61fd416c90785d5510fb732f Unnamed

A Charter to Change the Game

To our Valued Investors:

Before we dive into this week’s topic, some reflection on last week’s observances of the turbulent markets (The Beneficial Disconnect, January 26, 2022) seems to be in order. Last Wednesday, your Iron Edge VC update arrived one hour after the Fed announcement upon which all attention had been fixed, and one hour before the New York Stock Exchange and Nasdaq would close for the day. You might recall that the main indexes popped immediately after the Fed release, but everything went decidedly south in time for the closing bell. Thursday started with an upside head-fake, and things fell apart once more. We don’t mean to graphically relive a treacherous market, but the choppiness truly illustrated the point we were making. Markets are unpredictable, and it can hurt when the floor seems to fall out. We also don’t mean to drift too far out of our lane. We are not professional analysts of the broader public markets. Our goal was to illustrate the lack of correlation between those markets and our arena of privately held companies. Candidly, we aimed to highlight this “beneficial disconnect” in order to assuage concerns that the bruising selloff in the public markets might have a negative impact on Iron Edge’s portfolio — it absolutely does not. The message last week was meant to illuminate how our form of alternative investment might serve to mitigate risk.

Serendipitously, Sun Microsystems cofounder and legendary billionaire venture capitalist Vinod Khosla issued some remarks in the technology publication The Information, reinforcing our sentiments. “If you’re pursuing radical innovation, market cycles matter much less”, proclaimed Mr. Khosla. “Public market and hedge fund investors evaluate themselves every quarter. Venture funds might have to wait as long as ten years to assess how their investments performed. We should be cautious about frenzied valuations and investment cycles, but, aside from that, should ignore the ups and downs. What will the market look like in five or eight years, the typical holding period for an investment? Who will be president or which party will be in power? Will interest rates be going up or down? Will multiples expand or compress? These are extremely difficult, likely impossible questions to answer… Venture investing is a ‘buy and hold for many years’ game, not a ‘buy low, sell high’ transaction game. To me, a startup is not a ‘deal.’ It is some entrepreneur’s dream, and if we can assist them in building that into a large dream, then we will have large returns. It is much more company building and value building and long-term asset building, not short-term Ebitda optimization.” We could not have stated that better, and we hope Mr. Khosla’s observations underscore the major difference between the volatile public markets and our (beneficially) less liquid one.

Ark Invest CEO Cathie Wood, opening her firm’s “Big Ideas” annual research report last week, also offered an insightful view on the subject. “I completely understand what investors are going through today. Given all the fear, uncertainty, the doubt, the volatility… volatility is not always a bad thing. A year, eighteen months ago, volatility on the upside was a beautiful thing, but volatility on the downside is painful. It is important to keep a long-term investment time horizon when you’re investing in innovation, and we have five-year investment time horizon. I have never seen innovation on sale the way it is today, and if you look at innovation in the public markets and compare it to the private markets, the valuations continue to escalate in the private markets as they have plummeted in the public markets. This disconnect will not last and we think the private markets have it more ‘right’ than the public markets.”

At Iron Edge VC, we believe it is wise to pay heed to the advice of Khosla and Wood, two profoundly gifted investors. At the very least, we feel that our access to pre-IPO growth opportunities provides a very sensible means of portfolio diversification. Now, let’s turn this epilogue of last week’s newsletter into a prologue to this week’s look at Figure Technologies.

***

Founded in 2018, San Francisco’s Figure Technologies is a web-based platform that manages digital assets. It can be used for completing a multitude of financial and investment transactions including, but not limited to, home equity loans, mortgage refinancing, cap table management, personal loans, commercial payment services, digital fund services, and asset management. Figure leverages blockchain, artificial intelligence (AI), and analytics to deliver innovative home equity release solutions and other products that improve the financial services they provide their customers. The blockchain protocol Figure is building, known as Provenance, is engineered to fundamentally transform how financial products are originated and transacted.

Figure is bringing securitization, or the decades-old Wall Street practice of repackaging home loans into bonds, to the blockchain. The company recently announced that its Figure Securities, Inc. subsidiary received regulatory approval to become a federally approved broker-dealer and an SEC-registered alternative trading system (ATS). This means that Figure can begin tokenizing their marketplace of loans. In doing so, the company is comprehensively transforming the trillion-dollar financial services industry. Their protocols have brought speed, efficiency, and savings to both consumers and institutions. Figure’s ATS, known as Figure Marketplace, connects buyers and sellers of private digital assets, thereby unlocking the opportunity to trade historically illiquid assets with unprecedented efficiency.

In less than four years, Figure has unveiled several fintech “firsts” by using blockchain for loan origination, equity management, private fund services, banking, and payments. Billions of dollars of transactions had already passed through the Provenance blockchain by November 2020. It was then that Figure made the decision to submit to the Office of the Comptroller of the Currency (OCC) an application for a national bank charter to expand on their blockchain applications. The rationale was that blockchain can level the financial playing field for consumers, bringing the “underbanked” into parity with the “banked”, and lessening the advantages of large businesses and financial institutions over smaller ones. The national bank charter would provide a way for Figure to deliver sustainable, inclusive, and impactful financial solutions on the Provenance blockchain in a way that the licensing at the state level simply does not permit.

The potential fly in the ointment, though, arrived almost immediately when The Conference of State Bank Supervisors (CSBS), a national trade group of bank regulators, filed a federal lawsuit seeking to block the OCC from granting Figure’s national banking charter. The CSBS had a history of questioning the OCC’s authority to issue special purpose national bank (SPNB) charters to non-depository fintech companies or to uninsured deposit-taking fintechs, and this gripe about Figure’s application fell neatly into that category. The OCC, meanwhile, contended that it had every right to issue charters to such entities. Caught in the crossfire of this high-level spat, Figure’s chance to substantially broaden its impact seemed to hang in the balance.

Fortunately, the stalemate broke last December without either the CSBS or the OCC claiming a complete victory. Figure Technologies defused the standoff by amending its application to state that it would apply for FDIC deposit insurance, protecting its deposits from loss in the event of a failure. This basically rendered the CSBS’s “non-bank” complaint entirely moot, forcing them to drop the lawsuit. Even though it did not validate the OCC’s claim that it could grant charters to any fintech it darn well pleased, it did pave the way for Figure’s path forward. This is very good news for Figure, as it puts into place an indispensable component of their vision. With the national bank charter will come the actualization of a business model that is built perfectly for the future of financial interactions.

After extensive due diligence, market research, and evaluation of Figure’s leadership, we were very enthusiastic about the company’s near-term and long-term growth prospects over a year ago, even though state-level banking was all that Figure Technologies had. The elimination of this major challenge to Figure’s national bank charter is a very thick layer of icing on the cake, and our excitement for the company’s future has grown exponentially.

Figure Technologies shares are not available for purchase on any stock exchange. It is a private company, much to the chagrin of those who pay close attention to the breathtaking technological advancements in the world of fintech and, of course, the significance of a fintech enterprise acquiring a national bank charter. To those who dwell in the second market and who have truly done their homework, Figure Technologies has become somewhat of a “holy grail”. Iron Edge VC has recently taken a considerable stake in this promising innovator, and we have been accommodating the needs of clients who understand the company’s potential. Sales in our Figure series have been brisk, and our supply is finite. If you would like to learn more, or if you know anybody else who would, please don’t hesitate to contact us by clicking “Get in Touch” below.

If you have enjoyed this article, visit the Iron Edge Blog for past updates on our pre-IPO opportunities and for general commentary on investment in the private marketplace.

As always, shares of Iron Edge investment funds are available on a first come, first served basis.


All the Best,

Paul Maguire
Founder & Managing Partner

5f6e0d464e388c4975685025 Paul Min

Paul Maguire

Founder And Managing Partner