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Debt Ceiling: 15 million
Stability Fees: 4.5%
Min SPV CR: 111%
Min Vault CR: 105%
Min Vault Underlying CR: 116.6%
Check the RWA Documentation for more information.
NOTE: Since Fortunafi posted its MIP6 application, a new arrangement with Pipe has improved the overall risk profile of the pool.
Fortunafi is a fund management firm partnered with Centrifuge as a token issuance platform, initially focusing on Revenue-Based Financing, or RBF, as an asset class. The firm launched a Tinlake pool with Corl as its first Asset Originator, and will shortly add Pipe as its second. RBF (sometimes known as RBI) is a form of debt finance offered to creditworthy businesses with reliable revenue streams. The two Asset Originators have different focus areas and overall sizes of deal flow, and the revenue-based return is structured differently. FortunaFi will act as an Asset Manager pooling many Asset Originators. At scale, this will provide better scaling and a better risk profile for MakerDAO RWA.
For the first Asset Originator, Corl, investees are typically SMEs in digital industries, such as B2B SaaS and ecommerce. It focuses on earlier stage companies and charges a percentage of gross revenue with a buy-out amount of 1-3x at the end of a 24-month term. For the second Asset Originator, Pipe, a larger entity - one of the top three RBF firms, focuses exclusively on the SaaS revenue of much larger companies and charges principal and interest monthly with a maximum term of 12 months. Pipe’s current investors are large hedge funds, some of whom also invested in their recent equity funding (Siemens’ Next47 and Jim Pallotta’s Raptor Group co-led the round, which also included participation from Shopify, Slack, HubSpot, Okta, Social Capital’s Chamath Palihapitiya, Marc Benioff, Michael Dell’s MSD Capital, Republic, Alexis Ohanian’s Seven Seven Six and Joe Lonsdale - see this TechCrunch article).
Here is a high-level breakdown of the two Asset Originators:
|Revenue model||Fixed percentage of gross revenue + 1-3x buy-out at end of term||“Principal + interest” over the term, on SaaS revenue only|
|Term||24 months||12 months|
|Type of investees||Earlier stage companies in digital industries||SaaS revenue of large companies|
|Size of investees||About $1 mill annual revenue, at least $50K monthly revenue||At least $5 mill annual revenue, usually much larger|
|Risk measurement||Tech platform that performs initial assessment and ongoing monitoring, with links to bank accounts and accounting software of investees||Tech-based assessment using quality tranches, of which BBB (Prime++), BB (Prime+) and B (Prime) are Fortunafi’s focus|
|Expected monthly volume||$1-3 mill||$10 mill|
|Rate of return on assets||20-30%||5-8%|
|Expected pool proportion||5-10%||90-95%|
Fortunafi has structured a Delaware-based SPV to house its revenue-based assets from Corl and Pipe, and receives monthly revenue from investees. The financing is tokenized via Centrifuge, and Fortunafi has attracted DROP (senior) investors as well as funded the TIN (junior or equity) tranche at 10% of the pool. The Maker vault will hold DROP with a slight discount and slight over-collateralization, in the same way as with New Silver. While the initial Debt Ceiling is proposed at 15 million DAI, the portfolio is expected to grow rapidly in the first year to a target of $100 million. The DROP rate is now being reduced to 5% to account for the much larger presence of Pipe’s assets.
Fortunafi is a new entity while Corl and Pipe are relatively young. The success of the business model is somewhat proven but has not been demonstrated over a substantial time period. Mitigating this risk is the fact that SaaS and ecommerce are now established growth industries and have achieved considerable market presence. And because Pipe invests in the SaaS revenue of larger companies, the risk profile of their investments is low, with a corresponding lower return.
Younger companies attracted to RBF see debt financing as preferable to giving away large amounts of equity. In fact, RBF is often used as a way to increase scale prior to a major round of equity financing, at which time RBF obligations are paid off. Corl’s investees can experience bumpiness in revenue or even business collapse. Several factors mitigate this risk: Corl’s technology and approach, mentioned above; the investor’s senior position with unilateral claim to repayment via arbitration; an extremely tight default time window; and diversification of the portfolio. In addition, Maker proposes covenants below that would limit risk.
All the following covenants are considered as soft (meaning no direct action taken) and any breach (and liquidation) will be enforced by either a signal request, a proposition of a MIP46 PPC, and/or a mandated actor proposal.
- SaaS or Recurring Revenue companies
- Ecommerce companies
- Min monthly revenue: > $50K/month in last 3 months
- Min annualized revenue - SaaS only: $1M in last 6 months
- Min YoY growth rate of sub-$5 mill revenue: 20%
- Age of Investees: 2+ years in operation or post-revenue for a minimum of 6 months
- Max single investee size: 30% of DC limit utilisation
- Max ratio of non-SaaS/RR investments (Corl): 30% of DC
- Issuer TIN share: 60% - or - $1 mill min (Fortunafi Holdings Inc)
- Non-Maker DROP holders’ share: 25% - or - $1 mill and 10 investors min
- The RWF team has assessed that the asset originators most likely will be in business in 12 months. In the case of Fortunafi, the fund manager, the impression is the company is in early starting phase and according to the CEO has a current runway of 5 years.
- Portfolio monitoring: monthly
- Sector diversification: expected
- Healthy investee ratios: expected
- Restrictions on use of loaned amount by obligor: expected
- Restrictions raising additional debt by obligor: expected
- Surveillance of underwriting methodology: expected
- Surveillance of risk scoring methodology: expected
- Industry analysis
- Asset originator analysis
- Issuance platform analysis
Revenue-Based Finance (RBF) is an emerging asset class that has grown significantly in the past 15 years. Its roots go back centuries to investment instruments with returns in the form of royalty payments, though it can be argued that royalties are often defined in a limited way (usually referencing forms of intellectual property). Due to the emergence of digital businesses with recurring revenue streams, RBF has gained in significance as an attractive alternative to traditional debt and equity financing. Its risk profile is similar to debt, meaning it enjoys senior position regarding repayment of capital, while its return is higher and can be similar to equity. For investees, it provides growth capital without equity dilution and accessibility to capital when traditional bank loans may be out of reach.
The industry in this case is both RBF or RBI as a form of investment and the industries of investee companies. Fortunafi via Corl invests in digital industries such as B2B SaaS and ecommerce and target earlier stage companies with reliable revenue streams. Pipe facilitates investment in the SaaS revenue of larger companies. Though digital industries and SaaS encompass a wide range of markets, the assumption in this analysis is that digital industries are well known and the focus will be on startup dynamics.
In “2020 State of the Industry: Revenue-Based Investing,” Thomas Rush of advisory firm Bootstrapp Inc.analyzes 32 RBI firms in the US with 57 distinct funds managing $4.31B in total capital. Of this total, there is an estimated $2.1B of funds allocated to RBI across all years, though the actual number is difficult to confirm as most firms are privately held, and large firms like Kapitus, United Capital Source, Braavo and Clearbanc have claimed billions of dollars in RBI investments. Arthur Fox began using RBI as a form of venture investing for startups in the 1980’s and 90’s, and established perhaps the earliest fund called Royalty Capital in 1992. Few new firms appeared until 2005, and since then the number of RBI firms has grown at a notably faster pace. In the last 10 years (2010-20), 25 firms were founded.
The three largest RBI firms are:
- Clearbanc, now Clearco
- Shopify Capital (Shopify being an investor in Pipe, one of the asset originators)
- Pipe, one of the asset originators in this proposal
There are two (and possibly more) public companies:
- Flow Capital Corp.
- Timia Capital Corp.
Pipe innovated the use of recurring revenue contracts as atomic assets that can be loaned against. Here are two articles describing the overall context and significance of this innovation:
- Recurring Revenue: The Rise of an Asset Class | by John Street Capital | Medium
- Debt is Coming – Welcome to Dancoland
How do those assets respond in the event of a particular major economic event?
Investee companies may operate in industries that are susceptible to major shifts in the economic landscape, as we are currently seeing during the pandemic. It is clear that ecommerce has benefited greatly while traditional retail companies have not. Likewise, conferencing and online services that help companies cope with reduced travel and social distancing have also seen a boost. On the whole, digital industries have seen increased growth while some traditional industries have not, and therefore it can be expected that RBI focused on digital industries will benefit.
In the case of a major economic event adversely affecting digital industries, such as the dotcom crash in 2001-3, revenues will be reduced and so will the corresponding return for some RBI investors. However, since investees have reliable revenue streams and are creditworthy to start with, the chances of significant defaults remain low.
What remedial measures might be undertaken?
The remedial measures are clearly defined in the Revenue Sharing Agreement (Corl) between Fortunafi and each investee, and partly in the Whole Receivable Purchase Agreement between Fortunafi and Pipe. In the case of Corl, these measures consist of a Security Interest in the investee’s assets that is senior to all other interests, and a defined monthly payment process using direct debit within 7 days after month end. If payment is not completed within that time, payment can be arranged in a Resolution Period of 48 hours, and if that does not occur, Fortunafi can claim all amounts owed. Besides missing payment, other conditions of default include extending beyond the maximum term (12 or 24 months), and bankruptcy and/or insolvency. Arbitration is mandated.
The details of remedial measures between Pipe and its investees are being collected and this risk assessment will be updated once they are received.
What are the historical default rates in this industry?
The private nature of venture firms investing in RBI deals and lack of common industry associations mean historical default rate datasets are rare. Only empirical information made public by funds in press releases or comparison to default rates in the wider venture-debt financing category can be found. Venture Lender estimated default rate to be 3% in 2016, close to US-high yield loan default rates (3.5%). These figures are also in line with private-held firms’ probability of default ranges (1-4%). Empirical research also shows that increase in the following metrics reduces Probability of Default (PD) in early stage startups (< 3 years old):
- Leverage Ratio: Equity / Total Liabilities (Solvability); Equity / Total Assets
- Coverage Ratio: Net Debt/ EBITDA (Debt-to-EBITDA)
- Activity/efficiency Ratio: Net Sales / Total Assets (Asset-turnover)
- Human Capital: Founders’ Education, Founders’ Management Experience
Corl uses its own technology platform to underwrite applicants with links into the companies’ accounting systems and bank accounts. This direct connection into cashflows, P&L and balance sheets is then analyzed with risk parameters to determine not only a company’s health at origination, but also its ongoing and future performance. Needless to say, this provides great insight into the security and size of the investor’s return on investment, which is in the region of 15-30% annualized. The maturity is 24 months and investees also have a final buy-out amount which is 1 to 3x the original investment.
Pipe uses a similar approach of connecting with SaaS companies’ financial and accounting systems, and marries that with internal data about industries. Their rating system groups SaaS contracts into levels or tranches of quality.
When was the asset originator incorporated?
Corl Financial Technologies Inc. was founded in 2017. Pipe was founded in 2019 and Fortunafi was founded in 2020.
What is the background of the asset originator managers?
Derek Manuge, CEO of Corl, was a risk manager at ScotiaBank and KPMG, participated in the Global Association of Risk Professionals, and performed quantitative model development in his own consulting company before co-founding Corl. His extensive experience and knowledge of quantitative modeling has been central to the development of Corl’s underwriting platform.
Harry Hurst, CEO of Pipe, is a serial entrepreneur who developed a passion for technology early in life, graduating high school age 12 studying Computer Science. Harry and Pipe (Pipe – Instant access to your annual cash flow) co-founder Josh Mangel built their first company Skurt, a financial technology company in the mobility space. After four years, Skurt was successfully acquired by Fair (https://www.fair.com/) in 2018. Pipe was founded in 2019, to unlock the largest untapped asset class in the world — revenue — to empower entrepreneurs and companies to grow their business on their terms without debt or dilution. Harry has raised over $150 million for his companies and is considered an industry expert on financial technology and emerging asset classes.
Nick Garcia, CEO of Fortunafi, has over 8 years of experience in both fintech & crypto. Nick started off in fintech at Wells Fargo’s Tech & Venture Group (working on deals for Lending Club, Funding Circle, Prosper, & others). He then led finance & strategy at Zenefits (https://www.zenefits.com/), a fintech & insurtech solution for SMBs, and then was the head of finance at Shippo, a multi-carrier shipping API and led the Series A & B with Union Square Ventures and Bessemer Venture Partners. He started investing & trading digital assets in 2013 and Co-founded Space Whale Capital in 2018. Space Whale Capital LP is a proprietary investment firm that manages a discretionary trading strategy and has been actively investing and participating in DeFi since inception.
How many deals has the asset originator already done? What is the notional amount?
Corl has provided its platform to the Canadian government on a SaaS basis since 2019. The details of the Canadian government’s investment program are under NDA but the notional amount of investment was roughly $5-10 mill in 2019. In 2020, Corl began to originate investments from its balance sheet and launched a small portfolio with notional value of $425K, but progress was stopped by the pandemic and 1 of 3 investees suffered a default. In late 2020, Fortunafi partnered with Corl and established a Tinlake pool. The characteristics of this Tinlake pool are as follows:
- Total number of investments: 3
- Total pool value: 973,002 DAI
- Average investment size: $300,000
- Average Royalty Rate %: 4%
- Average Buyout Rate %: 100% - 150%
- Average Annual IRR %: 20%
- Defaults: 0
- Location: US
- Links: Tinlake UI
Regarding Pipe, according to TechCrunch: “In the first quarter of 2021, tens of millions of dollars were traded across the Pipe platform. Between its launch in late June 2020 through year’s end, the company also saw “tens of millions” in trades take place via its marketplace. Tradable ARR on the platform is currently in excess of $1 billion.” Fortunafi will start acquiring Pipe loan assets in June 2021.
Has the asset originator experienced a default? What is the plan in case of default?
One of Corl’s initial investees in 2020 had a large retail footprint and was badly affected by the pandemic. The investment amount was $25K and default occurred quickly. Corl has a personal guarantee against the owner and is in first position on the business, but the court system was backed up during the pandemic. Subsequent investments mandated arbitration to avoid the standard legal process via the court system.
Pipe has had no defaults so far. As noted above, this risk assessment will be updated with details of the remedial measures once received.
What is the due diligence they use to accept an asset?
The due diligence process is extensive. Corl’s platform accesses the financial records and bank account of the investees and performs a comprehensive risk assessment. The platform assigns a credit score and generates an investment report that is reviewed by staff as part of the manual due diligence process. The overall due diligence process includes:
- Owner(s) information (e.g. name, contact, equity stake)
- Business information (e.g. nature, duration, number of owners)
- Credit worthiness and credit rating of business owners
- Financial and banking position (e.g. profitability, financial performance, revenue history)
- Current number of paying customers/existing subscriptions and projected growth and/or churn
- Financial performance indicators (e.g. ratios)
- Projections and sensitivity testing of revenue growth
- Quality of management, product/service, and business
- Social profile and web search information (e.g. reviews, traffic)
- Risk scores and associated risk metrics derived from supplied information (e.g. supplier/dependency risk)
- Prospects for success of the business
- Material investment, financing, and operating contracts
- Capitalization tables, details of funding rounds, shareholder registrar
- Other “know your client” requirements, including Anti‐Money Laundering provisions and company supporting documents
After origination, the Corl platform provides an ongoing view of its investees’ financial performance, further reducing risk by flagging performance warnings.
Pipe uses a similar approach of integrating with investee’s financial systems and summarizes its use of data as follows:
Data sources include but are not limited to real-time continuous access to:
- Bank account(s) balance & transaction history
- ERP & accounting systems (e.g. Quickbooks, Xero, Netsuite etc.)
- contract & billing management/payment processing systems (e.g. Recurly, Stripe, Chargebee etc.)
- Internal Pipe data relating to historical performance across industry, company, asset & payments. (Proprietary data and models)
Here is Pipe’s description of their underwriting process:
Pipe Technologies has developed a proprietary Recurring Revenue Asset (“RRA”) Score that utilizes multiple data sources and data analytics in order to assess sell-side company quality and provide a basis for buy-side investors to make informed decisions. This methodology shares certain features with the corporate credit rating methodologies applied to issuers and instruments in the listed markets, however it is designed with the specific financial instrument - the trading of short-tenor recurring revenue streams - and the specific customer segment - companies in recurring revenue industries - in mind.
What is the valuation model used?
The valuation model in both cases is proprietary, but based on normal risk measures involving credit worthiness, cashflows, balance sheet and operating performance. See above.
What is the nature of asset defaults for the originator, and the possible solutions?
Default is primarily defined as late payment, and the default process is described above. In the worst case, Fortunafi will exercise its most senior claim against the investee’s assets using arbitration. More commonly, the investee will work out a payment arrangement with Fortunafi. In the case of bankruptcy and/or insolvency, arbitration could result in a months-long process (though shorter than a standard legal process) and result in partial or total loss of the investment, though monthly payments made before that event result in some return.
What are the historical default rates of the originator?
The historical default rates of Corl’s investees is not known, aside from the one default noted above. Since 2019, the Canadian government has used Corl’s platform to fund small businesses and permission to disclose any details of that activity has not been granted. The Canadian government had adapted their program during the pandemic and is now updating it again as Canada emerges from the pandemic.
Again, Pipe has experienced no defaults.
What explains the difference in default rates between the asset originator and the industry?
With the exception of loans originated through the Canadian government program, Corl’s default rates used in its back-test are in line with industry default probabilities. However, the sample of real financing considered here is not statistically significant to do a real comparison of PD rates. Once we build a longer performance record for RBFs, we will be able to assess the quality of Corl’s back-testing scenarios and score modelling accuracy.
Pipe’s focus on larger and more mature companies reduces default risk substantially, and since there have been no defaults, their performance to date is above any default rate.