[FFT1-DROP] MIP6 Application: Fortunafi DROP: Revenue Based Financing Assets

[FFT1-DROP] MIP6 Application: Fortunafi DROP: Revenue Based Financing Assets

This MIP6 Proposal will finance a special purpose vehicle (“SPV”) established by Fortunafi Holdings or affiliates thereof (the “Issuer”) to acquire U.S. based Revenue Based Financing (RBF) Assets. Upon acquisition of each RBF asset, the Issuer will be the legal owner of the assets and will hold the title to the asset.

This is the 7th MIP6 application to use Centrifuge’s model.

1. Who is the interested party for this collateral application?

The Issuer, Fortunafi, is represented by Nick Garcia who is Fortunafi’s main contact (@_nick, [email protected], CEO at Fortunafi). The issuer will source and manage the RBF assets. It will create and own non-fungible tokens (“NFTs”) that represent the pool of RBF assets. It will lock their NFT’s into the Tinlake protocol to serve as collateral. The issuer will pool its assets and offer ERC-20 tokens to investors, specifically DROP Tokens & TIN Tokens.

Centrifuge is providing the technology and framework for bringing real-world assets to MCD. The main contact on Tinlake for the application is Lucas Vogelsang (@spin, [email protected]) of Centrifuge as well as Lea Schmitt ([email protected]) and Jason Jones (@Jason), [email protected]).

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token

We will start with a brief summary of Fortunafi, the Issuer/Asset Manager. Fortunafi will use Centrifuge’s model and use MCD directly as a line of credit to originate new assets against revenue-based financing assets. This means we will quickly add large amounts of assets likely using up the assigned debt ceiling for the collateral type.

Fortunafi:

Fortunafi is an onchain credit fund focused on generating yield from tokenized real world, cash flowing assets. We are specifically focusing on Revenue Based Financing Assets (RBF). In traditional capital markets and securitizations, the process from asset creation to a final securitization bond product requires numerous counter-parties that capital market participants must pay to verify information regarding the assets that are being bought, sold, and financed every day. This results in a less efficient and more expensive process. Fortunafi is verticalizing the entire process by bringing significant efficiencies to asset originators and better yields to investors by eliminating the various rent seeking capital market participants. This type of yield has historically only been available to the largest institutional investors (Pension Funds, Sovereign Wealth Funds, Private Equity Funds, Hedge Funds, etc).

Fortunafi has partnered with Corl to originate the RBF assets. Founded in 2016, Corl is a financial technology company that provides Capital-as-as-Service (“CaaS”) to startups and small businesses through innovative funding strategies based on revenue. The Corl platform is data-driven, scalable, and uses artificial intelligence to identify value across high-growth sectors. Core to our approach is leveraging financial, banking, social, and customer data to provide founder-friendly growth capital to help entrepreneurs and investors reach their strategic financial objectives. With Corl’s proprietary data, methods, and machine learning algorithms, the Company is able to identify asset-light and revenue-heavy businesses underserved by traditional investors. Corl has helped North American government agencies and corporations effectively deploy capital from venture funds with over $100 million, generated portfolio returns in excess of 25% annualized, and helped support dozens of businesses obtain growth capital without giving up ownership or control. In 2020, Corl has partnered with FortunaFi to bring its real-world royalty assets to digital markets to allow individual investors to benefit from their technology and participate in their returns.

Additional Materials:

Revenue Based Financing Assets:

Revenue Based Assets or Revenue Based Financing (RBF) is a type of financial capital provided to small or growing businesses in which investors inject capital into a business in return for a fixed percentage of ongoing gross revenues, with payment increases and decreases based on business revenues, typically measured as monthly revenue. Payments are equal to 1-10% of your monthly revenue, and stop if the business buys out the investment for 1-3x the investment amount.

RBF assets offer several investment benefits including portfolio diversification, uncorrelated with public equities, growing asset class, and an impressive risk/reward (higher returns and lower risk than senior debt).

“Through the use of bank data (current cash balance, historic cash inflows /outflows, burn, etc…), subscription data (volume, churn, payment history, growth patterns, cohort analysis, net dollar retention, etc…), and Accounting Data (Income Statement, Balance Sheet, Statement of Cash Flows), coupled with proper structuring of the asset purchase agreement you alleviate the need to underwrite the SaaS company clients themselves. This is the most senior part of the capital structure. If we look at the risk / return profile of investing directly into recurring revenue contracts themselves, at current rates of returns are on par with equity linked & junior tranches of fixed income risk despite significant “seniority” due to structuring. Recurring revenue contracts notably stand apart on a risk / return basis.” John Street Capital

When comparing the risks associated with RBF assets vs other investable assets (examples in the below chart) we believe that RBF assets have a lower risk profile and higher pay back guarantees. For example, our RBF assets have perfected senior interest against the company and we get paid off of the top (gross revenue). We also structure the asset so that the funds are only allowed to be spent on revenue generating activities.

Revenue Based Financing Assets represent a growing asset class. The demand for RBF assets is currently larger than the entire global crypto market cap & growing. The growth of this asset class in 2020 (during Covid) can be observed through some select major VC funding announcements of RBF asset originators: Uncapped raised $26M, and Pipe raised $60M.

RBF assets skew heavily towards SaaS based businesses that demonstrate high recurring revenue. The businesses are data driven and predictable, making them attractive to underwrite on a cash flow/revenue basis. These businesses choose RBF over traditional equity funding because it minimizes their equity dilution and monetizes their future revenue generation, allowing growing businesses an alternative solution for financing their growth. More than 40% of all RBF assets are in the B2B software space.

The following describes two exemplary use cases:

E-Commerce:

Digital sales company selling items through Amazon/Social/etc. Luxury products to a niche market. Doing ~$50,000 per month in revenue with 30%-45% gross margins. The business requires ~$150,000 of inventory for sales over the next 8 months.

The Digital Sales company leveraged Corl Revenue Sharing Financing for the $150,000. Corl received 4% of the company’s monthly revenue as a royalty. The company grew revenues to $75,000 a month by month 10 of the contract where they were able to secure a SBA loan and buy out the Corl contract at the invested amount or $150,000. Corl’s total remuneration for a $150,000 financing was $150,000 plus 10 months worth of 4% of revenue (~$25,000) for a total of $175,000 over a 10 month period or an IRR of 22% for the time period.

The digital sales company received capital quickly to deploy into inventory, did not dilute ownership of their company and were able to buy out the agreement early to keep their cost of capital down.

Software as a Service Company:

A software company sells property maintenance software for real estate and construction companies. They raised a seed round with two real estate investment management groups and are looking to raise a Series A next year. In the time between Seed to today, they’ve built the product, grown the sales team and have built a pipeline of customers.

Today, they have ~$100,000 a month in recurring revenue at ~75% gross margins. They are ready to start allocating more money to marketing for their sales team. They need capital to do so and to hire additional customer support staff for the increase in customer count. They would like to hit $200,000 per month in recurring revenue prior to raising their Series A so as to increase valuation and decrease founder dilution.

To accomplish their goal of $200,000 per month in 1 year’s time, they leveraged Corl’s revenue sharing financing product and received a $200,000 investment. $100,000 was budgeted for the two additional customer support hires, with the rest going to sales and digital marketing.

Corl received 2.5% of monthly gross revenue as a return on the $200,000 investment. The company hit ~$260,000 in monthly recurring revenue in 1 year’s time and were able to raise their Series A round at a higher valuation. They used the capital in that venture round to buyout the Corl contract at the investment amount of $200,000. Corl’s total remuneration for a $200,000 financing was $200,000 plus 12 months worth of 2.5% of revenue (~$52,000) for a total of $252,000 over a 10 month period or an IRR of 28.9% for the time period.

The Software as Service company was able to hit their monthly recurring revenue target and raise a subsequent Series A round without further dilution and received the funds in a timely manner.

Legal Setup

Fortunafi formed its own SPV (Fortunafi Asset Management Series 1) for the acquisition of RBF assets. The SPV will enter into a service agreement with Centrifuge to get support from Centrifuge while using Centrifuge’s open and decentralized infrastructure. The SPV will tokenize the titles of each of its RBF Assets into NFTs and will add those NFTs to Tinlake as collateral. The SPV will utilize Tinlake to issue FFT1-DROP and FFT1-TIN backed by the pool of NFTs that are locked in Tinlake. Fortunafi will purchase the FFT1-TIN tokens and will lock the FFT1-DROP tokens into a MakerDAO Vault. Please find the documentation to the two-tranche structure here.

Fortunafi set up a legal structure that provides the necessary support to ensure that anyone that owns a DROP token has a legal claim to the underlying assets. This is done with a legal structure very commonly used in the traditional financial system: The collateral for the individual assets are assigned to a legal entity, the “special purpose vehicle” and lenders get an ownership interest in the entire portfolio of this entity (with this entity the assets are in an a bankruptcy remote structure that is not influenced by the Asset Originators).

Pool Structure:

Fortunafi has structured the pool to reflect a 90% vs 10% allocation to Drop & Tin, respectively. We structured the pool to ensure that there is sufficient coverage from Tin for the Drop tranche based on the average asset size and initial pool size. We believe that this structure is optimal given the nature of the assets in our pool (lower risk & higher pay back guarantee). Our RBF assets have perfected senior interest against the company and we get paid off of the top (gross revenue). We also structure the asset so that the funds are only allowed to be spent on revenue generating activities.

While Fortunafi is pursuing this MIP6 application for our Drop token, we continue to expect to have Drop co-investors. Since launching our pool in December 2020, we have built a strong group of existing drop investors in addition to a very healthy pipeline of new Drop investors currently undergoing our KYC/AML process.

3. Provide a brief history of the project

About Fortunafi

Fortunafi is a fintech startup that has been in stealth since early 2020. Fortunafi is a newly formed company that was created to partner with Centrifuge & Corl and launch an onchain credit fund. While Corl is our first asset origination partner, we seek to partner with additional asset originators to diversify our deal flow. The founding team at Fortunafi has deep experience in managing investment funds and in operating, scaling, and investing in fintech & DeFi startups. Fortunafi was incubated by Space Whale Capital, a proprietary investment firm that manages a discretionary liquid trading strategy and actively participates and invests in DeFi.

Nick Garcia, Co-founder & Chief Executive Officer

Nick is the Chief Executive Officer at Fortunafi. He has over 8 years of experience in both fintech & crypto. Nick started off in fintech at Wells Fargo’s Tech & Venture Group (worked on deals for Lending Club, Funding Circle, Prosper, & others). He then led finance & strategy at Zenefits, 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.

Jason Smith, Co-founder

Jason is the Co-founder at Fortunafi. He has over 9 years of experience as a full-time cryptocurrency investor. Prior to Fortunafi, he 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. He was introduced to Bitcoin after discovering in late 2010 and Bitcoin mining in 2011. He was previously a Software Engineer at Shippo, a multi-carrier shipping API startup backed by Union Square Ventures, and Quixey, a deep-linking startup backed by Alibaba. Prior to software engineering, Mr. Smith was a Producer at Blizzard Entertainment in their CG Animation studio executing on cinematic projects for the StarCraft, WarCraft, and Diablo franchises.

About Corl

Founded in 2016, Corl Financial Technologies Inc. (“Corl” or the “Company”) is a financial technology company that provides Capital-as-as-Service (“CaaS”) to startups and small businesses through innovative funding strategies based on revenue. The Corl platform is data-driven, scalable, and uses artificial intelligence to identify value across high-growth sectors. Core to our approach is leveraging financial, banking, social, and customer data to provide founder-friendly growth capital to help entrepreneurs and investors reach their strategic financial objectives. With Corl’s proprietary data, methods, and machine learning algorithms, the Company is able to identify asset-light and revenue-heavy businesses underserved by traditional investors. Equipped with these tools, Corl’s objective is to make revenue-sharing using Corl’s CaaS platform a mainstream method of raising capital and financing business growth.

Based on empirical evidence, there is an $850 billion funding deficit for start-ups and small businesses in North America that is currently not being met by angel investment, venture capital, alternative lending, or traditional banking.[1] Corl has identified an underserved segment in North American capital markets that can be served by a hybrid of debt and equity. For many businesses, revenue-sharing investments provide a mechanism for capital raising, without the burdensome contractual terms of traditional debt, or the high cost and controlling nature of equity. While revenue-sharing or royalty based investments have traditionally been popular in the pharmaceutical, entertainment, resource/energy, and manufacturing industries, they have largely been overlooked by emerging growth sectors in the digital economy, such as E-commerce, X-as-a-Service, or X-tech. Corl intends to change that through their CaaS platform and began offering financing through its platform in 2018 using their unique data-driven approach.

Since then, Corl has helped government agencies and corporations effectively deploy capital from venture funds with over $100 million, generated portfolio returns in excess of 25% annualized, and helped support dozens of businesses obtain growth capital without giving up ownership or control. In 2020, Corl has partnered with FortunaFi to bring its real-world royalty assets to digital markets to allow individual investors to benefit from their technology and participate in their returns.

Derek Manuge, Chief Executive Officer

Derek is Chief Executive Officer at Corl. He has over 8 years of experience in financial risk management, investment management, and financial technology. He previously held the position of Chief Technology Officer at Corl, and led the quant team in Financial Risk Management at KPMG and Scotiabank (TSX: BNS). Derek has advised more than 40 financial institutions, governments, and regulatory agencies as a subject matter expert in financial risk management. Derek has an FRM (Financial Risk Management) designation and a Master’s degree in Mathematics from the University of Guelph.

Ben Ames, Chief Investment Officer

Ben Ames is Chief Investment Officer at Corl Financial Technologies. He has over 8 years of experience as an investment professional with a keen understanding of value. He leads investment operations at Corl and was formerly Chief Investment Officer at Forge & Foster Investment Management, a real estate investment management firm. He was responsible for growing assets under management from $14M to $140M and managing a team of 10 individuals. He graduated from the University of Guelph with a degree in Economics.

Robert Bialek, Head of Engineering

Robert is Head of Engineering at Corl. He has over 15 years of experience in software development, application architecture, and technical leadership. He previously held the position of VP of Technology at IOU Financial (TSX: IOU). Robert specializes in software development in multi-national distributed environments using modern open-source technologies. He co-founded and successfully exited FairRates (acquired by IOU Financial), one of world’s first peer-to-peer lending platforms, and holds a Ph.D. in Computer Science from University of Copenhagen.

About Centrifuge

Centrifuge has built a technology solution for businesses such as Fortunafi to use their assets as collateral, turn them into fungible ERC20 tokens and borrow money against them through DeFi protocols. With Tinlake, Centrifuge has over 1.4M DAI locked in a number of different asset pools since the launch of v3 at the end of October and deployed capital from over 100 real people around the world.

Over the past months Centrifuge has worked closely with the different domain teams to onboard the first two partners, New Silver and ConsolFreight. This MIP6 application is the 7th MIP6 application to use Centrifuge (see previous applications: NS-DROP, CF-DROP, HTC-DROP, PC-DROP, KF-DROP) and there are more in the pipeline. We intend to grow DeFi massively and generate DAI from many different uncorrelated asset originators. We’ll work closely with the RWA working group to realize its mission to scale RWAs in MCD to $300M in 2021.

4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

Fortunafi’s mainnet deployment is accessible via tinlake.centrifuge.io

Technical documentation about Tinlake can be found here: https://github.com/centrifuge/tinlake

Maker specific implementation here: https://github.com/centrifuge/tinlake-maker-lib 1

5. Link any available audits of the project. Both procedural and smart contract focused audits.

Centrifuge has conducted several audits of its technology stack. The audits can be found here: https://github.com/centrifuge/security/tree/master/audits 2

6. Link to any active communities relating to your project.

7. How is the applying collateral type currently used?

The SPV will be financed by issuing DROP Tokens for 90% of the net asset value of the pool of NFTs plus cash on hand (collectively “Pool Valuation”) and TIN Tokens for 10% of the Pool Valuation.

The Issuer expects to launch with 1 million Dai of private capital. The Issuer will initially seek a 5 million DAI debt ceiling from MakerDAO, increasing to a 20 million DAI debt ceiling when 75% of the initial line amount is disbursed. We seek an initial 5 million DAI debt ceiling to pursue our pipeline of deals. We expect to fill up this initial 5 million dai in 2-3 months based on our existing pipeline. This capital would also give us the ability to scale up our average deal size.

The Issuer expects to invest in Revenue Based Financing (RBF) Assets that have an average value of $150,000 and expects to hold these assets for 24 months. Upon the sale or buyback of an RBF asset, the Issuer will repay the outstanding balance drawn against the NFT and accrued interest thereon. All of the assets in the pool will have similar risk characteristics.

Each investment provides Fortunafi certain rights to protect its capital from loss. In the event of non-payment and other technical defaults, Fortunafi has an irrevocable right to call back its capital, including any return associated with revenue payments and the buyout amount. In the event there are complications with receiving this value from the business after invoking the right, there are other means in which they can liquidate its assets. Since each investment is contingent on the business signing a General Security Agreement, that gives Fortunafi rights to all the tangible and intangible assets of the business in the event of default. In all cases, this security interest is senior and overcollateralized, and therefore Fortunafi has the right to claim proceeds from these assets to make itself whole before other creditors. If the usual liquidation proceedings are not pursued via voluntary or involuntary bankruptcy, asset sales, etc., the investments can be sold on the secondary market to third-parties such as lenders that specialize in liquidating and refinancing distressed assets. To this effect, there is a robust secondary market for commercial and small business credit assets. Through our partner Corl, we have referral agreements with over 20 small business lenders in the United States that originate and purchase more than $10B annually.

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

Fortunafi will bear legal responsibility for the collateral.

This SPV structure creates a bankruptcy-remote entity whereby owners, debt holders or interested parties of this newly created SPV are left unaffected by the parent’s financial, operational and/or legal health.

9. Where does exchange for the asset occur?

The SPV enters into a subscription agreement with lenders who receive DROP from the SPV in turn for providing DAI. The DROP token can be redeemed against the cash flows of the underlying collateral directly from the SPV by any DROP holder. This is ensured by the Tinlake smart contracts and is the primary way for interacting with these tokens.

10. (Determined by Legal Domain Team) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

First, the issuance of DROP and TIN tokens is handled via Securitize, with AML/KYC procedures and compliance with US securities guidelines. Investors based in the US must be accredited investors (generally defined as having a net worth of at least $1 million).

The offering structure overview and legal templates can be found here.

11. (Determined by Legal Domain Team) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.

The issuance of DROP and TIN tokens is handled via Securitize, with AML/KYC procedures and compliance with US securities guidelines. Investors based in the US must be accredited investors (generally defined as having a net worth of at least $1 million). The SPV issues DROP tokens for the Maker vault, and Centrifuge will post legal discussion about potential implications for Maker.

12. (Optional) List any possible oracle data sources for the proposed Collateral type.

The Issuer will provide monthly NAV updates for each underlying RBF asset, which will be used to value the NFTs.

If an updated NAV submitted by the Issuer shows a decrease in the total expected value of an underlying RBF asset, then the value of the NFT will be marked down. If, as a result of such mark down, the outstanding value of the DROP Tokens increases to more than 90% of the Pool Valuation, then Tinlake will lock the Issuer from drawing any further Dai and will lock the TIN investors from redeeming. The Issuer may restore balance and unlock Tinlake by: (1) buying additional TIN tokens so that the proceeds will increase the cash reserve in an amount necessary to cause the value of outstanding DROP Tokens to be no more than 90% of the Pool Valuation or (ii) redeem DROP Tokens in an amount necessary to restore the value of outstanding DROP Tokens to no more than 90% of the Pool Valuation.

If an updated NAV submitted by the Issuer shows an increase in the total expected value of an underlying RBF asset, the Issuer may: (i) draw additional amounts from the Financing Line to be funded by DROP Tokens up to the amount that would cause the total outstanding DROP Tokens to equal 90% of the Pool Valuation or (ii) withdraw TIN Tokens to restore the ratio of the value of the outstanding DROP Tokens to the value of the outstanding TIN Tokens to 90/10 or (iii) do nothing, which will effectively over collateralize the pool of assets by the excess value of the TIN Tokens.

13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

Each investment provides Fortunafi certain rights to protect its capital from loss. In the event of non-payment and other technical defaults, Fortunafi has an irrevocable right to call back its capital, including any return associated with revenue payments and the buyout amount. In the event there are complications with receiving this value from the business after invoking the right, there are other means in which they can liquidate its assets. Since each investment is contingent on the business signing a General Security Agreement, that gives Fortunafi rights to all the tangible and intangible assets of the business in the event of default. In all cases, this security interest is senior and overcollateralized, and therefore Fortunafi has the right to claim proceeds from these assets to make itself whole before other creditors. If the usual liquidation proceedings are not pursued via voluntary or involuntary bankruptcy, asset sales, etc., the investments can be sold on the secondary market to third-parties such as lenders that specialize in liquidating and refinancing distressed assets. To this effect, there is a robust secondary market for commercial and small business credit assets. Through our partner Corl, we have referral agreements with over 20 small business lenders in the United States that originate and purchase more than $10B annually.

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Great proposal Nick, happy to see it released.

I think this is great because the yield is so high, thats where the MakerDAO business case really shines.

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