Not all forms of financing are suitable for all businesses, but for many high growth technology companies, the financing options that fit their expansion paths may be limited.
James sagan, founder and CEO of the new asset-backed lender Capital of the architect, said the venture capital and risky debt that these young companies often rely on, while valuable, do not always meet the needs of digitally driven business models for companies like FinTechs, digital lenders or electronic commerce.
It’s a niche market that Architect Capital seeks to target in both Latin America and the United States, and a market that Sagan told PYMNTS has brought clarity to the latest wave of alternative lending and the FinTech innovation that is starting to infiltrate the market.
Understanding how the emerging business models of tech startups are changing the way “assets” are defined can have a profound impact on the evolution of the business models of lenders themselves, Sagan noted.
Define an asset
One of the main issues for high-growth digital startups today is that many of these companies generate assets at early stages in their lifecycles, but the venture capital debt and equity on which these companies generate. have historically relied are not always able to enter the fold. until later.
Sagan gave the example of a digital loan company.
“Loan companies are starting to generate assets in the form of receivables, but there is no one who has been put in place to finance, especially in the beginning, the assets generated by these companies,” he explained. “Venture capital debt doesn’t scale enough at first to provide liquidity against these assets, because the venture capital debt providers don’t guarantee the asset itself, they underwrite the sponsor. “
Likewise, equity can be “prohibitively expensive” when used against a portfolio of loans, he added.
If a need in a niche market was identified, understanding how to finance these companies from the assets they generate involved adopting a fluid and evolving definition of the asset. For Architect Capital, Sagan said, assets must be resilient and, perhaps more importantly, must generate cash flow.
Having the confidence that a lender’s receivables are durable enough to pay off a company’s debt is key to financing these businesses. Intellectual property, on the other hand, does not generate cash flow and therefore is not the right solution for Architect.
“In the beginning, we were much more comfortable with durable assets as collateral – real estate, say,” Sagan noted. “Subsequently, we have become much more comfortable with assets that have statistical properties that we can underwrite … As we continue to develop this business, the definition broadens.
Evolution of business models
While the United States has no shortage of FinTechs and e-commerce companies generating such assets, Latin America is seeing a rapid increase in the number of companies adopting these business models. Buy Now, Pay Later (BNPL), for example, is only just starting to gain traction in the geographic market, making it a prime time to step in, Sagan said.
As digital startups explore new business models, they are also able to take a digitally driven approach to their own back offices, using technology to manage finance, accounting and payments. that create a constant flow of digital financial data. This has been of great value to alternative loan companies working with these businesses and needing a rich and transparent overview of borrower cash flow.
Digital lender and e-commerce businesses that fit the profile of an Architect Capital client are also a reflection of a next wave of rapidly evolving alternative finance business models.
Again, Sagan highlighted BNPL’s FinTechs, which offer both a payment and financing solution, or FinTechs which can facilitate in-built financing in e-commerce portals, as new models that create assets generating cash flow in new ways. These companies also appeared to be learning from the first wave of alternative lenders that flooded the market following the 2008 financial crisis, which Sagan said relied on cheap customer acquisition strategies for the growth.
This generation of finance and credit FinTechs, meanwhile, relies on the valuable partnerships it establishes and the data it can generate and to which it has access through its collaborations to find both customers and clients. of success in the market today.
As these FinTechs evolve, their financiers must also evolve.
Understanding new ways of underwriting and defining an asset could close the funding gap that many FinTechs, especially in emerging markets, are grappling with. And according to Sagan, opening this route to capital could open a new market.
“I am extremely optimistic about the market we are in right now,” he said. “We are seeing strong growth.