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This past March, Fatburger announced that it raised $40M that included securities issued on Ethereum, marking the first time that Morningstar-rated securities were issued on the blockchain. The one-year-old NYC startup responsible for structuring this deal is Cadence, a securitization platform for private credit. Cadence’s platform has multiple functions that include short-term private credit investment products for retail and institutional investors. Cadence has already facilitated 80 short-term, high-yielding transactions, totaling $125M on the platform
AlleyWatch sat down with Founder and CEO Nelson Chu to learn more about Cadence’s unique offering, future plans, and recent funding round.
Who were your investors and how much did you raise?
We raised a $4M Seed round led by , with participation from Morgan Creek Digital, Nimble Ventures, Argo, Tuesday Capital, Manatt, and Recharge Capital.
Richard “Dick” D. Parsons, former chairman of Citi, also invested through R&R Venture Partners, the early-stage VC fund he launched with Ronald S. Lauder, the current chairman of Clinique Laboratories and a subsidiary of Estée Lauder Company.
Tell us about the product or service that Cadence offers.
We are the leading securitization platform for private credit, and we’re bringing transparency and efficiency to this trillion-dollar market that has struggled to innovate and has been left behind in the broader fintech revolution.
What inspired the start of Cadence?
We saw the rise of alternative assets play out as non-bank lenders emerged as viable sources of capital for borrowers large and small. Both institutional and retail accredited investors sought to find ways to tap into this growing market. In this low rate environment, there are few areas for investors to allocate capital that could offer meaningful diversification from equities. The investment platforms that emerged from this have significant barriers to investment, with high minimums and expensive fees. All of this together made for an unappealing investment experience that we felt we could capitalize on by creating the best alternative investment platform on the market.
How is Cadence different?
When you look at our platform relative to others on the market, we offer a truly differentiated experience. Institutional and retail accredited investors alike have taken to our platform in part because of the unique attributes of our offerings, including shorter durations, meaningful yields and zero fees. The deals we’re able to offer simply don’t exist anywhere else.
What market does Cadence target and how big is it?
Private credit is one of the fastest-growing asset classes in all of the private capital markets, growing at a 20% CAGR since 2000 and surpassing over $1T in size. It is comprised of thousands of VC-backed companies aiming to provide capital to underserved borrowers. These companies are difficult to source and diligence, and that is what has led to over $400B sitting in cash from traditional institutional investors that is waiting to be deployed.
Who do you consider to be your main competitors?
If you look at only one part of our company, for example, our retail investment platform, there are other online platforms that do exist, such as YieldStreet. This retail piece is just one small part of Cadence though, and ultimately if we execute on our vision, there’s no one that can match the breadth and depth of what we do and the sectors of the market we cover.
What’s your business model?
We have a variety of revenue streams from different areas of our platform.
We rely on deal-driven revenues through fees we charge to originators on a per deal basis, but there’s also recurring revenue streams we’re building around the data we’re aggregating and the various software suites we’re building.
What was the funding process like?
We went out to market quietly in the late summer of 2019 to finesse the pitch and better understand what VCs were looking for, especially since that time of year is relatively slow for investment activity. After Labor Day, we went out in earnest to capture investor interest and secure a lead investor. We managed to get significant interest from several of the investors in this round prior to a lead even being secured. In doing so, we were able to approach Revel Partners with a complete story and a group of industry backers already committed, this made it a compelling investment opportunity for Revel to offer us a term sheet late last year. From there, we were able to close quickly and it ended up being a very oversubscribed round, where we had to downsize allocations and leave some investors out altogether.
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What are the biggest challenges that you faced while raising capital?
The private credit and securitization industries are extraordinarily complex, which is why it has been so hard to disrupt this space. Unless you’re involved in this world or have a background in it, it’s not an opportunity that’s immediately obvious or easily explained. Ensuring our story and our vision was clear was something I was hyper-focused on so VCs could grasp the magnitude of what we had already accomplished and just how big the opportunity is in front of us.
What factors about your business led your investors to write the check?
We have an incredible team with 120+ years of combined experience in financial services and a proven model that worked. Though we had just launched publicly in July of 2019, we already had more than $43M invested in 41 offerings by the end of the year, with a substantial portion of that coming from institutional investors. By the time we were out fundraising, we had already succeeded in laying the foundation for an end-to-end securitization technology platform for private credit.
What are the milestones you plan to achieve in the next six months?
In the current environment, it’s tough to put hard timelines on achievements, but we’re adapting quickly to ensure we are offering the best possible experience for both the investors on our platform and the origination partners we work with to source the structured notes. Risk management is paramount and our capital markets team is putting in an even more diligent effort towards ensuring we have zero defaults on our platform. That’s a metric we never want to see increase. On the other side, our institutional business is gearing up for when the private markets open up again and we’re already seeing activity pick up. As a result, we expect to do a few more deals similar to the $40M whole business securitization we did for FAT Brands (NAS: FAT) in March.
On the other side, our institutional business is gearing up for when the private markets open up again and we’re already seeing activity pick up. As a result, we expect to do a few more deals similar to the $40M whole business securitization we did for FAT Brands (NAS: FAT) in March.
What advice can you offer companies in New York that do not have a fresh injection of capital in the bank?
The next few months to a year will be something no one has ever gone through before and now is the time to make hard decisions to ensure the survival of the company. Be nimble, be adaptable, and do anything and everything it takes to ensure the company can weather the storm. Revenue is revenue no matter where it comes from and don’t be afraid to pivot to ensure the company can make it through to the other side.
Where do you see the company going now over the near term?
We continue to believe there are opportunities to grow even in this uncertain market environment. Cadence plays in private capital markets and these markets tend to open up significantly sooner than public markets settle down when using 2008/2009 as a barometer. In addition to our retail accredited investor platform, we have an institutional business that is already going out to market with a few larger deals to gauge demand. Diversifying the sources of revenue is going to be critical this year and we aim to expand beyond just issuance into more recurring revenue streams.
What’s your favorite restaurant in the city?
Carbone
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