In Lending, It’s Hard to Iterate

When The Learn Startup was published in 2011, basically every startup VC/founder on the planet read it and swore by it.

The concept behind a “lean startup” was not that you should “spend less money,” but rather that you should: “throw sh*t against the wall, get customer feedback, and then iterate quickly. This was in opposition to the old way of doing this, which was to build out huge releases once per decade, assuming you’d know what the customer wanted — and iterate once every few years… and slowly.

That book was the pinnacle driver behind the popularity of Agile versus Waterfall development.

The problem is, for lending companies it’s really hard to follow the principals of a “Lean Startup.”

Why?

Because in order to build a lending company, you need to raise a debt facility to fund your loans. (It doesn’t make sense to use equity capital to fund loans). And when you raise your debt facility, you negotiate two very important terms:

Eligible Loan Criteria: What types of loans you are allowed to fund with the debt capital you’ve raised (example: 700+ FICO’s, $1,000-$5,000 in size, fully amortizing, 1 year term, etc.)

Exclusivity: What % of your loan volume you have to give to the lender who funded your debt.

The problem with these two terms, is often, before a company is even launched, they have to predict what kinds of loans consumers will want, and often offer up to 100% of all of their loan volume to a lender.

This means that if, in one year, the company realizes they predicted what types of loans their borrowers wanted, or that they had discovered a new, wildly enthusiastic customer set, they are already locked in to the existing product.

Eligible Loan boxes can be really tight. Sometimes — there are “pre-approved loan docs” that the company can’t even deviate from if they wanted to.

So unlike a “Lean Startup,” which can release a product, gather customer feedback, and then change when needed — a lending company must predict right the first time, and stay locked in to selling the same product for years and years.

There has to be a better way — it’s one of the things we’re spending our time thinking about a lot this month…

[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s

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