Framing Fintech: chatting with Alex Song from Ramp

Alex Song shares his tips on how new lending companies can raise capital

In this new blog series, Framing Fintech, our GM of Fintech, Charley Ma, sits down with leaders in the industry to chat through lessons learned, fintech trends and hot takes.

Alex Song is the Head of Finance at Ramp, the only corporate card and spend management platform designed to help businesses spend less. In August 2021, Ramp shared some exciting news when they secured $300M in new funding, tipping their valuation over $3.9B.

Since launching with Alloy’s Onboarding solution in 2019, Ramp has successfully onboarded thousands of customers, with more than 4,000 businesses using Ramp as their primary spend management tool.

In our first installment of Framing Fintech, Charley Ma chats with Alex Song to discuss his tips for founders raising debt capital for a lending company.

Charley Ma:
To start, can you share a bit about your background, experiences, and your journey to Ramp?

Alex Song:
I started out my career trading mortgage-backed securities. So, I was essentially a bond trader with a specialization in asset-backed securities. I initially worked at a large investment bank and subsequent to that, I worked at a number of different hedge funds for a number of years.

Over the last ten years or so, I gradually shifted focus to more esoteric flavors of asset-backed investing. What I mean by that is I would look for businesses with non-conventional needs, or very early stage, and figured out how to finance them. It wasn’t that different, really, than growth equity investing, VC investing or angel investing. But my focus was always on the debt-side, as opposed to being on the equity-side.

I did that for a number of years and worked with a lot of really cool fintech companies across a bunch of different sectors, like real estate, small business lending, green energy, litigation finance, healthcare. And long story short, that led me to Ramp.

I read about Ramp raising their Series A and I decided to reach out to see if maybe they needed some financing for the balance sheet. I was intrigued by the business — Ramp would have to issue credit cards. I knew that there was the potential for them to really scale, and hence, the need to finance those credit cards somehow. That’s how the conversation started. I fortunately discovered that I had a bunch of connections to people at Ramp. One thing led to another, and I decided to join the Ramp team about a year and a half ago, during the summer of 2020.

MA:
For founders that are building lending companies, how would you recommend they structure their company to be able to start and scale their business?

SONG:
Build things deliberately but also be comfortable with adopting more of an experimental approach, where you give yourself the freedom to make big bets, and where not everything will be perfect. You’ll likely have to originate and service the first batch of loans off the balance sheet and as a result, experience your first delinquency off that balance sheet. Make sure you at least have enough equity capital to support that. You might have to operate this way for the first six months or so. The initial period of experimentation using equity capital is key. There’s no need to get debt capital at that earlier stage. And as you’re doing that, think to yourself, “what happens if the portfolio is 10x or 100x?”

The next step is to raise capital. Go to a venture debt provider or a warehouse lender and get some additional balance sheet.

MA:
How do you decide if you should go out and look for venture debt versus going out and raising a warehouse line from someone like Goldman Sachs?

SONG:
In today's world, raising venture debt can be fairly quick and straightforward, but it’s not very scalable. A number of venture debt lenders will have a natural upper limit to how much they can lend to you. So as you think about scaling, think about how quickly you might tap out of venture debt, and how much time let’s say, $20M dollars, buys you.

If you wanted to go into traditional warehouse lending and get one of these larger lines (say, $75M or higher), there are a few hurdles. The first hurdle is reporting. You need real-time investor reporting on every possible data point that a lender may want to see. Because a lender will always have some ad hoc data request and these lenders tend to be very sophisticated.

The second hurdle is that you basically need to prove to lenders that you have a credible path toward scale. Some of the larger lenders generally need to fund loan pools of larger than, say, $75M in order for the deals to be worth their while. So you need some demonstration of proof of concept, product-market fit, and initial proof of scale.

The third hurdle is its cost, both from a time perspective and a financial perspective. Structured credit deals take longer to close. Venture debt you could probably get done in a month. Whereas, structured credit deals typically take 3-4 months because there’s way more diligence. And with all the added diligence, legal expenses are high as well.

So, you want it to be big enough for it to be an interesting deal and you want to have the time and money for the process. The pros are that the capital can be way cheaper and it’s way more scalable. You can probably go back to them to expand the deal if you demonstrate your track record.

MA:
How do you recommend kicking off discussions for credit fundraising?

SONG:
The front-end of this process doesn’t look that different than a VC process. You may cold call certain folks or you can get an introduction from someone, and you try to see who’s a good fit. You pitch the business model, you tell them about the asset and any performance metrics. Usually, it’s a fairly quick yes or no.

From there, you might have a few conversations going. The deal management process is a little more drawn out than a VC process because it is a market that is dominated by traditional financial institutions. They need to do due diligence, they need to kick it up to their credit committees and get approval, which can take a while, and the diligence tends to be very onerous and quite detailed. There will be quite a bit of back and forth - and it can get quite granular. I remember at Ramp, when we were negotiating our first debt deal, we spent probably 10 days discussing the exact mechanism and timing by which our cashback rewards were recognized, accounted for, and when it would appear on our financial statements.

Then, you’d receive a term sheet which you can try to negotiate, and from there it really just comes down to who you think you can get the best deal with and who has the most flexibility. This is where advisors, board members, and friends in the industry can really help you out with spotting good deals vs bad deals.

After you pick the best term sheet, then the legal and documentation process begins. This process is quite extensive and could take 2-3 months. Deals can break down in this phase, which can be expensive because you’ve spent a lot of time and money on it already to this point. You wouldn’t believe the time I spent negotiating the exact definition of phrases like “Regulatory Event,” “Securitization Event,” and Secured Overnight Financing Rate (SOFR) / London Interbank Offered Rate (LIBOR) substitution language.

MA:
How do you choose your partner? Because you’re doing a bit of underwriting on your side too to pick the right capital partner.

SONG:
For early-stage companies, it probably comes down to how flexible is the capital and how commercial they are. Because you’ll probably have to amend this agreement many times. So, how quickly can they get that done? Do they understand that we are a young business and we may need to change our processes and procedures from time to time?

Branding and pedigree matter as well. It probably is always better to find funding from a bigger name because you can do your own research on them and their capital is more ironclad.

Scalability is important because if you want to upsize a deal it’s great to not have to go out and negotiate a second deal from scratch.

MA:
Were there any lessons you took away from being on the hedge fund side for so many years that you took with you when you started looking for deals at Ramp?

SONG:
Before I started reaching out to investors, I created an exhaustive FAQ document with all the questions that I would want answered if I were making this investment. That way, if an investor came with any of those questions, I already had the answers to them.

I tried to be as comprehensive as possible. That made things a lot easier because there weren’t a lot of times people came in with data requests that weren’t included in that document already.

MA:
What would you tell founders who are building out a capital markets team?

SONG:
Well, Ramp is actually building a capital markets team right now (check out open positions at Ramp here!). At the outset, you want to focus on the analytical portion. You want good data analysts and engineers. You need people who are very fast with data manipulation and can drill down to a 0.5% data discrepancy and figure out what’s going on. You don’t necessarily need a “deal person” right away. Because the deal person is meaningless if you don’t have the data to back it up.

MA:
One last question: do you have any future predictions in the space?

SONG:
From a capital markets perspective, debt financing and venture debt, much like in venture capital-land, will get even more founder-friendly. Over time, negotiating and executing these deals will get cheaper and quicker, both because entrepreneurs will have more expertise, and have a better support network, and because lenders will become more sophisticated and able to take more entrepreneurial risk. And a lot of that comes down to better data automation. This data is going to get standardized over time. Not sure how long that will take, but it’s definitely on the horizon. That will make financing cheaper, more efficient, and easier for founders.