Lend2Fund chooses its poison

I have to admit that most of my other startup discussions were hosted by some Sydney’s finest publicans, but Lend2Fund has certain been caffeine-fuelled.

From the second meeting of Lend2Fund, Mike and I began researching both the overseas and local markets for Peer2Peer lending.

Now, for the record, Mike’s original idea for Lend2Fund in August 2014 incorporated bitcoin, blockchain, P2P lending and small business. He certainly had a passion for assisting small business and farmers in Australia, as well as wanting to be at the forefront of advances in technology. So don’t be surprised when you see ‘leading technology’ and passion as the heart and soul of Lend2Fund.

Following our kick-off coffee (every project needs a kick-off) was a steady stream of more coffees and discussions regarding the proposed model for Lend2Fund.

We were astounded by the traction of the P2P market in US and UK (and later discovering that China was even bigger), and the relative ghost town of Australian P2P lending. Australia had missed the recession and subsequent credit squeeze following the 2008 global financial meltdown, which was the trigger for the growth of the peer2peer alternative-financing (altfi) phenomenon.

This put Australia at least 5 years behind the wave of overseas altfi activities. But we also note missing catalysts in Australia : absent recession, credit squeeze and upswing of anger against the banks.

When we started our deliberations, there were five possible markets on the table for discussion; personal loans, farmers, small business, residential and commercial property and infrastructure.

Personal Loans were dismissed immediately, for the following reasons:

(i) SocietyOne was already in this space

(ii) Banks were offering 0% credit cards on balance transfers for up to 18 months

(iii) Neither Mike nor I had any experience in retail lending.

We developed a framework right from the start in order to guide our thinking.

The framework included:

a) Highly scalable

b) A “low touch” business

c) Low overhead business

d) Keep the costs variable

We knew that in order to achieve a scalable business, we couldn’t be beholden to the tyranny of Australia’s vast distances. Farm lending was ruled out when Mike was assigned the responsibility of driving all repossessed tractors back to Sydney. Small business lending went the same way — more through a lack of interest from myself rather than Mike (so you can blame me for that).

Residential home loans is a vast market in Australia and prime for disruption. But it still didn’t match our skill set for building complex trading systems. It was also a retail market (no competitive advantage from us) that would require vast sums of money for marketing,

But as we dispensed with coffee after coffee, it was clear that the closest aligned asset classes to our investment banking experience, knowledge, connections and credibility was commercial property.

Very early in our deliberations, I had invited Cameron Paterson, a lawyer with ASIC and APRA regulatory experience, former Bankers Trust and Macquarie Bank colleague and friend of 15 years to help us through the regulatory issues.

At the time, Cameron was a co-founder of an electronic conveyancing startup, which was also part of the real estate value chain that we were investigating, which seemed a perfect fit to compliment our knowledge gaps.

Cameron had also been closely following the Australian Finance System Inquiry by David Murray, and Cameron confirmed that the regulatory and capital adequacy changes to be recommended by the inquiry would cause most impact to the banks for Commercial Real Estate Lending.

But there was one more decision that we made by which we will live or die by.

We researched the Commercial Property lenders in the US and UK. And all of them offered P2P lending, but at the same time, we had seen the banks and institutions enter the p2p loan markets in the U.S.

In a massive call, we decided that there was nothing peer2peer in the nature of Commercial Real Estate lending. No one had ever gone this way before. We were going against the experience of every successful P2P lender in the world. Time would tell if this is our best decision, or our worst.

So Lend2Fund would not be Peer2Peer, but “Marketplace lending” — where the professional come and do their thing. Faster, cheaper, better.

Now, how to make Lend2Fund a highly scalable, low touch, low overhead, variable cost business ???

The scene was now set for Lend2Fund v0.01.