When The Music Stopped: How The Pandemic Threatened the History and Culture of Austin, Texas
November 15, 2020
In April of this year, Threadgill’s – a legendary Austin music venue and beer joint that, in the 1960s, famously launched the career of blues singer Janis Joplin — turned off the lights and pulled the plug on its sound stage.
A converted gasoline station, Threadgill’s had been a rollicking music scene since 1933 when musician and bootlegger Kenneth Threadgill secured the first liquor license in Texas after Prohibition. His juke box was crammed with Jimmie Rodgers songs and Threadgill himself famously sang and yodeled Rodgers’ tunes.
For generations of students at the University of Texas, Threadgill’s was a rite of passage.
“The first time I went to Threadgill’s was in the fall of 1968, when I was a freshman at UT,” recalls Perry Raybuck, a songwriter-folksinger and retired government worker who, as a member of the Southwest Regional Folk Alliance, played the stage in 2018. “It was the beginning of an education for me,” he adds. “I had been a Beatles and rock n’ roll kid and it opened me up to different music styles. I became a convert.”
In 1981, Threadgill’s was taken over by another acclaimed club owner, Eddie Wilson, who previously had been the proprietor of the Armadillo, a fabled music venue. Wilson began to actually pay musicians – Threadgill had compensated them mainly with free cold beer – and installed a circular stage.
It was Threadgill’s and an assortment of funky clubs and stages with names like the Soap Creek Saloon and Liberty Lunch helped put Austin on the map as “The Live Music Capital of the World.” The city remains home to the widely acclaimed television program “Austin City Limits” on PBS and the internationally renowned South by Southwest festival, which was canceled this year amid fears of a “superspread” of the coronavirus.
“Live music,” says Laura Huffman, chief executive at the Austin Chamber of Commerce, “is why people come here. It is a central component of Austin’s cultural and economic life.”
Omar Lozano, director of music marketing for Visit Austin, the city’s main tourism organization, says: “We have close to 250 places in the greater Austin region where you can hear live-music, although it’s closer to 50-70 on any given night. During South by Southwest, no stone is left unturned — everything becomes a stage: parking garages, grocery stores, housing co-ops. There are also four or five stages at the Airport, which helps liven up the mood.”
But that identity is being put to the test. So far this year, Austin has lost a raft of live music venues. Among those joining Threadgill’s in honky-tonk heaven since the pandemic struck are Barracuda, Plush, Scratchhouse, Shady Grove, and Botticelli, all of which provided niche audiences to both established musicians and up-and-coming acts.
The roller-coaster ride of government mandated shutdowns followed by a limited re-opening in the spring and another shutdown since July fourth is making life miserable and untenable for both club owners and already hardpressed musicians and artists, says Marcia Ball, a piano player and blues singer.
Ball, who was named by the Texas Legislature as “2018 Texas State Musician” and whose musical style was once described by the Boston Globe as “mixing Louisiana swamp rock and smoldering Texas blues,” told AltFinanceDaily: “There was already a limited amount of opportunity for musicians to perform and monetize their work in Austin, so it has always been necessary to travel to make a living. But we still depend on a thriving local scene, and we’re losing that when key venues like Threadgill’s disappear.”
Adds Graham Williams, a prominent Texas promoter of touring bands: “These venues and bars are vital to the music ecosystem. Local bands and cover bands need hangouts, even if people are not buying tickets. They’re places to play every night of week.”
While unheralded outside the Austin scene, the local music joints were often a port-of-call for out-of-town promoters and nightclub owners checking out Austin talent – “most notably Barracuda (which) had super-popular acts and was like a hipster garage venue,” says promoter Williams. “A lot of touring bands played there on their way up.”
A July study by the Hobby School of Public Affairs at the University of Houston found that the city’s live music industry is in desperate straits. Sixty-two percent of live music spots and 55% of the bar-and-restaurant businesses reported to researchers that that they can endure for no more than four months, making them the most vulnerable of 16 industries surveyed.
And the situation has become “even more ominous” since the report was published, explains Mark P. Jones, a political scientist at Rice University in Houston and a lead researcher on the Hobby study. “That survey finished polling two hours before all bars and restaurants closed back down,” he says. “Everything people were saying was when bars were at 50% capacity. That’s a best-case scenario.”
Austin’s experience amid the Covid-19 pandemic mirrors what is occurring nationwide as bars, nightclubs and music halls in myriad cities and towns experience similar trauma. In Seattle, Steven Severin is co-owner of three nightclubs – Neumos, Barboza and recently opened Life on Mars – all in trendy Capitol Hill, the hub of the city’s club and live-music scene. He reports that he is barely holding on thanks to some help from the city and a sympathetic landlord who is “a big music advocate.”
“He knocked down the rent a little bit,” Severin says of his landlord, but the situation is dire. “We just had a fifth venue, Re bar, close at the end of August,” he says. “It was a punch in the gut. This could be me.”
The Bitter End in Greenwich Village is also keeping its head above water despite not opening its doors since March. The nightclub has a storied past: owner Paul Rizzo recounts that it is where pop singer Neil Diamond got his start and where “everyone from Curtis Mayfield to Randy Newman” has performed since its opening in 1961. But the club is silent now since the pandemic overwhelmed the city’s hospitals and made New York the epicenter of sickness and suffering during the spring. So far the club is getting help from a landlord’s forbearance and loyal musicians.
Peter Yarrow (the “Peter” in the bygone trio Peter, Paul and Mary), donated a streamed concert to patrons who contributed to a fundraiser that raised more than $50,000. And grateful local musicians also put on a benefit directing people to a Go Fund Me page on the Internet that raised another $16,000. “We’re a major venue for local musicians,” Rizzo says. “We should pull through.”
It’s in their self-interest for artists to do whatever they can to keep the doors open at a club like The Bitter End. “These days because of the last two decades of declining record sales — live music is the bread and butter of a musician’s income,” says journalist Edna Gundersen, a recently retired, 28-year-veteran of USA Today. “That’s true whether it’s a local entertainer or an international superstar.” (Gundersen earned the reputation as Bob Dylan’s favorite journalist; it was she who scored his only interview after he won the Nobel Prize for literature in 2018, publishing his eccentric musings in the The Telegraph of London and breaking the news that he would indeed accept the prize.)
“Touring has been crushed,” Gundersen adds, “and festivals have been canceled. So people doing the circuit and clubs are gone for all intents and purposes. Streaming — while initially up — is down because people aren’t listening to music in the gym or in their cars. Physical record sales are also down because people aren’t going to stores. All of this is just killing musicians.”
The Paycheck Protection Program, the multi-billion, multi-tranche aid package for small business which Congress authorized as part of the CARES Act in March, has provided some funding for the live-music and entertainment industry. But because of the PPP’s requirements that only 40% of the funds can be spent on rent, mortgage and utilities, which are major expenses for nightclubs and music venues, the program has largely been a disappointment.
Hoping to win attention and assistance for their plight from the federal government — “We’re the first to close and the last to reopen,” Severin says — live-music entrepreneurs like himself and Rizzo and more than 2,800 club-owners and promoters across the country have banded together to form the National Independent Venue Association.
Their membership includes independent proprietors (no corporate members allowed) of saloons, cabarets and concert halls as well as theaters, opera houses and auditoriums from every state plus the District of Columbia. To help plead their case with Congress, the organization hired powerhouse law firm Akin Gump Strauss Hauer & Feld, the largest Washington, D.C. lobbying firm by revenue.
NIVA also blanketed Congressional offices with two million letters, e mails and correspondence generated from hordes of fans and performers. Among the many scriveners are a slew of boldface names: Mavis Staples, Lady Gaga, Willie Nelson, Billy Joel, Earth Wind & Fire, and Leon Bridges. Comedians Jerry Seinfeld, Jay Leno and Jeff Foxworthy have also penned notes to lawmakers championing NIVA’s cause.
Their message: without federal funding, 90% of independent stages will go under over the next few months. “The heartbreak of watching venues close is that once a building is boarded up, it’s not going to be a music venue any more,” warns Audrey Fix Schaefer, communications director at NIVA. “They operate on thin business margins to begin with and they’re too hard to develop.” For touring acts, each city stage is “an integral part of the music ecosystem,” Schaefer explains. “When artists finally do get back on the tour bus, they might have to skip the next five cities and go on to the sixth.”
Thanks to the bi-partisan efforts of Senator Amy Klobuchar (D-Minn.) and Senator John Cornyn (R-Texas), NIVA’s campaign has gotten traction. The unlikely couple have teamed up to author a rescue bill, known as the Save Our Stages Act. If enacted, it would establish a $10 billion grant program for live venue operators, promoters, producers, and talent representatives.
The legislation would provide grants up to $12 million for live entertainment venues to defray most business expenses incurred since March, including payroll and employees’ health insurance, rent, utilities, mortgage, personal protection equipment, and payments to independent contractors.
NIVA’s chief argument for the legislation is coldly economic rather than sentimentally cultural. The organization cites a 2008 study by the University of Chicago that spending by music patrons produces a “multiplier effect” for the broader economy. For every dollar spent by a concert-goer at a live performance, the Chicago study determined, $12 in downstream economic activity occurs.
Explains Scott Plusquellec, nightlife business advocate for the City of Seattle: “You buy a ticket to a show and the direct economic impact of that purchase is that it pays the artist, bartender and the club itself as well as the band, advertisers, and promoters. The indirect economic impact,” he adds, “is that after you bought the ticket, you went to a barber shop or a hair salon to look good that night. You might also have dinner, go to a bar for a drink and tip the bartender. That’s the whole the idea of a ‘multiplier.’”
In Austin, that economic logic is an article of faith with city burghers, asserts Lozano of Visit Austin, who reports that live music in the capital city is roughly a $2 billion industry. To promote live music, the tourism bureau sponsors such endeavors as “Hire an Austin Musician.” That program, Lozano says, “sends musicians around the U.S. to represent us during marketing season.” In another promotional campaign, Visit Austin arranged for singer-songwriter Julian Acosta to play a gig at travel agents’ offices in London when Norwegian Air inaugurated direct flights between London and Austin in 2018. “The U.K. is one of our best markets,” he reports.
Even so, efforts by the business community and the City of Austin have failed to stanch much of the industry’s bleeding. According to its website, the city has disbursed $23.7 million in loans and grants to small businesses and individuals, but slightly less than $1 million of that has gone to live-music and performance venues, entertainment and nightlife, and live-music production and studios.
In late September, The city of Austin’s Economic Development Department released a slide show breaking down how the $981,842 in industry grants and loans – of which $484,776 was provided by the federal government under the CARES Act – were awarded. Most top recipients appeared to be well known nightclubs and entertainment venues downtown or close to the city’s inner core.
The Continental Club on South Congress – a key fixture in the hip “SoCo” strip just over the Colorado River from downtown – appeared to do best. It picked up $79,919 from two programs: $40,000 in the CARES-backed small business grants program, and $34,919 from the city’s Creative Space Disaster Relief Program. Other clubs receiving $40,000 in the small business grants program included Stubbs, The Belmont, Cheer Up Charlies and the White Horse. (For a full list go to: http://www.austintexas.gov/edims/document.cfm?id=347299)
Joe Ables, owner of the Saxon Pub, a major Austin venue for jazz – blues singer Ball hailed it as one of several important Austin clubs “that sustains creative endeavor, especially for songwriters” – was vexed that his grant application was denied by the city “with no explanation.” Ables also voiced dissatisfaction that the city paid the Better Business Bureau a 5% administration fee to handle $1.14 million in relief funds, including determining which applicants were approved. “What would they know about live music,” he says.
Even for clubs that received city largesse, it hasn’t been nearly enough to sustain them. The North Door, which got $15,240, closed for good on September 11 (an ominous day — the anniversary of the attacks on the World Trade Center and the Pentagon.)
Meanwhile, enough clubs and venues were left out in the cold that club owner Stephen Sternschein could tell AltFinanceDaily just before the slide show was released: “I’ve heard talk of a $21 million grant program but most people I know haven’t seen a dollar of that.”
Sternschein is managing partner of Heard Presents, an independent promoter and operator of a triad of downtown clubs that includes the spacious Empire Garage, which features hip hop and urban jazz, and has space for 1000 music-goers. A member of NIVA, Sternschein describes efforts by both the state and local governments as “woefully inadequate.” Says he: “People are looking to the federal government for answers.”
The diminution of places for musicians to ply their trade is a double edged sword. If Austin loses its luster as a hot music town, it puts the city’s overall economy in jeopardy. Explains Jones, the Rice political scientist: “The difficulty for Austin is that it could lose its comparative advantage. Unlike restaurants, movie theaters or sports events, which people can find just as easily in other cities, the Austin music scene draws capital and revenue from across the country.
“You can go out to dinner in Waco,” he observes, referring to the mid sized Texas city between Austin and Dallas best known as home to Baylor University and its “Bears” football team, fervent Baptist religiosity, and unremarkable night life. “Music brings in revenue to Austin and to Texas that wouldn’t otherwise come here.”
In addition, Jones says, the large presence of “artists, creative types, and freelancers” helps make Austin a strong selling point for “brain industries” to attract talent from the East and West Coasts. “It supports the technology industry by making it easier to recruit employees to live there,” he says. “Austin is an alternative to Silicon Valley. People who are progressive might be hesitant to come to conservative, red-state Texas from California but they’ll come to Austin because it’s culturally cool.”
Austin, which embraces the slogan “Keep Austin Weird,” is on the verge of becoming just like every place else in Texas. Should it relinquish its flavor and charm, it could discourage many of the assorted business groups and professionals from keeping Austin on their dance card as a popular destination for meetings, conferences and get-away trips.
Howard Freidman, managing director at Bluechip Jets, a broker of private luxury aircraft, had an earlier career as a technology industry executive. Partly drawn by his previous experiences with the city, Freidman moved to Austin earlier this year. “It had the same coolness and weirdness of New Orleans — but also with the professionalism of a tech city,” he says.
“Whenever we’d come here,” Freidman adds, “the music was always integral to the Austin scene. Even when you’d go to private parties you’d end up downtown at the club scene on Sixth Street. Austin was always a place everybody liked going to.”But as Austin has steadily been morphing into more of a high-technology center than a live-music town, it’s experiencing a silent exodus of musicians and artists who are being gentrified out of their apartments and Craftsman duplexes. Displacing them are software engineers, website designers and the like, their sleek BMWs and black, tinted-glass SUVs glistening in the parking lots of steel-and-glass corporate centers.
Many of the technology firms – including such needy companies as Samsung, Intel, Rackspace, Facebook, and Apple – have each received tax breaks, grants and subsidies worth tens of millions of dollars from a variety of local jurisdictions. Not only have the city of Austin and Travis Country been beneficent, but adjacent county governments and the state of Texas have provided abundant support. A 2014 study by the Workers Defense Project, in collaboration with UT’s Lyndon B. Johnson School of Public Affairs, reported that the state of Texas showers big business with $1.9 billion annually in state benefits. Most recently, officials with Travis County and a local school district granted Tesla more than $60 million in tax rebates to build a massive “gigafactory” southeast of town near Austin-Bergstrom International Airport.
To house the burgeoning cohort of “knowledge workers,” there are condominium conversions, tear-downs, high-rises and other forms of frenetic real estate development which, in their train, bring higher property taxes, steeper rents, and unaffordable housing.
Add in some of the country’s most snarled traffic, dirtier air, and a growing homeless population, and members of the artistic community are increasingly decamping for smaller satellite towns like Lockhart and San Marcos. Others in the diaspora are abandoning Texas altogether for more hospitable locales like Fayetteville Ark., Asheville, N.C., or Olympia, Wash. “Whatever made anybody think this would be a better town with a million people,” laments blues singer Ball. “This was a perfect town with 350,000. Now we’ve got Silicon Hills, Barton Springs are cloudy, and drinking water’s going to be scarce. Why is this supposed to be better?”
The drop-off in live music and the belt-tightening by musicians is causing third-party pain for people like veteran Austin journalist and publicist Lynne Margolis, whose national credits include stories for Rolling Stone online, and radio spots for NPR. “The public relations aspect of my work has dropped away because artists can’t afford to pay,” she says, “and music journalism is falling by the wayside. It’s hard not to feel to like a double dinosaur.”
Led by bars, restaurants and music venues, on many days the solemn departure of small establishments has the business news sections of Austin newspapers reading more like the obituary page. One hardy survivor is Giddy Ups – a throwback honky-tonk on the town’s outskirts that advertises itself as “the biggest little stage in Austin” – promising “just about everything,” says owner Nancy Morgan, including “country, blues, rock, bluegrass, and soul.” For the past 20 years Giddy Ups has developed a devoted following of musicians and patrons while fending off hyper modernity.
“It has an untouched, back-to-the-seventies, cosmic cowboy vibe,” says local musician Ethan Ford, a guitarist and bass player whose trio, The Slyfoot Family, has graced its stage. “It’s a time capsule,” Ford adds.
Morgan declined to disclose her annual receipts but in 2019, she reports paying out $188,000 in wages to employees, $72,000 to musicians, and $185,000 in combined sales taxes to the city of Austin and to the state. Despite her status as a taxpayer, employer and entrepreneur, she has received no state aid and is disqualified from receiving city pandemic assistance programs, meager as they may be, because she’s located in an extra-territorial jurisdiction.“
Nancy still bartends most nights and does all of the booking,” says Ford. “Her knowledge of the Austin music scene could fill a couple of books. I know a decent fistful of Austin venue owners and she’s about the only one that hasn’t given up, been forced out, or just retired. She’s a dynamo.”
Unless the cavalry arrives for Morgan and other holdouts, though, their musical days may be numbered.
Editors Note: Threadgill’s didn’t make it. The venue “has closed for good, the property has sold, and the building will eventually be torn down,” according to information disseminated for its Last Call Music Series. Its November 1st grand finale show featured Gary P. Nunn, Dale Watson, Whitney Rose, William Beckman, and Jamie Lin Wilson.
The building will be replaced with apartments.
To Niche or Not to Niche, That Is the Fintech Question
October 1, 2019
A store that sells only cufflinks. A restaurant that serves nothing but grilled cheese sandwiches. A tiny stand where you buy only artisanal salt. In the not-too-distant past, these kinds of shopping and dining options were almost unheard of. Readers of a certain age will remember that if you wanted cufflinks, you went to an all-in-one department store like Macy’s. If you had a hankering for a grilled cheese sandwich, you ordered one off the kids menu at TGI Fridays. And if you wanted fancy salt, you probably learned how to make it yourself. But as times changed, so did consumer behavior, and industries adapted; these days a consumer can find a singular shopping or dining experience for almost any bespoke want or need (entirely egg-based restaurants—they’re a thing). These specialty places have done well by a) focusing on a niche product or service, b) applying expertise to something they believe in and c) executing and perfecting it daily.
In the past decade, the fintech industry has followed this model to a tee. Whether it was B2B or B2C, fintech startups broke the banking business into narrower segments, offering singular niche services for various finance needs, e.g. credit card refinancing, small business loans, student loans, P2P payments, mortgages and more. From this model, big banks became the TGI Fridays of financial offerings (where you go to experience a full spread of financial services), and fintech platforms became the speciality grilled cheese shops (where you go to get the one thing you really crave).
Fintech Niches Fill Big Gaps
Many startups went niche not only because it was a business model that worked, but because the legacy banking industry model was out of date and there was room for true disruption. With these opportunities, niche fintechs could hone in on services that fulfilled singular needs, and they could do it with a focus, passion and dedicated customer service that most general banks couldn’t provide—and the results of this have been mostly positive. Globally, financial inclusion of unbanked people has improved. According to The World Bank, 69 percent of adults or 3.8 billion people now have an account at a bank or mobile money provider. In the U.S., niche fintechs made it easier for small businesses to get a loan post-recession. A host of online lenders stepped in to fill the gap, understanding that without access to relevant capital, small businesses struggle, which ultimately affects economic growth, jobs and inflation.
Can Fintechs Stand up to Tech Giants?
Tech giants thrive when users treat their platforms/offerings as a one-stop shop, something that is already commonplace in China, where millions of people use Tencent’s WeChat app to do almost everything—pay bills, book medical appointments, chat, play games, read news and pay for meals. Although this is not at the same level of activity in the U.S., it is a trend likely to continue.
The winds have been shifting as fintech companies question whether it makes sense to stay true to their niche or offer additional services as a path to scalability and profitability. By taking the latter path, former niche startups are now either a) building out and offering more financial services or b) partnering with more established companies/banks. Some recent examples include eBay and Square Capital, Venmo and Uber and KeyBank and HelloWallet. These partnerships seem to be a win-win—for the niche companies hoping to solve for scale and revenue stream issues, and for the established companies looking to offer complimentary services their core customers already use—but they also have fintech startups standing at a crossroads. Will working a niche be sustainable in 2020 and beyond, or is becoming a jack of all trades the only means of survival?
Beware of Diluting the Brand
For starters, the only means of survival for any fintech company is to solidly define what the company brand is and what it stands for. For example, many small business lenders are deeply passionate about fueling the American dream through helping business owners unlock their financial potential. Supporting small business is key to our country’s economic fabric. Dynamism and the ability to recover from an economic downturn are both dependent on startups’ ability to grow quickly, and in most cases, the only way for them to do so is through access to capital. For a fintech lender to become a trusted brand to small business owners, it must remain devoted to them as a company that has the financial wellbeing and vitality of small businesses in mind. This means facilitating the right loan for them, right when they need it.
The key for fintech companies is to be careful about diluting the brand. When companies stray too far from what they are passionate about, their core audiences suffer. Tech giants enter new spaces every day, whether from R&D or acquisitions. A strong brand (and the loyalty its customers have to it) will not only insulate a fintech company from the tech giant threat, but make its mission and voice stronger by comparison. Think about this the next time you are eating at In-N-Out Burger (sorry, East Coasters!). The humble hamburger shop became a cultural phenomenon through its razor-sharp focus on simplicity, quality and consistency.
Always Consider the Human Factor
Innovation and automation are both critical to survival in the fintech space. But how much tech can a fintech leverage in its solutions to avoid becoming too niche? The answer lies in understanding the core customers’ needs and how much technology can be used to fulfill those needs. For an e-wallet app, the key needs of customers are frictionless payments and transfers happening in real time; it is not a solution (when it’s working) that needs a lot of human interaction. A fintech company such as this can use technology and machine learning to automate most of its services.
Conversely, the human factor is still a huge part of the equation in some fintech services. For example, a person’s livelihood is at stake when a small business takes on a loan or another capital solution for its growth needs. This is a very personal and consequential decision for a business owner. In fact, in the majority of cases, they don’t want to rely solely on a technology-powered platform to deliver the most appropriate loan options for their needs, not to mention address their specific concerns and questions. A fintech lender can leverage technology at every touchpoint to optimize the application and loan approval process; but ultimately, many business owners will desire interaction with a live representative, not a chatbot. The human factor is crucial in business lending, and something that could become lost as a result of brand dilution. While scalability is important, customer service is equally so.
In the end, the decision to offer niche services or to go wide will depend on what’s at the core of a fintech company. Indeed, the pressures to scale, grow and earn returns for investors are huge for any business, but decision-makers must keep their perspective on the market they serve and the problems they solve best. If expanded offerings and partnerships with other service providers enhance your brand and what it stands for, then this approach makes sense for growth and customer satisfaction. If not, then serving up the best grilled cheese sandwiches around, to the folks who really crave them, may well be the best path.
Gold Rush: Merchant Cash Advances Are Still Hot
August 18, 2019
Last year, when Kevin Frederick struck out on his own to form his own catering company in Annapolis, the veteran caterer knew that he’d need a food trailer for his business to succeed.
He reckoned that he had a good case for a $50,000 small-business loan. The Annapolis-based entrepreneur boasted stellar personal credit, $30,000 in the bank, and a track record that included 35 years of experience in his chosen profession. More impressively, his newly minted company—Chesapeake Celebrations Catering—was on a trajectory to haul in $350,000 in revenues over just eight months of operations in 2018. And, after paying himself a salary, he cleared $60,000 in pre-tax profit.
But Frederick’s business-credit profile was so thin that no bank or business funder would talk to him. So woeful was his lack of business credit, Frederick reports, that his only financing option was paying a broker a $2,000 finder’s fee for a high-interest loan.
Luckily, he says, everything changed when he discovered Nav, an online, credit-data aggregator and financial matchmaker.
Based in Utah, Nav had him spiff up his business credit with Dun & Bradstreet, a top rating agency and a Nav business partner. This was accomplished with a bankcard issued to Frederick’s business by megabank J.P. Morgan Chase. Soon afterward, he says, Nav steered him to Kapitus (formerly Strategic Funding Source), a New York-based lender and merchant cash advance firm that provided some $23,000 in funding.
“They led me in the right direction,” Frederick says of Nav. “A lady there (at Nav) helped me with my credit, warning me that the credit card I’d been using had an effect on my personal credit. Then she led me to Kapitus, all probably within a week.”
Now, Frederick has his food trailer. He reports that its total cost—$14,000 for the trailer, which came “with a concession window, mill-finished walls, and flooring” plus $43,000 in renovations—amounted to $57,000. Equipped with a full kitchen—including refrigeration, sinks, ovens, and a stove—the food trailer can be towed to weddings, reunions, and the myriad parties he caters in the Delmarva Peninsula. In addition, Frederick can also park the trailer at fairgrounds and serve seafood, barbeque, and other viands to the lucrative festival market.
Meanwhile, the caterer’s funders are happy to have him as their new customer. The people at Kapitus, to whom he is making daily payments (not counting weekends and holidays), are especially grateful. “Nav provides a valuable service,” says Seth Broman, vice-president of business development at Kapitus. “They know how to turn coal into diamonds,”
Nav does not charge small businesses for its services. As it gathers data from credit reporting services with which it has partnerships—Experian, TransUnion, Dun and Bradstreet, Equifax—and employs additional metrics, such as cashflow gleaned from an entrepreneur’s bank accounts, Nav earns fees from credit card issuers, lenders and MCA firms.
The company has close ties to financial technology companies that include Kabbage and OnDeck, and also collaborates with MCA funders such as National Funding, Rapid Finance, FundBox, and Kapitus. “We give lenders and funders better-qualified merchants at a lower cost of client acquisition,” says Caton Hanson, Nav’s general counsel and co-founder, adding: “They don’t have to spend as much money on leads.”
As banks have increasingly shunned small-business lending in the decade since the financial crisis, and as the economy has snapped back with a prolonged recovery, alternative funders—particularly unlicensed companies offering lightly regulated, high-cost merchant cash advances (MCAs)—have been piling into the business.
And service companies like Nav—which is funded by nearly $100 million in venture capital and which reports aiding more than 500,000 small businesses since it was founded in 2012—are thriving alongside the booming alternative-funding industry.
Over the past five years, the MCA industry’s financings have been growing by 20% annually, according to 2016 projections by Bryant Park Capital, a Manhattan-based, boutique investment bank. BPC’s specialty finance division handles mergers and acquisitions as well as debt-and-equity capital raising across multiple industries and is one of the few Wall Street firms with an MCA-industry practice. By BPC’s estimates, the MCA industry will have more than doubled its small business funding to $19.2 billion by year- end 2019, up from $8.6 billion in 2014.
Bankrolled by a broad assortment of hedge funds, private equity firms, family offices, and assorted multimillionaire and billionaire investors on the qui vive for outsized returns on their liquid assets, the MCA industry promises a 20%-80% profit rate, reports David Roitblat, president of Better Accounting Solutions, a New York accountancy specializing in the MCA industry. Based on doing the books for some 30 MCA firms, Roitblat reports that the range in profit margins depends on the terms of contracts and a funder’s underwriting skills.
The numerical size and growth of the MCA industry is hard to ascertain, reports Sean Murray, editor of AltFinanceDaily (this publication), which tracks trends in the industry and sponsors several major conferences. “So much is anecdotal,” Murray says.
Even so, the evidence that MCA companies are proliferating—and prospering—is undeniable. Over the past two years, AltFinanceDaily’s events, which experience substantial attendance from the MCA industry, have consistently sold out, requiring the events to be moved to larger venues. In Miami, attendance in January this year topped 400-plus attendees, Murray reports, roughly double the crowd that packed the Gale Hotel in 2018.
Similarly, the May, 2019, Broker Fair in New York at the Roosevelt Hotel drew more than 700 participants compared with the sellout crowd of roughly 400 last year in Brooklyn. (Despite ample notice that this year’s Broker Fair at the Roosevelt was sold out and advance tickets were required, as many as 40-50 latecomers sought entry and, unfortunately, had to be turned away.)
The upsurge of capital and the swelling number of entrants into the MCA business has all the earmarks of a gold rush. “Everybody and his brother is trying to get a piece of the action,” asserts Roitblat, the New York accountant.
And there are two ways to hit paydirt in a gold rush. One way is to prospect for gold. But another way is to sell picks and shovels, tents, food, and supplies to the prospectors. “If you can find a way to service the gold rush, you can make a lot of money,” says Kathryn Rudie Harrigan, a management professor and business-strategy expert at the Columbia University Graduate School of Business. “It’s like profiteering in wartime.”
As Professor Harrigan suggests, cashing in on the gold rush by servicing it has parallels across multiple industries. Consider the case of Charles River Laboratories, which has capitalized on the rapid development of the biotechnology industry over the past few decades.
As scientists searched for biologics to battle diseases like cancer and AIDS, the Boston-area company began producing experimental animals known as “transgenic mice.” Informally known as “smart mice,” Charles River’s test animals are specially designed to carry human genes, aiding investigators in their understanding of gene function and genetic responses to diseases and therapeutic interventions. (The smart mouse’s antibodies can also be harvested. “Seven out of the eleven monoclonal antibody drugs approved by the Food and Drug Administration between 2006 and 2011,” according to biotechnology.com, “were derived from transgenic mice.”)
In the MCA version of the gold rush, a bevy of law and accounting firms, debt-collection agencies and credit-approval firms, among other service providers, have either sprung to life to undergird the new breed of alternative funder or added expertise to suit the industry’s wants and needs. (This cohort has been joined, moreover, by a superstructure of Washington, D.C.-based trade associations and lobbyists that have been growing like expansion teams in a professional sports league. But their story will have to wait for another day.)
Rather than being exploitative, supporting companies serve as a vital mainstay in an industry’s ecosystem, notes Alfred Watkins, a former World Bank economist and Washington, D.C.-based consultant: “A gold miner can’t mine,” he says, “unless he has a tent and a pickaxe.”
And in the high-risk, high-reward MCA industry, which can have significant default rates depending on the risk model, many funders can’t fund if they don’t have reliable debt collection. Many of the bigger companies, says Paul Boxer, who works on the funding side of the industry, have the capability of collecting on their own. But for many others—particularly the smaller players in the industry—it’s necessary to hire an outside firm.
One of the more widely known collectors for the MCA industry is Kearns, Brinen & Monaghan where Mark LeFevre is president and chief executive. The Dover (Del.)- based firm, LeFevre says, first added MCA funders to its client roster in 2012; but it has only been since 2014 that “business really took off.”
LeFevre won’t say just how many MCA firms have contracted with him, but he estimates that his firm has scaled up its staff 35%-40% over the past five years to meet the additional MCA workload. The industry, LeFevre adds, “is one of the top-growth industries I’ve seen in the 36 years that I’ve been in business.”
He also says, “People in the MCA industry know a lot about where to put money, but collections are not one of their strong points. They need to get a professional. It gives them the free time to make more money while we go in behind them and collect.”
If repeated dunning fails to elicit a satisfactory response, KBM has several collection strategies that strengthen its hand. The big three, LeFevre says, are “negotiation, identifying assets, and litigation.” He adds: “We have a huge database of attorneys who do nothing but file suit on commercial debt internationally. Then we can enforce a judgment. You don’t want someone who just makes a few phone calls.”
Because business has become so competitive, LeFevre says, he won’t discuss his fee schedule. As to KBM’s success rate, he says no tidy figure is available either, but asserts: “Our checks sent to our clients are more than most agencies because of our proprietary collection process.”
Jordan Fein, chief executive at Greenbox Capital in Miami and a KBM client told AltFinanceDaily: “We work with them. They’re organized and communicate well and they know to collect. They’re on the expensive side, though. I’ve got other agencies that I use that are cheaper.”
Debt-collection firm Merel Corp, a spinoff from the Tamir Law Group in New York, might be a lower-cost alternative. Formed in just the past 18 months to service the growing MCA industry, Merel typically takes 15%-25% of whatever “obligation” it can collect, says Levi Ainsworth, co-chief operating officer.
A successful collection, Ainsworth asserts, really begins with the underwriting process and attention to detail by the funders. “Instead of coming in at the end,” he says, “we try to prevent problems at the start of the process.”
For an MCA firm dealing with an excessive number of defaults, Merel sometimes places one of its employees with the funder to handle “pre-defaults,” for which it charges a lower fee. The collections firm has also built a reputation for not relying on a “confession of judgment.” Now that COJs have been outlawed for out-of-state collections in New York State, Merel’s skills could be more in demand.
Better Accounting Solutions, which has its offices on Wall Street, is another service-provider promising to lighten the workload of MCA firms by providing back-office support. The company is headed by Roitblat, a 36-year- old former rabbinical student turned tax-and-accounting entrepreneur. Since he founded the company with two part-time employees in 2011, it’s ballooned to some 70 employees.
Roitblat does not have all of his firm’s eggs in one MCA basket. His firm handles tax, accounting and bookkeeping work for law firms, the fashion industry, restaurants and architectural firms. Even so, he says, thirty MCA clients— or more than half his clientele—rely on the firm’s expertise, three of whom were just added in June. His best month was January, 2018, when six funders contracted for his services. “Growth in the MCA industry has been explosive,” he says.
MCA accounting work has its own vagaries and oddities. For example, because of the industry’s high default rate, Roitblat notes, a 10%-slice of every merchant’s payment is funneled into a “default reserve account.” And when an actual default occurs, credits are moved from the receivables account to the default reserve account.
Roitblat takes pride that his firm’s MCA work has passed audits from respected accounting firms like Friedman, Cohen, Taubman and Marcum LLP. Moreover, he has helped clients uncover internal fraud and, in one instance, spotted costly flaws in a business model. An early MCA client, Roitblat says, had no idea that “he was losing close to $100,000 a month by spending on Google ads.”
Better Accounting also keeps its rates low. The firm typically assigns a junior accountant to handle clients’ accounts while a senior manager oversees his or her work. “He (Roitblat) does a fantastic job,” says David Lax, managing partner of Orange Advance, a Lakewood (N.J.)-based MCA firm. “They understand the MCA business. And even if your business is small, they can set up the infrastructure and do the work more economically and efficiently than you can. You’d have to create the position of comptroller or senior-level accountant,” Lax adds, “to equal their work.”
Top-notch competence and low rates, Lax says, are not the only reasons he often refers Roitblat’s firm to fellow MCA companies. “The only thing better than their work,” he says, “is the people themselves.”
Whether it’s oil and gas, banking and real estate, construction, health care or high-technology—you name it—lawyers have an important role across nearly every industry. So too with the MCA industry where, as has been shown, there is an especially high demand for attorneys skilled at winning debt-collection cases.
To hear Greenbox’s Fein tell it, a skilled lawyer handling debt collection can write his or her own ticket. A talented attorney, he says, not only retrieves lost money and prevents losses, but enables the funder to “offer the product cheaper than the competition.
“We use a ton of attorneys in 35 states in the U.S. and in Canada,” Fein adds, “and you have no idea how many attorneys we go through until we find a good one.”
Until recently, much of the MCA industry’s success has resulted from a hands-off, laissez faire legal and regulatory environment—particularly the legal interpretation that a merchant cash advance is not a loan. The industry has also benefited from the fact that most credit regulation focused on consumer credit and not on business and commercial financings.
But now, as the MCA industry is maturing and showing up on the radar screens of state legislatures, Congress, regulatory agencies, and the courts, there is heightening demand for legal counsel. In just the past 12 months, California passed a truth-in-lending statute requiring MCA firms not only to clearly state their terms, but to translate the short-term funding costs of MCAs into an annual percentage rate. The state of New York, as has been noted, passed legislation restricting the use of COJs.
Moreover, notes Mark Dabertin, special counsel at Pepper Hamilton, a top national law firm based in Philadelphia, the state of New Jersey is contemplating licensing MCA practitioners. The Minnesota Court of Appeals recently determined in Anderson v. Koch that, because of a “call provision” in a funding contract, a merchant cash advance was actually a loan.
And, Dabertin warns, the Federal Trade Commission, which has the authority to treat a merchant cash advance as a consumer transaction—replete with the full panoply of consumer disclosures and protections—is training its gunsights on the industry. “On May 23,” Dabertin reports in a memo to clients, “the FTC launched an investigation into potentially unfair or deceptive practices in the small business financing industry, including by merchant cash advance providers.”
These pressures from government and the courts will only make doing business more costly and drive up the industry’s barriers to entry. Failing to stay legal, moreover, could not only result in punitive court judgments, but render an MCA firm vulnerable to legal action by their investors.
“It’s inevitable that the industry will evolve,” Dabertin says, and firms in the industry will have to self-police. “They will need to hire counsel and a compliance staff,” he adds. “You can’t just do it by the seat of your pants.”
Lights, Camera, Crypto-Transaction – How a Lending Journalist Raised Millions to Build Magic Lamps Through the Murky World of Initial Coin Offerings
November 15, 2017
This past July, the winner of the Best Journalist Coverage category at the 2017 LendIt Conference Awards, announced that he would be stepping outside of his journalistic endeavors to raise money for a futuristic lamp company. The product, dubbed Lampix, is described as a lamp with a projector, a camera, specifically placed light-emitting diodes (LEDs), and a cloud-enabled computer. On the company’s “Medium” blog, Lampix promises that the product is “designed to transform any flat horizontal surface into an interactive computer.”
The man behind Lampix, George Popescu (whose Lending Times news site competed against and beat out fellow finalist AltFinanceDaily at the LendIt Awards), makes for an interesting case study in alternative finance. That’s because Lampix shunned traditional capital-raising methods by relying on an Initial Coin Offering (or ICO), an unregulated blockchain-based corporate event which is similar to an initial public offering. Rather than purchasing shares, as is the case in an IPO, investors in an ICO receive digital tokens instead of shares. In August, Lampix raised $14.2 million through its ICO*.
Popescu’s name popped up again a few months after the LendIt award on a regulatory blotter in the UK.
In case details published by the UK’s Insolvency Service on August 1st, the agency announced that Popescu was disqualified from serving as a company director.
Mr Popescu breached his fiduciary duties to act in the best interest of Boston Prime Limited (“Boston Prime”) and/or failed to ensure that both Boston Prime, as the regulated firm, and him individually, as the approved person, complied with the Financial Conduct Authority (“the FCA”) rules and guidance.
$6.2 million was transferred out of the company to a company named FXDD. Boston Prime’s receiver is presently suing FXDD seeking the return of the funds to the company. Proceedings are ongoing. Mr. Popescu is not under investigation and there are no legal proceedings at this time against Mr. Popescu.
It’s an inauspicious beginning for someone financing the “lamp of the future” using an unregulated and controversial strategy. Even so, when its ICO concluded on August 19, Lampix declared its gambit a success after raising $14.2 million through the sale of its digital tokens, which are known as PIX.**
By mid-November, the market value of those digital tokens, which exist on the Ethereum blockchain, had dropped by 50%, causing Lampix investors to suffer losses of $7 million. Unlike shareholders in publicly traded companies, token buyers have few investor protections. It’s not clear they are even considered to be actual investors at all. Buried in the fine print of Lampix’s 85-page “white paper” – a convenient way to avoid the label of prospectus – is a disclaimer. “Buyer should not participate in the [PIX] Token Distribution or purchase [PIX] Tokens for investment purposes. [PIX] Tokens are not designed for investment purposes and should not be considered as a type of investment.”
Additional disclaimers, moreover, declare that the white paper is not a prospectus, that the tokens “are not securities, commodities, swaps on either securities or commodities, or a financial instrument of any kind.”
But the distinction has not deterred people from joining in the frenzy of buying digital tokens like PIX. So much so, TechCrunch reports companies employing this strategy had raised nearly $800 million by means of ICOs in the first half of 2017.
And the SEC is not exactly excited about ICOs. “Fraudsters often use innovations and new technologies to perpetrate fraudulent investment schemes,” a July 29 directive by the SEC states. “Fraudsters may entice investors by touting an ICO investment ‘opportunity’ as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors should always be suspicious of jargon-laden pitches, hard sells, and promises of outsized returns. Also, it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.”
On September 29, moreover, the SEC brought an enforcement action against REcoin Group, charging Los Angeles businessman Maksim Zaslavskiy and two companies he controls with defrauding investors “in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds,” an SEC press release said.
The SEC alleges that Zaslavskiy and his companies –REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) — have been selling unregistered securities, and that “the digital tokens or coins being peddled don’t really exist.”
Meanwhile, telephone calls and an e-mail to the SEC seeking the federal regulator’s view on Lampix’s ICO drew a terse response from Ryan T. White, a public affairs specialist, who replied that the agency would “decline comment.”
Deborah Meshulam, a partner in the Washington office of law firm DLA Piper and a former SEC enforcement official, told AltFinanceDaily: “Regarding the lack of equity ownership, Lampix is seeking to establish that the tokens are not securities. Whether the SEC would agree should it decide to look into the offering depends on the facts and circumstances. The SEC staff would look past form to substance to assess whether the sale of the tokens constitutes an investment contract under legal standards. If so, then the SEC would view the Lampix offering as a securities offering. It may be that Lampix (or its lawyers) already vetted the offering with the SEC but I don’t know the answer.”
Popescu tells AltFinanceDaily in an e-mail interview, “We had to respect all securities rules and regulations of course, respect the Howey test and so on. There were no hoops to jump through as we are not trying to avoid anything or prevent anything. We honestly built a token to build a community to help us crowdsource (mine) pictures for all applications among which, Lampix.”
“Each PIX token,” the Lampix website explains, “will be used as a form of payment to picture image miners, voters and app developers or to purchase a Lampix, cloud computing and apps.”
Meshulam also notes that the June, 2017, date of the Lampix white paper pre-dates the SEC’s enforcement activity in this area. She adds, “The statement that ‘token sales or ICOs are not currently regulated by the U.S. Securities and Exchange Commission may be very literal in the sense that there is not a specific regulation, but the SEC has stated that, in the right situation, ICOs are subject to the US federal securities laws.”
Erin Fonte, an attorney in the Austin, Texas, office of Dykema Cox, and the leader of the firm’s regulatory & compliance group, says, “The ICO stuff is so up-in-the-air. The SEC is looking at it closely. But it’s fairly new. And some of them (ICO’s) have been tied to fraud and Ponzi schemes. If a client came to us (seeking advice), we’d want to vet the people behind the offering.”
But what of Lampix, the company that won the Augmented and Virtual Reality category of the South by Southwest (SXSW) Accelerator Pitch Event earlier this year in March – and put a pretty feather in the cap of Popescu?
Popescu’s resume is no doubt impressive. He holds a trio of master’s degrees in various scientific and technological disciplines, including one from Massachusetts Institute of Technology. And he is a serial entrepreneur who lays claim to having founded 10 companies: they include, according to his LinkedIn profile, online lending, a craft beer brewery, an exotic sports car-rental space, a hedge fund, a peer-reviewed scientific journal, and a venture-debt fund.
He’s charmed journalists like Forbes contributor Roger Aitken, who declared: “The founders (of Lampix)…believe that Lampix will impact humans as much as computers or smart phones in the future…Think Tom Cruise in Minority Report. Imagine your room in five years: you will be able to use any surface around you as if it was a computer. The ability to transform any surface into an interactive computer (augmented reality) is going to unleash applications we have not even conceived of.”
The Lampix website hyped its ICO with the aid of an infographic listing “active product inquiries” the company has in its pipeline, the likes of which includes Amazon, Apple, Samsung, Microsoft, Sony, IBM, BMW, Bloomberg, PwC, and the Aspen Institute. With all of these names seemingly lining up, it begs the question: Why did Lampix choose the controversial route of an ICO to raise capital?
But it’s hard to determine the seriousness of these corporate relationships. Florin Mihoc, Lampix’s Strategic Partnerships & Development Advisor, said he could not assist us with confirming any of them, citing the slow and cumbersome bureaucracy of dealing with Fortune 500 companies. He did invite us to try reaching out to some of them on our own, which we did.
Bloomberg is one of the few acknowledging a relationship with Popescu’s company. Chaim Haas, head of innovative communication at Bloomberg, told AltFinanceDaily that the New York-based media and financial communications company “collaborated” with Lampix. Bloomberg, he says, “has used Lampix hardware in its fellowship program (Bloomberg AR Fellows) as a prototype for augmented reality applications.” But Haas declined to elaborate on whether Bloomberg’s relationship with Lampix was more than an experimental one.
Edward Caldwell, director of public relations for East Coast markets and sectors at Pricewaterhouse Coopers, the Big Four accounting firm, declined to comment about Lampix. “We can’t discuss individual companies, clients or engagements,” he reports.
Douglas Farrar, senior manager for communications and public affairs at the Aspen Institute, told AltFinanceDaily that he could find no business relationship between Aspen and Lampix. “I have gone down quite a few rabbit holes here,” he said in an e-mail, “But I’m coming up empty.”
When Popescu was directly confronted about this, he wrote, “The companies would only figure [in the infographic] if they actually themselves reached out to us and we exchanged emails with somebody from that entity. Most of these entities have many people and most of the companies’ people will have no idea [that] somebody else in the company is talking to us.”
Telephone calls and e-mail requests for comment to Microsoft were not returned.
A spokesperson using BMW of USA’s official twitter account, however, responded to an inquiry by saying they were a customer of Lampix, “but only for office usage.”
Meanwhile, George Popescu has been on the sales trail. A case in point was his October 5, Youtube interview conducted by Ian Balina, a self-described influential investor in blockchain technology and cryptocurrency – and someone with a reputation as an industry promoter and evangelist. (Balina caters to the get-rich quick crowd and publishes how-to guides trumpeting promises like “How ICOs can make you a millionaire in 3 years” and “make millions with bitcoin.”)
Balina asked Popescu the softball question, could he show viewers a demonstration of the product? Popescu admitted he wasn’t prepared to do that and when he attempted to set one up on the fly, it didn’t work. The incident is notable because Lampix has been promoting the video through its social media network.
Popescu corroborates a number of details about the ICO, however. He confirmed the ICO price of a PIX token to be 12 cents, the US dollar price people had to pay per token. Cryptocurrency exchanges, where token speculators can buy and sell tokens online, show the trading value of a PIX token currently hovering around 6 cents, which translates into roughly a 50% loss in value.
Investors feeling hurt by such a loss can’t contest the purchase of PIX tokens with their credit card issuers. That’s because of a requirement that token sales had to be purchased with ether (ETH), the currency of the Ethereum blockchain. While ether is arguably similar to Bitcoin, it operates on an entirely different blockchain.
To participate in the ICO, in a Youtube video, Lampix also explained to purchasers, for example, how they could first buy ether with dollars through an online exchange known as Coinbase** before forwarding the ether to a digital wallet. Next, investors were instructed to send the ether from the digital wallet to a specially designated PIX address. An automated “smart contract” would then release the appropriate amount of tokens to the buyers’ digital wallets 31 days after the ICO was consummated.
It’s a byzantine procedure. And for investors – especially for those who are not exactly tech-savvy – the rigmarole makes it nearly impossible for them to recover their money should they feel buyer’s remorse. Neither the video nor the Lampix white paper mentions any buyer restrictions. Indeed, Lampix’s white paper specifies that “anyone” in the global market can participate. That means that an investor could theoretically be underage or a citizen of Iran or North Korea. (When asked what steps Lampix took with regards to KYC/AML, Popescu said, we “implemented the standard ones with partners specialized in it.”) Investors could even be citizens of the UK where Popescu is banned from being a company director.
And global they are. AltFinanceDaily interviewed Rudy (whose last name we are withholding), a graduate student who lives in Singapore that says he bought approximately $2,200 worth of PIX tokens during the ICO. The drop in value has gotten him so frustrated that he’s contacted securities regulators in the United States to investigate Lampix. Despite the caveat in the white paper that tokens are not an investment and should not be used for investment purposes, Rudy said he considered himself to be an “investor” and that his reason for buying the tokens was to sell them in the future for a profit.
Popescu, who wasn’t asked about Rudy’s experience specifically, told AltFinanceDaily that Lampix is not selling PIX tokens as an investment but rather to primarily build a community. “What people do with the tokens is their choice and we cannot prevent them,” he asserted.
English is not his first language but Rudy said, “I think that [the] SEC should regulate ICOs in the USA. There are no rules currently, teams can promise anything before the ICO and forget everything after the ICO. Things have to change, there should be legal pressure on crypto teams.”
Rudy added that he was “so enchanted” by Lampix’s ideas that he had promised himself not to sell the tokens for at least two years even if they were losing value. He conceded that he was not a tech expert. But, he says, the award at the SXSW competition was an important milepost to him.
AltFinanceDaily found 700 more people interested in Lampix on the company’s official Telegram channel. The chat history since September 20, which we were able to obtain, has been dominated by talk of the PIX token’s trading value. Those bemoaning the low price regularly use the term “investors” to describe themselves – never mind that the white paper specifies that PIX tokens are not supposed to be an investment or to be used for investment purposes.
The chat’s administrator, who uses the nickname Chester, identifies himself as a “community manager” at Lampix. At one point he too refers to PIX holders as investors. “Hey guys,” he wrote in the channel on October 1, “Lampix is a company, not a single person, we don’t do things that quick, but pretty quick and we try not to confuse our investors by telling you unconfirmed news. Be patient, things will be just fine.”
Laura Toma, another community manager for Lampix, responded to complaints about the depressed price in the channel by saying, “The issue is that people want to get rich in a month.”
Indeed, investors hound not only the community managers, but also Popescu himself, who frequently joins in on the chat and fields questions about the trading price of PIX. “You should care more about the company revenue, clients, users.” Popescu replied to one user.
“Are you serious?” a user calling himself Dante fired back. “We are investors, and we care about the return on investment.” Another user with rough English tells Popescu, “As you know, most people come to ICOs for short-term profit. We cannot deny it.”
Others keep the faith. “PIX will be the real Aladdin’s magic lamp,” writes one user. Another hyperbolically predicts the price will “fly out of the earth, fly to the moon, and finally fly out of the galaxy.”
There is very little discussion about the use of the product itself while numerous inquiries are written in Mandarin. “Lampix has a lot of Chinese investors,” writes one. Other users self-identified as citizens of Russia, Romania, and France. Meanwhile, Toma writes, “Yes, there are investors from USA as well.”
Despite the losses that investors have so far experienced with Lampix, among other concerns, Popescu isn’t limiting himself to just one ICO. According to his online statements, Popescu is connected as an “advisor” to another company engaged in an ICO. AirFox, a Boston-based start-up launched by two Google alumni, provides free data to mobile phone users in return for eyeballing advertising. In early October, Airfox’s ICO raised $15 million. But a month later its AIR tokens, which sold for two cents apiece during the ICO, had lost 75% of their trading value. That means investors in AIR, the company’s ICO ticker symbol (which is becoming an increasingly ironic moniker) have seen more than $11 million go up in smoke almost overnight.
Popescu says in their defense, “The AIR tokens are meant to solve a real problem, of remunerating people who watch ads in exchange of getting more data and minutes on their mobile phone. The ecosystem is still being worked upon, the product is not live. Once the ecosystem is live we will see what really happens. Until then the token is mostly being handled by speculators. The price can therefore vary widely and it doesn’t reflect their true value.”
Even as Lampix and AirFox have been racking up massive losses for investors, Popescu announced on November 5 in a LinkedIn post that he would be involved in five more ICOs.
Among them is DropDeck Technologies, at which Popescu is listed as the chair of the advisor board; its ICO is scheduled for November 21. Another company, Factury, for which he is listed as an advisor, is initiating its ICO on December 15.
He’s an ambitious man.
And his ICO familiarity hasn’t escaped the scrutiny of PIX investors. “I find it strange that you are directing 5 other ICOs,” writes one user in the Telegram chat on November 4. “To make Lampix big, this will require a CEO [who is working] full time working on the project.”
Popescu responds personally. “I am working full time on the project but people have asked me to advise on their ICOs and this grows Lampix’s notoriety a lot in the crypto space,” he writes. He offered further assurances that he wouldn’t be advising those companies’ projects beyond their ICOs.
In an email to AltFinanceDaily, he writes, “I run right now Lending Times, Lampix and Block X Bank only. The ICOs are just customers of Block X Bank. I have built about a dozen companies in 9 years, sold a few, closed a few. Each company has a team to help me, I am not doing this alone. For the ICOs I am more or less involved as an advisor / helping them project-manage their ICOs. How to run 3 companies? It’s about being effective, organized, delegating, partnering and being productive. Oh and I don’t watch TV, so maybe I have a few more hours per day than the average person. I do work long hours.”
Block X Bank, through which Popescu extends his efforts toward other ICOs, is described on the company website as “a boutique investment consulting company specializing in connecting blockchain projects with funding.”
In all of these ICOs, money is seemingly being created out of thin air. A consultant who was hired by AltFinanceDaily to help analyze the technical aspects of both ICOs and smart contracts determined that Lampix raised much more than just the $14.2 million in token sales. In addition to the 114 million PIX tokens sold to investors, our consultant explained, the company also issued 220 million tokens to itself. At the ICO price of 12 cents apiece, those tokens would theoretically be worth $26.4 million – a huge piece of the total ICO pie that Lampix could sell on cryptocurrency exchanges if it wanted to rake in even more money.
There’s a kicker too. At scheduled intervals over the next four years, the smart contract that made PIX tokens possible in the first place is slated to automatically create – and allocate – 330 million new tokens to Lampix. Thus, when Lampix raised $14.2 million in August, the company reserved $66 million worth of PIX tokens for their corporate use.
Popescu said in his e-mail to AltFinanceDaily that these company tokens are for “corporate usage like employee incentives, M&A, other company investments…etc.”
It’s a mind-boggling sum of money for the development of a futuristic lamp whose followers mostly seem to reside on internet chats like Telegram, reddit, and bitcointalk.org.
And this has occurred despite the company’s withholding any information regarding Popescu’s status in the UK. Balina, who interviewed Popescu on Youtube, told AltFinanceDaily he wished he had known about his disqualification in the UK. “This is definitely a big issue and I wish I would have known about it so that either my audience or I could have asked him this directly on the live stream,” he said.
AltFinanceDaily asked Paul Savchuk, Co-founder, CEO, and Chief Product Officer at Cryptocurrency Capital LLC, a US-based hedge fund that only invests in utility tokens as commodities, if Popescu’s ban in the UK would have been relevant information in the Lampix ICO. “Yes, that might be a red flag for us in some cases and require us to perform additional research,” he wrote in an emailed response. “We look at management very seriously – especially since a lot of projects are treated like startups and management is a key component to whether or not many of these ICOs can make it. We try to find such events and spot red flags whenever we conduct our due diligence research on ICOs. The reason: each project has something that needs to be improved. ‘Red flag’ – sometimes conversely can lead to a great opportunity when other market participants ignored it or were too skeptical.”
Mr. Savchuk further said, “Lampix is a perfect example of a coin that on the surface looks very promising, but when you dig a little deeper, you do find red flags that can dampen the excitement for this investment.”
And yet Savchuk spoke rather positively of the Lampix product after reading their white paper. “We believe the project is looking to change the current AR/VR tech industry,” he said, referring to augmented reality/virtual reality. “The project is promising for two reasons. First, they have multiple companies in their pipeline. Second, they have a legitimate product which they will manufacture and sell. They are one of the few blockchain products to offer a tangible product with the ability to disrupt the market.”
“Third,” he went on, “most companies have gaps in building a strong structure at the outset of their existence. Some have bugs in initial code that cause breaches in cybersecurity. Others release product with a low level of usability – the ones who are aware of such problems have a greater chance of success. We would prefer to see publicly known strengths and weaknesses of such companies. Management has to be transparent about their team and product no matter what. Whenever possible, we want to be in touch with the management team.”
With regard to the price drop, Savchuk said, “This is a danger for all purchasers of ICOs. Sometimes it’s caused by token purchasers (swayed by) fear and greed and (hoping for) easy money and fast money. I doubt somebody sold Apple Inc.’s stock right after its IPO. It is also very difficult to restrict exchanges from allowing massive pump and dumps. That’s not even mentioning the difficulty of measuring the value of tokens,” Savchuk concluded. “Consequently, such projects are struggling with low credibility. However, it also creates a possibility for those who believe in the idea and product on a long-term run.”
Popescu downplays the significance of the UK issue. The root of the debacle, he says, is the result of Boston Prime – the company he previously ran – being forced into bankruptcy by the actions of a company he is now suing called FXDD. “FXDD bought the companies and then bankrupted them and that’s why Boston Prime [went bankrupt],” he writes. “Myself personally and each company separately are suing FXDD for this. UK has archaic laws where if you are a director of a bankrupted company you get disqualified from being a director again for a time. Attorneys charge about 40,000 GBP to defend this automatic case and I weighed the pros and cons and decided to ignore it as I have no plans to be a director in the UK for time being.”
Investors unhappy with underperforming ICOs may be willing to challenge their legality. On October 25, for example, a class action lawsuit was filed against Tezos, a computer networking project that raised $232 million in one of the largest ICOs ever. In a complaint, the lead plaintiff alleges that, among other things, Tezos unlawfully engaged in the unregistered offer and sale of securities and fraud in the offer or sale of securities. “In July 2017, Defendants conducted an ICO in which they sold 607,489,040.89 tokens (dubbed ‘Tezzies’ or ‘XTZ’) in exchange for digital currency worth approximately $232 million at the time,” the complaint reads. The plaintiff, who purchased 5,000 Tezzies, feels he was misled about the company and the offering.
Internal squabbling at Tezos which has delayed the release of its product and the sheer amount of money at stake have put the company on the map with the mainstream media and business press. The New York Times, Wall Street Journal, and Fortune as well as news services Reuters and Bloomberg have all covered the allegations of fraud.
The day before the class action lawsuit was filed, moreover, a AltFinanceDaily reporter attended an explosive session at Money2020 in Las Vegas that saw Tezos co-founders, Arthur and Kathleen Breitman, attempting to give a status report of the company. A crowd that had gathered outside prior to the doors opening had attendees speculating whether the Breitmans “would actually show their faces” in the midst of all the drama.
To date, no lawsuits have been filed against Lampix despite the drop in the token’s value.
At a cryptocurrency/ICO meetup in NYC in October, a AltFinanceDaily reporter met with executives at one company preparing an ICO who said they would not allow American investors to participate because of securities-enforcement fears. Pressure is mounting in the Far East as well. Citing their illegality, Chinese regulators in September issued a blanket cease-and-desist order on all ICOs in their country. What that means for Lampix’s Chinese investors bears watching.
Popescu says that Lampix supports regulation in China. “Of course, all Chinese people have to follow Chinese regulation,” he writes.
Meanwhile, on the product front, Popescu says that right now a Lampix lamp can be purchased for $10,000, a tidy sum because they must be hand-made. “We plan to improve the manufacturing costs and then we’re planning to do a kickstarter early next year for around $500 [per] Lampix,” Popescu told AltFinanceDaily in his e-mail interview.
But for investors, it always comes back to the trading value of PIX. On October 25, one investor asks Popescu if the company will buy back its own PIX tokens at the ICO price to pump up their market price. “If you want a pump and dump please go to other companies,” Popescu responds. “We are here for 5-10 years to build a $100 billion dollar company and compete with Apple.”
And it all began with an ICO.
“ICOs also help with bootstrapping the user base – breaking the chicken and egg problem,” Popescu also explains in his e-mail to AltFinanceDaily. “In addition, given that Lampix is looking to crowdsource images, we prefer many different people hold PIX tokens rather than 2-3 VC funds. And last but not least I think tokens are better rewards for the community (liquid, mark to market, etc.) than illiquid instruments.”
Not everyone agrees that PIX is the most liquid instrument to grow the community. US Dollars come to mind, for example. “Let’s say I’m a customer,” one investor poses to Chester, a Lampix community manager. “I want to use the cloud computing service but then I see I have to pay with PIX. I have no experience in crypto and have no idea how to do that. I just want to use your service fast and don’t want to buy PIX coins first before I can make use of it. Will there be a fiat option?”
Chester is awed by the idea. “Well, you are so professional,” he writes. “Man, you are good. You are good, the question you threw just hit the spot seriously. I guess there is always something Lampix needs to figure out and choose the best solution. Technically speaking they are jolly good at this point, but it doesn’t mean it’s perfect.”
Chester, who assures him that he isn’t being sarcastic, goes on to refer to the investor who asked that fairly elementary question as a “big shark” that is “born to bite.”
It remains to be seen if the PIX “user base” shares the same philosophy as Lampix. Ian Balina, who interviewed Popescu on Youtube, separately asked his social media followers: “What’s the first thing you’re going to do once you hit your goals in cryptos?”
The responses fly in:
“Buying my Lambo”
“Travel to Paris”
“Buy an island”
“Buy my mum her dream home”
“Quit my job and start up something for me”
“Pay off mortgage and be financially free”
“Buy house in Miami, buy Lambo, enjoy life”
“Retire”
“Easy. Buy more crypto”
Meanwhile on Telegram, where investors continue to engage Lampix management on a daily basis, Dante offers a sobering reminder of what they’ve bought into, “We don’t have equity, we only have tokens,” he writes. “And we are taking a big risk.”
* The amount of tokens sold multiplied by the 12 cent ICO price doesn’t exactly match the dollar amount Lampix says they had raised. That’s because Lampix not only issued bonus tokens to buyers at each stage of their ICO but also because the market value of ether, which users had to convert to from dollars to buy PIX, had fluctuated when they reported how much they raised. Like Bitcoin, the value of ether is volatile.
** The smart contract Lampix wrote to launch Lampix’s tokens into existence specifically named them PIX tokens and dubbed their publicly identifiable symbol to be PIX.
*** Coinbase is a respected digital currency wallet platform based in San Francisco.
Balance Letters, Payoff Letters, And Not Letting Go
June 10, 2016
The following is a guest-authored opinion piece on the business financing space
Everyone is struggling to keep their head above the water. Just imagine the scene in the movie Titanic. Currently we are in the scene where they zoom out to show the ship sinking slowly with more people in the water trying to survive than on the ship. “Never letting go” is something everyone is doing and clinging on to whatever floats is the only way to survive. The decline in submissions and quality of funded deals is one aspect that many Funding Companies are realizing. No one is letting go of a piece of their portfolio without a fight.
For many A/B paper (for those who go by the grade system) or the Prime to Sub-Prime, 1st position companies know what I am talking about and it’s time to come clean on the truth and the real perception of why things are the way they are.
You can’t get that payoff letter because that Funding Company does not want to let go of their good paying Merchant. Whether the funding was originated from a Broker or organically, that Business is in bed with that funding company and did not have any intention of breaking a relationship until the option was brought to their attention. Whether this Merchant was solicited by another Broker or the Merchant decided to take it upon themselves to seek additional funding, there is one thing that will most often happen.
As soon as the Funding Company receives a request for a payoff letter or balance letter, they will ask why it is needed or delay the process in releasing one or not give one at all until the Merchant is 100% positive and the reasoning and demand is final. Is there anything wrong with this?
To a Broker? Yes. To a Business Owner? No. As many Brokers will fight and try to justify the circumventing of their Merchants, in this case, this is not circumventing at all. The Business has a contract with the Funding Company and until they have a zero balance, that Funding Company has the right to review their account and offer additional funds or discounts to keep their business. This is how it is with any company. Try calling your cable company to cancel your service. What do they do first? They transfer you to the reconciliation department to try to appease you, offer you free or discounted features, and find out what they did wrong or what company you are switching to. Companies are always trying to improve their service and give their clients the best experience.
Throughout the years, if the original Funding Company could offer a better rate or term than what the competing offer is, it has always been in the best interest of the Merchant to continue with that original Funding Company. It is NOT in the best interest nor is it ethical to put the Merchant in another position that will hurt the business or “double up” contracts to equal an amount if ONE company cannot adhere to the request. “Stacking” by offering a second position is one thing, squeezing in as many positions is another, and over time it has hurt many 1st position Funding Companies.
Fast forward to now, the rise in funded accounts that have “defaulted” may have fallen victim to the promises of something better. There is no one educating or clearing the air that there probably isn’t something better… but that advice won’t make anyone commissions and those Funding Companies still rely on Brokers to bring in submissions.
There has been no recourse on this issue, rather growth, and those who have paved the way have found their path covered in dirt. Stomping in this path are other funding companies who have adopted practices from veterans but feel the need to set hierarchy to something they can’t control.
So, with that said, who really sets the rules to what is fair when we are all walking on egg shells? The cost of acquiring a customer and the cost of losing one is an expensive and tricky loss. It is safe to say that once a Merchant is stacked- there is no going back. Should ethics rule over the choices and fate of a Business? Should we put more emphasis on realistic expectations before and after a Business is funded?
A simple request for a payoff letter can open a can of worms. The underlying factors of the difficulties companies face in our industry are all brought upon by the decisions we make when working with each Merchant. At the end of the day you have to ask yourself- am I helping or am I hurting the Business?
Google Culls Online Lenders – Pay or Else?
March 15, 2016Can you become one of the biggest or most successful online lenders without Google? A search layout update may be inadvertently culling the herd.
In late February, Google eliminated ads from the right side of the page while adding another layer to the top and bottom. When factoring in features like site links, the effects on organic search has been devastating. Non-paid links are now entirely below the fold for many commercial keywords, which means users may limit their selections entirely to ads. Here’s an example of a full screen browser window on a Macbook Air when searching for Business Loans:
Brad Geddes, a Google Adwords marketing author, expert and consultant, has said the Click-through rate (CTR) on this new 4th ad placement is skyrocketing. “Depending on the keyword, position 4 is going to have a 400%-1000% CTR increase,” he said on Webmaster world. And while side links and bottom links were never a huge factor anyway (less than 15% of click-throughs), Geddes believes a consequence of this change is that fewer ad slots means higher cost bids to rank on the 1st page. “Companies with thin margins are going to have a lot of words fall to page 2,” he wrote.
In summary: Fewer ad placements, higher costs per click, decreased likelihood of organic click-throughs.
And the online lending industry is already feeling the burn. Several funders and ISOs on the commercial side have told AltFinanceDaily in confidence that the online lead gen battle has been lost or that they have been temporarily sidelined by the increase in costs. At least one funder is refocusing their efforts entirely on the ISO channel after a horrible experience with Pay-Per-Click.
And it’s not just the costs, it’s the quality of leads, they say. The searchers clicking their expensive ads and running up their bills sometimes literally meet none of the qualifications their ads stipulate. Yet many searchers click anyway, rendering the ads’ carefully scripted messages moot. One study might explain why that is. In it, users spent around .764 seconds considering the first paid search result and a total of only 4.5 seconds scanning the first five results. That’s not a whole lot of time to read each ad, digest them and consider whether or not there’s an appropriate fit.
On one industry forum, ISOs have reported that the cost of acquiring a merchant cash advance or business loan deal from Pay-Per-Click is ranging from $700 to $1,200. “PPC for premium keywords as high as $40 at times. Ugly. Real ugly,” one user wrote. Another user wrote, “It’s not just Adwords that is saturated. The whole market is saturated. Lenders and the onslaught of new brokers are making it tough. Lenders with programs like Funding Circle and Kabbage, and with all the advertising money in the world to burn and get direct traffic.” And still another believes that online ads are simply inviting the lowest hanging fruit. “Internet leads have the highest level of fraud,” said one sales manager.
Notably, many of the top 8 funders are only competing for a limited number of competitive keywords or may not even be running Adwords at all. PayPal and Square for example, focus only on their existing payment processing customers despite being “online lenders.”
It’s too early to tell what effects Google’s ad changes will have on the online lending industry, though a couple of companies who were paying just enough to extract clicks from side ads have indicated the change is for the worse and they have suspended their campaigns.
The natural alternative to paid search, organic search, is seldom discussed anymore as a realistic strategy these days, in part because the rankings might be rigged anyway.
One irony that’s pervasive in the online lending industry is that borrowers are being targeted offline where it’s potentially more affordable. In a discussion thread that garnered 76 posts last fall, ISOs and funders suggested that direct mail, referrals, UCCs, cold calling, radio and even going out and shaking hands, were pegged as “what’s next” for marketing. Pay-Per-Click was only mentioned once and only in the context of it being something that had long ago been made too expensive for small and mid-size companies.
The cost of making these things work might be why so many funders are hoping that brokers can figure it out. “We decided that the best way to grow is to build relationships to avoid the overhead, compliance, training and manpower that a sales team would require,” said Nulook Capital’s Jordan Feinstein in an interview with AltFinanceDaily last month.
With Google becoming even more competitive now though, perhaps United Capital Source’s Jared Weitz summed it up best. “Marketing is getting more expensive and only the ones who can afford to pay can play,” Weitz said.
CFPB (and others) Not Amused By Quicken’s Push-Button Mortgage Ad
February 9, 2016Is Quicken in the right place at the wrong time?
Imagine a world where you could get a mortgage at the push of a button. And then imagine like literally pushing that button while you’re sitting in a dark auditorium watching a magic show. As the magician saws a woman in half, you agree to a $400,000 loan payable over 30 years. That pivotal moment, according to Quicken’s vision for American prosperity, will lead to a “tidal wave of ownership” that will flood the country with new home owners.
Consider the implications of that commercial on its own merits (or watch it below of course) and then imagine watching it after you’ve just seen The Big Short in theaters. Given that the movie is a true story about the build-up of the housing and credit bubble in the 2000s that led to a near catastrophic global collapse, a mortgage “tidal wave” might not be the best way to describe your new mobile app.
After Quicken’s push-button mortgage commercial aired during the Super Bowl, the Consumer Financial Protection Bureau responded on twitter:
When it comes to #mortgages, take your time, ask questions and #knowbeforeyouowe. https://t.co/UUaGyWDbzk
— consumerfinance.gov (@CFPB) February 8, 2016
While the mortgage process shown on TV looked overly ambitious, a Quicken customer service rep who I chatted with while posing as a borrower, said that it really can be all done online, even if the mortgage was for like $600,000. When I inquired about what documents I’d need to provide through that process, I was told all I needed to do was state the address of the home.
A no-doc process?
According to the Wall Street Journal, “borrowers can authorize Quicken to access their bank and other financial information directly, eliminating the need for sending pay stubs, bank statements and tax returns back and forth.” So there’s still documents, they’re just electronic and retrieved via APIs.
Having scanned the process, there is clearly more than just one button to push (I counted 9 steps), but it may actually be possible to get a mortgage while watching a magic show. Apparently a lot of people on twitter don’t think that’s a good thing:
Thanks Rocket Mortgage for thinking the '08 housing crisis needed a sequel
— Wyatt Rasmussen (@Wyatt_Rasmussen) February 8, 2016
Let's start another financial collapse. #RocketMortgage https://t.co/7CkBTGJRPD
— Turney Duff (@turneyduff) February 8, 2016
My kid was playing with my phone and bought 7 houses. I can return those right? #RocketMortgage #SB50
— Tim Murphy (@TimMurphy104) February 8, 2016
Rocket Mortgage: explaining the 2008 financial crisis in one commercial
— Rahul Vedantam (@RahulVedantam) February 8, 2016
This commercial is making an excellent case for a massive real estate bubble. It worked awesome in 2007. #RocketMortgage
— Ben Shapiro (@benshapiro) February 8, 2016
Meanwhile, Rana Foroohar, Assistant Managing Editor and Columnist for Time and Global Economic Analyst for CNN, argued that the backlash is unfounded. “No, the Rocket Mortgage Ad Is Not the Sign of Another Financial Apocalypse,” was the headline of her Time story published on Monday. Her evidence? Nobody can afford a mortgage anyway so there’s nothing to worry about, she basically says.
Private equity firm Blackstone has become the largest buyer of single family homes in the country over the last few years. […] Most ordinary Americans need mortgages to buy real estate; at current housing prices and incomes, it would take a typical family more than twenty years to save even a 10% down payment for a home plus closing costs. But they can’t get the loans, because in our post-crisis world, banks are still keeping credit tighter than usual. Besides, many individuals simply don’t have the secure employment, nest egg, and increasingly high credit scores needed to obtain a mortgage these days.
– Rana Foroohar
http://time.com/4212259/rocket-mortgage-super-bowl-ad/
See? There can’t be a bubble brewing because nobody can possibly qualify.
So when Quicken makes wildly provocative sales pitches like this:
Push Button. Get Mortgage. https://t.co/UzOXYFF25C#RocketMortgage 🚀🚀🚀
— Quicken Loans (@QuickenLoans) February 8, 2016
What they’re really apparently trying to say is that the process for those that qualify is supposedly more transparent and therefore better for borrowers:
.@CFPB We agree. No better way than #RocketMortgage for full transparency into mortgage options & info needed to make the right decision.
— Quicken Loans (@QuickenLoans) February 8, 2016
Of course, it probably doesn’t help when their legal help page is titled “legal mumbo jumbo.”
Quicken CEO Bill Emerson tried to clarify the message of the commercial to the WSJ. “What we’re saying is that a strong housing market filled with responsible homeowners is important to the economy,” he said.
Don’t worry about the mumbo jumbo folks, just push button, get mortgage.
—
What do you think? Is Quicken walking down a slippery slope?
Who’s On Your Fantasy Funding Team?
September 14, 2015
A few years ago, a friend of mine was dropped by the funding brokerage he worked for and put on the waiver wire. He was promptly picked up by a competitor and today ranks among one of the top closers in the industry. It was one of the strangest moves of the season because his numbers had been really good month after month. It turned out that he was turned loose for earning too much money, something the firm wasn’t content with.
Even though he was compensated on a commission-only basis, he was apparently putting the company over their salary cap. That of course begged the question, why was there a compensation cap for a top performer, somebody who was directly leading to the firm’s growth? For what it’s worth, he was entitled to approximately 20% of the company’s gross commission revenue. So on every deal funded the company took home the other 80% of the commission. This worked for both parties until the closer started earning well into the six figures, at which point they told him he wasn’t allowed to earn more than a certain amount.
Although discouraged by the sudden limitation, he continued to work hard to prove why the cap should be removed. It wasn’t. Soon afterward he found himself on the waiver wire.
He was replaced by two rookies fresh out of college who were willing to do the same job for a lot less, but neither had any experience in the field.
As someone who has been active in this industry for nearly a decade, I’ve watched this scenario play out dozens of times.
- Firm needs top talent to grow
- Firm hires Talent
- Talent produces
- Firm grows
- Firm doesn’t like that Talent is making so much
- Firm fires Talent or Talent quits
As the firms gallop off to the next scouting combine to find somebody younger and more malleable, the pool of experienced talent is dispersed across a sea of competitors. A consequence of this is that each of those companies become more evenly matched and it becomes increasingly difficult to stand apart from the crowd.
At trade shows and happy hours, it’s not uncommon for top players to openly question what would happen if they all joined forces to create a funding dream team of sorts. And while such cohesion rarely actually happens, I can’t help but imagine if given the opportunity to build the best team to win, who I would pick.
Top talent is expensive. I know this because I recently spent 89% of my budget in a fantasy football auction draft to acquire just three players. And last year I spent a similar percentage on only four players and won the entire league. My thought process was to build a team that was centered around the best of the best. Previous years of conservative play led to mediocre results and I wanted to change that.
Today, there are hundreds of alternative business financing companies and thousands that can be considered brokers. There’s a lot of decent teams out there but few that are built around a group of all stars. And oddly, some companies seem to be dumping their best and brightest on purpose, just like I described previously. That might lead to improved margins for the firm, but probably won’t help them win in the long run.
Here’s something to think about while you’re watching Monday Night Football. If you had to build your company around a core group of talented people, who would you pick? Don’t worry about whether or not they’re available or if they fit into your budget. Those are obstacles that can be overcome.
Here’s a list of positions to help you imagine your fantasy funder:
- 1 Senior Manager
- 2 Underwriters
- 2 Closers
- 1 Flex Spot
- 1 Admin
- 1 Collector
- 1 Tech Person
Good luck!
