get in front of prospects at that transactional point of intent, we had no prior insight as to whether or not they would make it through our underwriting criteria. Instead, we would gather financial data at the point of application and were reliant on third-party data sources for this assessment (be it their self-reported financials in their accounting software, their bank transactional information, tax filings, and personal/business credit scores — much of this being lagging indicators of their financial health). Often, a customer would look great at first blush and have a compelling use case for our loan, but then they would quickly be disqualified because of poor credit and/or financial history. Again, this had a significant impact on our funnel and unit economics.

We believe that the best way to avoid these traps is by building a lending business that “leads with software” as opposed to a financial product. The goal with this approach is to build a product or platform that gives you unique visibility into both the transactional intent and approvability of your customers. The ability to “push” a loan to the right customer at the right point in time as opposed to “pulling” your customer into your funnel (without these insights) can dramatically improve your unit economics, credit quality, and ability to scale.

We’ve seen a number of creative approaches to this strategy. Many vertical software players that sit in the payments flow and have visibility into customer financials have executed against this thesis. Famously, Toast has evolved from a POS terminal to becoming a broader financial operating system for the restaurants they serve — delivering inventory management, workflow tools, and payroll in addition to their core payments product. As a result of seeing both income and expenses, Toast has been able to identify merchants within their network that might qualify for working capital and extend financing at the right point in time (importantly, with a high degree of conversion given their visibility into “transactional intent” and “approvability”). In our portfolio, we recently announced an investment in a company called Adaptive, which is building vertical software for general contractors in the construction industry. Adaptive’s software will help contractors better manage and reconcile spend with their subcontractors. Because they have visibility into purchasing and payments flow within their network, they’ll be able to extend financing to qualified customers at those moments of transactional intent — improving both their unit economics and credit quality versus a traditional lending approach.  

If you’re building with this thesis in mind — we’d love to hear from you. My partner Sumeet and I are on the lookout for other vertical software businesses across industry categories that can build upon their core SaaS offering and further monetize through this financing advantage.