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Happy Monday, Fintech Takers!

Today’s newsletter comes to you from the mountains of Utah, which aren’t quite as stunning as the mountains of Montana. However, they are still spectacular and, more importantly, they are the setting for a week of great fintech content (courtesy of my friends at MX and LoanPro).

I’m also delighted to be joined for the first part of this week by my wife. A couple of days away from the kids for her and me is just what the doctor ordered.

Now, let’s get into it.

- Alex

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Engineering: large cogs meshing together, and diagrams of epicycloid curves. By Stanislas Petit (1905).

3 FINTECH NEWS STORIES

Aven, a fintech lender focused on asset-based finance, raised some money:

Aven … today announced a $110 million Series E financing at a $2.2 billion post-money valuation — more than double its valuation from a year ago. The round was led by Khosla Ventures, with participation from existing investors General Catalyst, Caffeinated Capital, GIC, Electric Capital, and Founders Fund.

With the support of their investors, Aven is well-positioned to accelerate building America's first full-service "machine banking" platform – powered by automation, patented robotics, and large-scale machine learning – to dramatically reduce borrowing costs and support consumers in every aspect of their financial lives.

“Machine Banking”

That’s definitely a term you can use! I’m not sure what it means, exactly. But I suppose that’s actually helpful in convincing VC investors to kick in money at twice the valuation you had a year ago.

Here’s what we do know:

• Aven was founded in 2019. According to this Forbes article, it has an annualized revenue of more than $200 million a year, but isn’t yet profitable. It had 33,000 customers as of July 2024, and is now available in 41 U.S. states.
• Its primary product is a credit card that offers credit lines of up to $400,000 (with average interest rates of 10-11%), secured against the equity that a cardholder has in their home. A portion of the credit line is available as a cash-out or balance transfer, which converts that amount into a traditional installment loan with fixed monthly payments (plus a 2.5% transfer fee).
• Aven also offers an unsecured credit card and a traditional home equity line of credit (HELOC) installment loan. Moving forward, the company is planning to extend into the mortgage refinance business (focusing, specifically, on the cash-out refi business). Its goal, overall, is to cut Americans’ interest payments in half and “to drive the single largest change in the cost of capital in American history.”

That last part, I think, is most indicative of where Aven wants to go. It has mastered the ability to incorporate asset underwriting into the overall digital lending process (without unduly slowing down or complicating the experience for borrowers), and it sees an opportunity to extend that capability beyond the HELOC/credit card product structure that it started with.

Now, on the one hand, I can appreciate the thinking here. Asset-backed credit is generally less expensive than unsecured credit. It also has the potential to be more accessible, depending on the asset (homes aren’t the best example, given the housing affordability issues we face right now, but there are similar products that tap into other assets, like cars). 

Banks have done a very poor job, to date, of streamlining the home equity lending process to the point where it can become a viable option for today’s convenience-above-all-else consumer. Aven has succeeded where they have failed. 

On the other hand, I get a little nervous about credit products that make tapping into the equity that consumers have built up in their assets too easy. That equity is a valuable and low-cost source of liquidity when you need it. But it’s also risky to tap into. The worst-case scenario (losing your home) is significantly worse than it is with an unsecured credit card.

The trick in this space is striking the right balance. Building asset-based lending products that align the interests of consumers, lenders, and investors, and distributing those products in contexts that lead to responsible usage (this is one of the reasons that I like the emerging Home Appreciation Partnership product category … it’s built for people who have already decided to sell their homes).

As Aven goes deeper into the world of asset-based consumer lending (or machine banking, as they have apparently christened it), I will be watching closely to see how it manages this balance.           

Mazlo, a financial management platform for nonprofits, emerged from stealth after raising some money:

After working for nearly two decades in the nonprofit sector, Kian Alavi saw firsthand one of the biggest pains the sector experienced: managing finances.

So he teamed up with Sean Anderson and Chad Haynes to build a platform that could help nonprofits manage this pain. The goal was to solve the problem of nonprofit money management at scale.

In mid-2024, Mazlo raised about $1.1 million from Andreessen Horowitz and Social Good Fund to grow the San Francisco-based company.

The startup launched in August 2024, and things were going well. But then Mazlo faced another problem. Money was running out.

But with about a month of runway left and nearly missing payroll, Alavi and team raised another $3.5 million in seed funding from Westbound Equity Partners, Super{set}, and Social Good Fund, along with friends, family and advisers.

And now the company is emerging from stealth as it works with more than 60 organizations with over 1,600 users across nearly all 50 states.

I’m having a bit of a love affair with vertical SaaS right now (lots more content coming on this front soon). There are many reasons for this, but this story illustrates two of them.

First, in the traditional VC-backed tech startup space, we often become far too obsessed with the idea of “total addressable market,” which we use as a loose proxy for evaluating the potential of different startups. The problem is that calculating TAM is a lot trickier than it seems, and the process is often distorted by the biases of investors, in the same way that major league baseball teams undervalued players who got walked a lot in the pre-Moneyball era.

Mazlo has struggled to find investors who weren’t biased against the nonprofit space, as one of its lead investors explains:

Tom Chavez, co-founder of Super{set}, said that besides being impressed with Alavi’s firsthand experience with nonprofits, he could also see a “vast” market opportunity.

Via email, he wrote: “$500 billion is sloshing around the balance sheets of these nonprofits.”

Chavez acknowledged that many investors have ignored the nonprofit center “because the word ‘nonprofit’ naturally scares them away.”

“What that misses is that there are hundreds of billions of dollars on the balance sheets of entities that literally cry out for a smarter, stronger solution than the patchwork of onesie-twosies they’re currently using,” he added.   

Imagine passing on investing in a fintech startup because your lizard brain translated “nonprofit” to “not profitable”.

Second, I’m constantly reminded when I look at verticalized fintech solutions just how many nuanced requirements, specifically related to money management, exist in different industries and how crucial it is that those requirements are met.

For example, in the legal industry, law firms are required to manage the money held in trust for their clients with an extreme level of care. Even the tiniest mistake can result in the lawyers responsible for it being disbarred.

In the case of nonprofits, a similar level of rigor is required when it comes to financial accounting and reporting, as Mazlo’s CEO, Kian Alavi, explains:

“There were companies out there handling bits and pieces, like basic spending accounts and the ability to accept payments for sorority fundraising,” he said. But their aim with Mazlo was to build a fully compliance-driven solution, “one that had all of the banking and finance tools a nonprofit organization would need.”

“The compliant piece was everything, because once you make an accounting or reporting error, it doesn’t matter how much you’re helping people, fail an audit and you risk losing your nonprofit designation and have to shut down,” Alavi explained. 

If you’re building in the vertical SaaS space, you want to RUN towards jobs-to-be-done where the stakes are existential for your customers. That’s where all the value is. Mazlo seems to understand this.

Two interesting and related bits of news from the world of subprime auto lending.

First, Tricolor filed for bankruptcy:

Tricolor Holdings, a used car seller and subprime lender that focuses on undocumented immigrants in the US Southwest, filed to liquidate in bankruptcy.

Dallas-based Tricolor didn’t give a reason for its collapse in its Wednesday filing. But hints of trouble emerged a day earlier, when regional lender Fifth Third Bancorp said it had discovered alleged fraud at one of its clients. People with knowledge of the matter told Bloomberg the client was Tricolor, and that JPMorgan Chase & Co. and Barclays Plc were also expecting to write down loans tied to the company.

And Lendbuzz filed to go public:

Lendbuzz, an auto finance fintech company, filed an IPO prospectus Friday.

The Boston-based company is targeting a valuation of around $1.5 billion, according to a person familiar with the matter, who asked not to be named discussing internal matters. That valuation may change as Lendbuzz and its advisors hold discussions with investors. 

The decade-old company uses alternative data and machine learning algorithms to assess the creditworthiness of consumers with limited financial history. Lendbuzz’s loans are funded by asset-backed securitization, warehouse loans from traditional banks and through the sale of portfolios to institutional investors – mainly insurance companies – that are looking for yield.

At a high level, Lendbuzz and Tricolor are in the same business: subprime auto lending, specializing in serving immigrants. 

This is a lucrative business, if you can find ways to derisk it sufficiently, because automobiles are one of the few things that immigrants, even undocumented immigrants who are obviously cautious about engaging with the regulated financial industry, need and need to finance. That demand, combined with a constrained supply (most auto lenders aren’t willing to take on the risk), equals significant revenue potential. And not just for Tricolor and Lendbuzz. The banks that have lent those companies money to make their loans and the investors that bought the loans, after they were packaged as securities, have also been doing quite well for the last couple of years.

The question is whether Tricolor’s failure is a canary in the coal mine for the subprime auto space generally, and for the documented and undocumented immigrant segments of that market specifically.

Perhaps not. Tricolor had a very unique, vertically integrated business. It bought and sold used cars itself and handled all financing in-house. By contrast, Lendbuzz has a more traditional model, where it works through auto dealerships, with both direct partnerships and through existing embedded financing rails (Dealertrack & RouteOne).

And according to the early reporting on the Tricolor situation, it appears that fraud played a role in the company’s failure, and law enforcement investigations and lawsuits from creditors are likely to follow. That’s obviously not a risk that we can generalize across other providers in Tricolor’s market.

However, there are still reasons for concern.

The subprime auto lending space has been overheated for a while. For the last few years, lenders have been extending the terms of their loans to keep customers’ monthly payments low while automobile prices have climbed. That trend has been pervasive across the entire auto lending market, but it obviously poses the most significant risk in the subprime space, where consumers have less capacity to absorb shocks.

And Lendbuzz itself warns in its S-1 that serving immigrants is a riskier proposition these days:

While our credit models look to approve consumers who have stability of residency and employment, a significant change in immigration patterns, policy or enforcement could cause some consumers to emigrate from the United States, either voluntarily or involuntarily, or slow the flow of new immigrants to the United States. Changes in immigration laws, policies or enforcement patterns, or announcements thereof, that make it more difficult or less desirable for immigrants to work in the United States or introduce greater uncertainty into the immigration system have affected spending patterns by immigrants in the past and may do so in the future, which may have in the past, and may in the future, lead to fluctuations, including declines, in originations from time to time. Such changes may have in the past, and could in the future, also result in increased delinquencies and losses on our loans due to more difficulty for potential consumers to earn income. In addition, if we or our competitors receive negative publicity around making loans to undocumented immigrants, it may draw additional attention from regulatory bodies or consumer advocacy groups, all of which may harm our brand and business.  

That last part (“if we or our competitors receive negative publicity around making loans to undocumented immigrants”) just happened. And I wouldn’t be super optimistic that serving immigrants is going to become any easier over the next three years.

2 READING RECOMMENDATIONS

Kiah’s newsletter last week explored the resurgence in credit risk transfers, a 2000s-era tool that failed massively during the 2007 financial crisis. I learned a lot from reading it, which is becoming a trend with Fintech Takes Banking! 

I enjoyed this short post from Adam on the challenges that banks create for customers trying to close deposit accounts, which I have personally experienced and find quite aggravating.

1 QUESTION FROM THE FINTECH TAKES NETWORK

There are a TON of interesting questions being asked in the Fintech Takes Network. I’ll share one question, sourced from the Network, each week. However, if you’d like to join the conversation, please apply to join the Fintech Takes Network. 

What are the best examples of fintech or fintech-adjacent products that solve specific problems that consumers have at different life stages?

If you have any thoughts on this question, reply to this email or DM me in the Fintech Takes Network!

🏀 FINTECH TAKES THE COURT 🏀

Yep, it’s happening again!

I am DELIGHTED to officially announce the third annual “Fintech Takes The Court” 3x3 basketball tournament, which will take place in the morning on Sunday, October 26th, in Las Vegas.

This year’s tournament is being sponsored by SOLO, and it’s going to be the best one yet. If you’ll be attending Money20/20 (or just in Las Vegas that week) and are interested in getting off the Strip for a few hours and getting some exercise (or just coming to cheer the teams on!), fill out this form. Space is limited, so don’t wait 🙂   

Thanks for the read! Let me know what you thought by replying back to this email.

— Alex  

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