Transcription:
Spencer Lee (
I guess I'll get started. Good afternoon. My name is Spencer Lee, a reporter at National Mortgage News. Very delighted to have you all here with us at Digital Mortgage today. In person this year. I'm really delighted to be here that a few of you the last two days, hopefully meet a few more, over the next couple days. My first live in person digital mortgage event, so I'm real excited to be here. Again, the name of this panel is, Venture Capital Favorite Deal, Making Ideas for 2022. 2023. That's a mouthful right there. Now, we all know that, since the last time we met virtually last year, last December, a lot has happened in the home finance industry, and I'm sure our panelists will have, quite a few thoughts about the VC, funding environment based on that. I'll let them introduce themselves in a moment, but I want to add that we will have a Q and A session at the end. So if you hear anything sparks your interest, please don't be shy. But again, our panelists, we have, I'll let them introduce themselves in just a moment, but, we have Dave Eisenberg, Lizza Benson and Clarie Peters. And so why don't we start, and why don't you tell us a little bit, about your background and maybe one or two companies, one or two startups that you've been involved with in the last few years that you're maybe quite proud of? I don't know who wants to start.
Clelia W. Peters (
Okay, So my name is Clarie Peters. I'm, the managing partner of a fund called Arab Ventures. and I think relevant to this audience, I come to being a prop tech investor, via involvement with, family residential real estate business, primarily on the brokerage side. In terms of businesses that, I've been involved with and I'm proud of. One that I think is interesting for this audience is a business called Side, which is a disruptive real estate brokerage business, taking top teams and allowing them to stand alone, basically to build their own brokerage, supported by the side platform.
Liza Benson (
Yeah. Thanks Hi, my name is Lizza Benson. I'm a partner at a firm called Modern Ventures. Modern Ventures is a venture capital fund that invests, invests in technologies around real estate, home services, FinTech, and InsureTech. I have, been in the real estate tech space for about the last five years, but prior to that, had a more generalist career in venture for the previous 20. In terms of the companies that, we've invested in recently that are relevant, one would probably be Easy Knock, Easy Knock is a company that has a sale lease back solutions that people can access their home equity, while staying in the same home. I think these things are become more and more popular, as the economy worsens and people need access to more cash. And as we know, HELOCs are very difficult to get and often, aren't a large percentage of the equity. So that's one that I think could be interesting in the next couple years.
David Eisenberg (
Hi everyone. My name is Dave Eisenberg. I founded a venture capital firm called Zig Capital. we're based outta New York. We have about, half a billion under management and about 20% of our, portfolio is actually connected to the mortgage ecosystem. I started to run the numbers and it was, about as high as I could remember in history. We got started investing in Mortgage Tech back with our, investment in Snap Docs Uhe round back in 2013. Some of our more recent investments in the category have been leading, around into a company called Vesta, which is a next generation, LOS a company called vti, which is a infrastructure software company focused on investor mortgages in the B2B space, as well as a next gen servicing software company called Willow.
Spencer Lee (
Thank you, get started. I just appreciate your thoughts. When we met last December, I think we were at the tail end of the mortgage origination boom. We didn't quite know it at the time, or maybe we had hints but since then, what happened? What has happened has happened so quickly, I think far more quickly, far steeper than anyone expected. And how does that affect, the way you do business and the outlook for venture capital funding for mortgage Tech? And, PropTech wants to star?
David Eisenberg (
I won't, pull any punches here. I think it's been incredibly challenging the last, seven months. I'm sure that sentiment is shared with everybody at this conference. the sentiment went in a very short period of time from extremely ebullient to extremely cynical and pessimistic, and probably will continue to get worse as we have rising rates. It's interesting, as you look at technology companies in the mortgage space, almost to a T these companies are involved in automating some steps that previously were done manually and should, by their nature be deflationary. Most of the companies that we've backed, pitch themselves as being a cheaper alternative than the status quo or than the legacy solutions. And I think that's the right approach for this moment in time in this market. I think it was actually quite hard to get the attention of the mortgage industry when everything was just up and to the right, to an unbelievable degree last year and to a certain extent the year prior. So, it's definitely like a silver lining type solution. This is not, trying to paint a picture that's, any brighter than that. But I think our hope is that the builders in this world keep building and they go back to work and they don't focus on fundraising every six months, instead they focus on what is the innovation that I can bring to this industry that'll help drive down costs, both to the consumer as well as to lenders. And, our hope is that that's the right long term strategy for most of these businesses. And so I think we remain very bullish on this category of mortgage tech over a decade long period. I'd say in the very short term, there's gonna be some good companies that either go out of business or have to do recaps or have to do flat rounds, things like that. And that's just gonna be a degree of pain in our world. That hasn't really happened since 2008. Again, it's probably not unhealthy in the long term, but in the short term, it is a major headwind for a lot of folks in our world.
Liza Benson (
Yeah, I mean, I would sort of echo what David is saying. I think in the short term we're gonna see some pain for sure, that we're already seeing. But I think the long term prospects of investing, around, mortgage tech and leads and things of that nature, is going to have sort of a bright future overall, longer time horizon. All the companies now are being much more a judicious with their spending, which I think makes sense and not growth in any cost. So, I think that we're going to, see companies grow in a more, consistent matter with, the amount of financing they have. I mean, one thing that I've seen, that could sort of flourish in this type of environment is, leads for originators and for agents have been coming in from the left to the right when you have such a hot market and technologies that enhance, a company's ability to get leads, whether from their existing customer base or from, agents or whatever it might be, might be a kind of an area. I think that could be a bright spot given that those are gonna be so valuable during this period of time.
Clelia W. Peters (
Yeah, I think it's worth also disaggregating some different segments in the market, which I think are gonna perform really differently. So, Dave, I think it's a really good point that technologies that have focused on, what, for lack of a better term, I would call like the guts of the mortgage are potentially deflationary. And I think that if they can find depending on who they are selling to and the position that those people feel they are in financially or what their business model is, I think that some of those companies actually will continue to see, meaningful growth during this period. And some of that has to do with the fact that I think there is some frustration, within the industry with the incumbents and there's a desire for next generation solutions. I think then, Lizza, to your point, there is a whole group of companies that is trying to find a different way to sell mortgages, particularly via relationships with real estate agents. And I will say that one big thing that we're seeing in the tech space broadly around the residential transaction is this idea around like bundled secondary services and this idea that you use a brokerage platform or agents themselves to sell through multiple kinds of services. And in some cases that is in relationship with an existing mortgage company, and in some cases people are attempting to create their own mortgage products that they then sell through via these agent relationships. And, I think that we will actually see a bigger push on those right now as brokerages really struggle with their own profitability and try to use this as a way to sort of stem some of the bleeding that they're experiencing. And then I think, we've seen some essentially direct to consumer mortgage disruptors really struggle during this period. I mean, I think the best example is better who was so buoyed by the refi boom. And I think that in an uncertain period like this, we are going to see consumers actually going back to, going back to what they know. And I think that it, we will see some of those players really struggle, as they look, they struggle to establish and maintain relationships with consumers.
Spencer Lee (
Interesting, now, Lizza you mentioned being judicious and you sort of touched on some segments, that might see, increased interest. Any other areas, outside, outside of what you mentioned?
Liza Benson (
I think one of the things that, just touching on clearly said is, keeping that, keeping more of the transaction sort of within the brokerage and how can you capture sort of more of the value in that transaction. And I think, again, when things are up and to the right, people are less concerned about, getting the entire value of the transaction and perhaps more just about, putting numbers on the board. So, I think that any technologies which, enhance the agent's relationship, with the home buyer, keep that relationship going for a longer period of time, I think those type of companies are gonna have more interest in this time period.
Spencer Lee (
Yeah, no, just that's the theme that I've been hearing just just in the two days I've been here just, anecdotally speaking to some of the participants here and, and in the panels, I've attended just, retention. How do you, build that? How do you build that now as venture capitalists and, and, in your companies? How, how has the past, I guess nine months, has it changed your strategy like that? Like how
David Eisenberg (
Yeah, I think in our world, you build a portfolio of companies, call it twenty, twenty five, fifteen, depending on the fund size and your hope is that a handful of those two or three may end up driving the bulk of the returns. I think most of the venture capital firms, and I won't speak for everybody, I think focused on their most highest, their highest potential businesses and, and really concentrating capital into those businesses so they could potentially be on offense in a moment where most of the industry is on defense, we did some of the same, we concentrated capital into Vesta, which was, an important bet. I think for our fund. Vesta is attempting to do something that's gonna take quite a while to build. It's a completely novel approach to an LOS that really requires way fewer people, to process and moves at a much higher speed and actually has intelligence like baked into the product. I think it's going to be a year or two before you start to see the fruits of the R and D dollars that are going in, but you've got dozens of software engineers, working on this product that that's what you do in a moment like this, you, you really put your head down and, and you build. From our perspective, maybe we've gone a touch earlier in a moment where the public markets, have effectively dropped, 70, 80% for the prop tech businesses, the technology businesses in real estate and mortgage. That when public in the last year largely driven by this spec mania that was sort of unprecedented, but when the public position dropped so steeply, like you don't really have a choice except to focus on the very young businesses. the ones that are new and were founded last year, they don't really care what the short term turbulence of a market is because they're gonna be building for the next five, 10 years. That, was effectively what we did in backing this company. Willow was founded by a woman who was a product manager at Snap Docs, knew the domain inside and out and had a point of view for how to build a much more software developer friendly, modular, piece of infrastructure for the servicing category. And, it's year one for them. And so, what they're finding is that being a faster, cheaper, more pleasant to work with solution in some of the incumbents has really won them some business in a moment where people are really looking for cost savings. So, I don't think our strategy has changed. I think, most VCs don't change their strategy year to year. So, I'd be surprised if, if you guys were doing too much differently. But, curious if you have anything else.
Liza Benson (
I mean, I think we're not necessarily changing strategy. I think we are trying to take advantage a bit of, the lower valuations that entrepreneurs are coming to expect, by not putting necessarily less dollars to work, but just by owning more of the company with really some of the higher conviction things that we're seeing. I think, we get more comfortable with the company having more like three years of cash, so maybe like two years that we had before. So, maybe that's a little bit of a change of strategy in terms of, really fortifying the balance sheet for a longer period of time. But in terms of the types of companies we're investing in terms of the level of activity that we're doing, I see, no difference. In fact, even more activity, perhaps
Clelia W. Peters (
My fund is a baby, so.
Liza Benson (
You have no, you have no problems. That's the good news.
Clelia W. Peters (
We didn't have a strategy before this environment cuz we were born in this environment. But, I do think across venture in general that, it's a really interesting moment for the venture ecosystem because there, we had been in this like grow, grow, grow period and people had just been pouring capital into companies and encouraging, founders to, almost grow at all costs. And I think that there has been a radical recalibration, and people are much more focused now on profitability and more reasonable growth. and I will say, that probably means two things. One is that, some of the, the feeling of like you're surrounded by new companies who just keep getting more and more funding and they're like coming really quick, I think that's gonna go away for a little bit because I think that there will not be, left, right and center new companies being funded, and then just more and more capital being poured on them. And, but I think the flip side of that is that, winners are gonna aggregate their power during this period. And that actually, this historically is, these types of periods are often the periods where, you see the field winner and then you have some major player emerge as the victor, and then you will see more capital poured around that player and that player can then build a lot of momentum because they're clearly the winner in terms of disrupting some category.
Spencer Lee (
It just reminds me of, what an old graduate school instructor, said. It's all about winners and losers, so Yeah, now one thing we've been seeing in the past several months is well origination volumes are down over 60% year over year. I cover that every week. So I have that data in my head. Refis have, plumed over 80% from one year ago. And we've seen, mortgage companies sort of, one of my sources have said, you'd be crazy to refi right now, if you refinance the past couple years. And so we've seen companies start offering helos, offer other non-mortgage products. do you see investment, in these categories in two companies who are branching, diversifying? Maybe
David Eisenberg (
I think the fun part of our job is that every year there's like a bunch of new ideas. I think one of the themes over the last few years has been, helping millennials and Gen Z home buyers buy a company, buy a home in partnership with a company that buys a piece of their home shares in some of the upside and some of the downside. Anything that sort of reduces the amount of money that, a younger buyer has to put down has been somewhat in vogue in our category. We don't actually have a portfolio company in that category. I think the complexity with some of these more capital intensive things is just at the speed at which you want these companies to scale. It can consume an enormous amount, of money that has to be raised, and stored, off balance sheet and so forth.
(
I think, you will certainly see new approaches in the HELOCsk space. I think, just to give you one example we have a investment in a NextGen originator called Tomo, that's founded by the former, leadership team in Zillow. And, in Q1 of next year for a thin slice of their applicants, they'll be able to deliver on your phone, an end to end mortgage application in under five minutes. And, and I think, again, it's not gonna be for everybody, it's gonna be for the simplest applications. It's gonna be kind of, a proof point I think of what the future could be for a larger number of people. But that's the type of thing that we like to back is these big ambitious goals. especially I think targeting a different demographic, than some of the businesses that have, gotten quite big over the last few decades. because this is where the market is moving in terms of home buyers. And so, yeah, I wouldn't be surprised if we see a bunch of new financial products that require less money down, probably take away some of the upside of the appreciation that may happen in a home, but which allow people to get a lot of utility out of their home over a five, 10 year period before moving on.
Spencer Lee (
Did you, I just, sorry to interrupt, but did you say under five minutes getting application approved?
David Eisenberg (
Yeah, well again, a thin slice of applicants in specific states with specific credit scores. It's not gonna be, it's not gonna be everybody, but it's gonna be a, a preview, I think, of the future.
Spencer Lee (
Okay. Yeah, I just had a conversation, at lunchtime, someone comparing, just how long it takes to, to close a mortgage and said it should be like getting it auto loan, you can get it in 15 minutes and Okay, five minutes. That's okay. That would be hard to beat.
Liza Benson (
Yeah, I mean, I think some of the, equity sharing type companies are gonna be, have difficulty at this point because they're really reliant on, raising off balance sheet financing to do that. And, when you have home prices that are gonna be uncertain fact going down, the bet is that, they, the price goes up. So for those, I think that could be challenge. I do see an opportunity for new companies to offer some type of structure for HELOCs or other ways to get equity out of the home, and perhaps there's a preferred return structure or something of the sort to, appease that sort of off balance sheet financing partners that they're gonna need. But I think there's an opportunity there, because it is, obviously everyone's biggest asset, generally in the US and you are accessing that equity, I think is something that, that everyone is, keen to do so. Yeah.
Clelia W. Peters (
There's a couple things I would say. One is, before we saw interest rates, increase in the way they have, one of the things I've been thinking about a lot in the residential transaction space was actually, financing almost becoming the top of the funnel. Historically it had been that you would go to an agent and then you would go through the process of finding a home and then you would finance. But with the pre-approvals, and some of, even what you're talking about Dave, with tomo, technology coming in and allowing people to really understand what they can do financially, I do think that will be a trend overall and that you may see people more and more, it's possible that there will be a world in the future where, mortgage brokers will be referring leads to real estate agents, not vice versa. In fact, like that feels like a, a potentially likely outcome to me. I will say also, there is this really interesting trend and even around transaction volume, this trend plays in that there's more and more institutional money coming into the SFR space, and that does have an impact in several different ways. One is that, we have this weird world right now, right? Where, even though, transaction, well the number of buyers looking to buy right now is meaningfully down. We still are inventory constrained. This is very, historically unusual situation and then the other thing that the other way I think this will impact us is that, I actually think there will be capital available for these next gen financing, opportunities, whether it is, participating in a down payment or heloc, because I think we're gonna see more and more institutional appetite for, whether it's full or fractional exposure to SFR as an asset class. And, I think that that will allow people to get more and more creative. And I think this is part of this overall trend of the disaggregation, post 1950 in the United States, we've had this sort of white picket fence ideal of what home is. And in fact, the mortgage was created at that time as well, and we haven't had much innovation around the way that the home was financed. But I think we're seeing this really interesting disaggregation right now between people's association with their homes as their homes and people's association with the home as a economic entity. And I wouldn't be surprised that at some point in the future we see things like someone who rents their home and then owns an SFR portfolio to expose them to the upside of the, residential market. And I think all of these fractionalization tools, and I really do think they are going to, millennials and Gen Z are going to think differently about how they build value in home equity than prior generations have.
Spencer Lee (
That'll be, willing to follow. So, I have, I have one other question, but first I wanna take any audience questions in a little more than five minutes. We have, are there any questions here?
Audience Member 1 (
Yeah, My question is for the panel it's a more tech related question. Over time, the mortgage industry is proven. Its proven, it's volatility, and I think to a certain degree also, it's proven its durability, right? Lot, 2008, 2009, some people felt that maybe there wouldn't be a mortgage industry left after everything that occurred. As you think about investing in this cyclical, volatile industry, do you take apart originations servicing and secondary capital markets opportunities and think about them differently? Or is more tech just one big bucket? volatility and risk?
Spencer Lee (
let me just repeat the question for the cameras. Just, thinking about the cyclicality of mortgage, do you see it segmented? I hope I'm paraphrasing correctly, or just like one big pool?
David Eisenberg (
We see it segmented. I mean, you could certainly argue that in pursuit of an elite user experience with a high net promoter score to contrast the net promoter score of the big banks and the consumer's perception of them, that some people are trying to create a delivered bundled experience where, and you could sort of put a whole class of startups in, I wanna be the end to end solution for a consumer, and I want that to be pleasant and well designed and fast and not annoying and I have to reenter information a bunch of different places. You, could say that's a segment of mortgage tech companies, and I think it's gonna be a productive one just given how big the pie is for doing things faster, cheaper, better, and more pleasant and better design for consumers. You could also look at the world and say, if we continue to focus on user experience, you've got the consumer user experience, you might have the L,O user experience, you might have the executive at a lender user experience as they think about portfolio and risk, you might think about the user experience of the bank that's securitizing a pool of, more originated mortgages. And, as a result, we've got companies that are going after point solutions in each of those places where, again, the pie is so big that I think, one thing that's common about the companies that are being founded today and and we're funding today is just openness. There are APIs that allow you to push data in and pull data out from the adjacent solutions around them. That's not really the way a lot of these products that were designed in the seventies and eighties were built. They were not built to interact with a different software application and, and share data, among them. And, I think that's one of the reasons why the mortgage industry's been held back from really pushing forward better and better user experiences is that there's a lot of proprietary lock in. And I think one of the things we look for in all of our investments is what's their API strategy? What are the ways that these companies can actually partner with each other to go to market and have more of an impact than trying to do it all yourself with paid advertising. It's just, it's not easy.
Spencer Lee (
Actually. I think, we're running short on time, so if I could just, I think I saw another hand out here, so just wanna make sure we get.
Audience Member 2 (
That's nice. So, thank you. Great presentation. One of the questions I have is I keep hearing as a, well, I'm from the Canadian market, by the way, so different than us, but still keep hearing everybody's hungry for leads, hungry for deals. And you guys talked a bit about lead generation, but my question is, you can't invent leads because less and less people are gonna qualify. So, when we talk about lead generation is important, do we mean that there's a higher efficiency of funding ratio? Do you guys mean that you're looking to invest in mitigating risks perhaps for the lenders so that the leads that they get have a low chances of default? And I know you also talked about cross selling so that the lead you're getting have opportunities to cross sell. Please guide me through a bit simpler onto what exactly you meant in each of these areas to, find the ideal, tech provider or a borrow.
Liza Benson (
Well, I mean, some of it's kind of keeping the customers that you have, right? So, if a customer has gets another mortgage or does even whether it's a refinance or a new home or a heloc, are you actually likely that customers going somewhere else, right? As they're searching for rates? So how are you keeping even existing customers you have retaining those better? So, looking at technologies that can predict when someone is likely to, need another mortgage product. So, I think things like that, kind of making your, making your own leads, in many ways as opposed to, going out there and, and just purchasing them.
David Eisenberg (
We made an investment in a company called Stairs Financial. It's particularly targeting homeowners who have trouble qualifying for a mortgage. It targets, less educated, less sort of, wealthy consumers. And I think what they're finding is they can go and aggregate all of the government grants that are available to consumers to help them buy a home. There's a lot of incentive programs that are hard to navigate and then partner with a real estate agent and partner with a traditional mortgage, company to actually help someone that was previously not in the prime bucket, that would qualify to start pulling together other things on offer to take what would've been a low quality lead without these things and turn it into a quality lead.
Spencer Lee (
I'm sorry, we're just about out of time, but I did have, one last quick question, and I asked this last year. are there one or two companies that you're funding right now or just, starting to fund that you think hold a lot of promise, that we might be hearing about next year? I know, a couple of you talked about last year, last December, they're at this event they're presenting. So, if you just go down the line real quick.
David Eisenberg (
One I didn't talk about is a company we invested in this year called Staircase. staircase you can think of as an API for allow you to design novel mortgage experiences where you can bring your own tech or you could use the entire bundle of what they offer. But, I think there's gonna be more companies that sell to software developers inside of traditional mortgage organizations and traditional lenders, to allow them to do more with less.
Liza Benson (
We have a company, that is called New Viz, which essentially takes all the transaction management and CRM from the brokerages, white labels it, and tries to help monetize essentially, that home buyer, for more parts of the transaction, even going to their cable and their solar and their security and things of, and security system. So, I think companies like that, that are trying to capture more of the transaction are to become, more popular.
Clelia W. Peters (
Yeah, and I mentioned a company called Welcome Homes, which is adjacent in so far as a next generation home builder, and they're bringing in a bundled, land mortgage and construction loan, which I think is significant just because the consumer themself finances that unlike typical home building where the home builder would carry, the cost of building the home on their own balance sheet. And I think we'll see more and more solutions kind of like that. Dave has a investment in neighbor, which is a similar solution in the multi-family space.
Spencer Lee (
Well, that doesn't for us just been a real fun conversation. So I want to thank, our panelists, Dave Eisenberg, Lizza Benson will tell you Peters. Thank you for attending.