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HOUSEKEEPING 📨

In Christopher Nolan’s famous The Dark Knight, Harvey Dent quoted the line, “You either die a hero or live long enough to see yourself become the villain.” I am becoming increasingly certain every day that Silicon Valley, and the technology industry in general, is becoming the villain. Between the fears of artificial intelligence, Elon’s heel turn, Andreessen’s smugness, Y Combinator funding gutter trash, prediction markets gambling, OpenAI sex slop, Meta’s rubbish AI feeds, presidential shitcoins, and the general lack of decorum from some of tech’s elite, I think the world is turning and tech.

I feel like this is now what tech is supposed to be. Tech is how the world progresses. It’s how we all live happier, healthier, and generally fuller lives. But honestly, we are losing our way. Or maybe I am a Pollyanna, and we really lost our way a long time ago.

What I do know is that it doesn’t have to be that way. The formula is simple: 1) don’t be a piece of shit, and 2) fund and build things that are positive, that we need, that will move the world forward. Degeneracy is a choice, one that we do not have to accept. Anyway, enjoy today’s piece!

ZERO TO ONE 🌱

Mike Cagney, Co-Founder & CEO at Figure Markets

Mike Cagney is a serial entrepreneur and fintech pioneer, serving as Co-Founder and CEO of Figure Markets and Executive Board Chair of Figure. After working as a trader at Wells Fargo in the 1990s, he founded Finaplex (acquired by Broadridge) and Cabezon Investment Group (a global macro hedge fund) before attending Stanford Business School. In 2011, Cagney and four Stanford classmates co-founded SoFi to lower loan costs. As CEO, he raised a record $1 billion from SoftBank, helping turn the company into a fintech giant valued at over $4 billion.

In 2018, Cagney co-founded Figure Technologies with his wife, June Ou, to build blockchain-based financial products. Under his leadership, Figure became the largest non-bank HELOC lender and processed over $50 billion in blockchain transactions, reaching a $3.2 billion valuation by 2021. His vision to “displace trust with truth” has driven innovations like Provenance Blockchain and Democratized Prime. Figure recently filed confidentially for an IPO, while Cagney, now Executive Chairman, focuses on Figure Markets to open institutional-grade financial tools to everyday investors.

Tell me about what you’re building? It seems like it’s the AWS of financial services?

I think it's consistent with that direction. Our firm belief is that blockchain is a generational transformational technology for capital markets. That belief is rooted in blockchain's ability to displace trust with truth. When you displace trust with truth, you create a paradigm that allows you to overhaul everything in markets—from trading to financing.

We see three pillars of the value proposition. The first is transactional efficiency. On the lending side, we've reduced over 100 basis points of costs through the origination, aggregation, and securitization of loans using blockchain technology.

The second pillar is liquidity—the ability to run marketplaces with certainty. For example, we run regular loan marketplaces where our origination partners (we have over 170 of them) can access capital markets directly through bid-wanted-in-competition or offer-wanted-in-competition auction processes. The combination of knowing for certain that the loan is authentic on-chain and knowing its history, performance, and prepayment information allows those loans to trade real-time as digital assets. This has never happened before. The only liquid marketplaces for loans have been Fannie Mae and Freddie Mac mortgages. Through blockchain, we've brought that liquidity to the market, which has been a huge benefit to our partners.

The third pillar is financing. Because the asset is on-chain, because I can get direct security and perfected interest in it, and because I can liquidate it directly, I don't have to trust that a custodian is holding the asset or worry about double pledging. This opens up direct asset-based lending, where I can assess liquidity and volatility to determine my risk as a lender.

This really unlocks tremendous value by connecting sources and uses of capital directly. You can see this on platforms like Aave, where there are approximately $8 billion in stablecoin deposits. I can borrow against crypto there at around 6.5%. In wholesale capital markets, if I were to go to Cantor or someone else, that loan would cost at least 9.5%, possibly more.

Why is DeFi more efficient? It's a Pareto condition where both parties are better off. The lender is better off because they were getting nothing before, and now they're getting five or six percent. The borrower is better off because they're not paying all the overhead of banks as capital allocators. Banks aren't efficient capital allocators, even though that should be their role. There's huge overhead that you pay for as a borrower. By directly connecting sources and uses of capital, you unlock something really unique and efficient that benefits both sides. That DeFi construct is the most powerful part of blockchain, which is why we created Democratized Prime.

What was the initial idea? Why did you see HELOC as your wedge?

At SoFi, one of our key objectives was to establish a direct connection between capital. The idea was to connect student loans with alumni from schools where those students graduated, in a way that offered greater value than a bank or the government as the lender. The challenge was we were a victim of our own success. The loans were so popular that demand far outstripped the speed at which we could raise capital from the alumni community. We went to wholesale capital markets and took a different trajectory.

When I was thinking about what to do next, I was considering blockchain. I'd always given lip service to Bitcoin and talked about it as great and wonderful, but I never really had the aha moment.

I said, "This is going to change the world. It's going to change how all financial services work."

We wanted a tangible use case. Of the three value propositions—transactional efficiency, liquidity, and financing—the market initially accepted only the first one. So we focused on transactional efficiency. I went to banks early on and said, "I think you can originate, aggregate, and securitize loans on blockchain and save 85 basis points of costs." In a 600-basis-point gross revenue business, that's huge. Universally, every bank said, "This is great, we love it. We'd like to be the tenth bank to do this." No one wanted to be a first mover.

I wasn't looking to build another lending platform after SoFi, but I knew that's what we needed to do. We had to de-risk this and be the lender ourselves, with the expectation we could bring others in later. In picking a lending category, I wanted something as greenfield as possible because I didn't want to compete with SoFi in personal loans or others in mortgages while trying to convince the buy-side and sell-side to use blockchain. That was too big a lift.

That's why the first loans we did in 2018—the first consumer blockchain loans native to blockchain—were HELOCs.

Was the idea always much larger, with HELOC as a necessary stepping stone?

Yes, it's a means to an end. We aren't a HELOC company—we're a blockchain company. We initially started by originating HELOCs on blockchain, but we now offer a range of other loan types on blockchain.

_{*Note: The chart below is from Figure’s site and may not be up to date and current by the time you read this, so check here for current rates.}

The key is that those three value propositions—transactional efficiency, liquidity benefits, and financing—are equally extensible into things like equities. For example, Figure just went public. One thing I intend to do now is bring a second equity native on blockchain—not a DTCC security.

But most importantly, I want to bring it onto Democratized Prime because I want people to first be able to borrow against that stock in an open market—borrow to buy Bitcoin, borrow to buy Figure loans, whatever they want.

Second, I want them to control the borrowing of that stock. Today, when I buy stock on any app like Robinhood or Schwab, the street holds that stock and controls the stock loan. They're lending that stock out to short sellers and earning the premium. I want to empower the individual to do that. I want them to control the stock themselves and lend it directly. That's what you can do in Democratized Prime. You can say, "I've got this stock and I'll lend out 100 shares at 8% or 18%," and that benefit accrues directly to you.

That really ties into this democratization construct—bringing what historically has only been available to hedge funds through prime brokerage to any investor.

Who was on the founding team, and why did you choose them?

The most important co-founder I had was June. June built all our technology at SoFi and ultimately built all of our technology at Figure. She also built Provenance Blockchain, which is the public chain we operate on.

The reason she ended up having to do that was that, at the time, proof of work was still the predominant blockchain, and proof of work is very challenging in financial services due to its speed and predictability. Proof of stake was coming online, along with other permutations like proof of history for Solana, but the issue was that they acted like open data sets. If you put a loan on a proof-of-stake network, the whole loan went on the network and was available for everyone to see. What we needed was a way to obfuscate things like customer information and social security numbers—all the things we had to hide.

Provenance gave us the ability to do that. So, June ended up building Provenance Blockchain for us, and her team—which consisted of a significant portion of the core engineering team at SoFi that accompanied her to Figure—were instrumental in building this out.

I had a host of other folks like Cynthia Chan, Alain Aldegna, and others who were important as part of that founding team, but June was critical to it.

What was the best thing you did in the very early days?

When you're an entrepreneur, you always balance raising money versus dilution and all the challenges that come with that. I had a particularly memorable moment at SoFi, where I raised a billion dollars from SoftBank—the largest private round anyone had ever secured at the time. I didn't want the billion dollars; I wanted to raise $200 million. Masa basically said, "You're going to take the billion or I'm not giving you anything."

It was one of the most significant changes that altered the business's trajectory, providing us with the balance sheet capability to take risks and do things our competitors couldn't. It's a big reason why SoFi is what it is and LendingClub is what it is—they're different businesses, but I think a lot of that was rooted in some of that decision-making. When we started Figure, we were fortunate to have a decent valuation as repeat entrepreneurs. We initially raised $70 million, which is a substantial amount for an A round, but it made sense given what we were trying to achieve. It bought us a lot of runway and got us to a point where, when we raised capital again, we had demonstrated enough to do it at a significant valuation boost.

But even before that, what was most important: when we built SoFi, we never really thought about the culture of the business. Everyone talks about culture being important. We were very meritocratic, maybe to a fault. We just hired the very best people we could find and didn't really care how they fit organizationally or culturally. In hindsight, that was a mistake and had some negative repercussions.

What I did with the founding team at Figure before we even started the business, before we had raised money, was literally spend over a month just talking about what we wanted as an organization in terms of cultural norms—how we wanted to treat each other, customers, employees, and investors. We tried to build something that made sense and was genuine enough that we could live up to. If you try to build cultural norms that aren't part of your beliefs, they're going to be very difficult to adhere to.

That mattered a lot and helped tremendously in the beginning—getting everyone aligned and moving really fast. What I discovered was that you're better served with an aligned organization than one with superstars who are at odds with each other.

How do you decide what to build, partner on, or buy?

I think we've always had the most success building organically. Some of that is because so much of what we do is greenfield. It wasn't that there was another large RWA player in the market when we came into the space. We kind of pioneered that asset category with $50 billion of transactions and continue to innovate on that front. So it's not that we have an aversion to buying or partnering—we partner with tons of people in the loan origination process. We partner with credit bureaus, valuation companies, title services, and lots of folks who are integral to that process, where it makes much more sense to use their services than build our own.

But in terms of the core technology, it's partly because of how greenfield what we do is, but also because we're building into a much larger vision in terms of how all these pieces fit together.

If the end game was being a HELOC company, that could change a lot of decision-making around technology. But if the end game is changing how capital markets work, that necessitates a little more heavy lifting and doing these things yourself. Even if first-order, they aren't the most efficient way to do something; second-order, they get you where you want to go long-term, so it can make sense to do that.

How important have partnerships been to Figure's success?

Some of our early partners—and you could call them customers, but I would call them partners because they were integral in building the product out and integral in being early adopters—like Guaranteed Rate, for example, which was one of the largest mortgage companies in the U.S., was an integral early partner for us and still is a very important partner for us. Those were critical because they gave you market acceptance, they gave you invaluable product feedback, and product direction. They set the standard in terms of what you needed for your support organization.

Had we not gone the business-to-business-to-consumer route, Figure would look very different today and nowhere near as big and nowhere near as fast growing. Those early partners were critical in helping us unlock that market and build that trajectory.

What is the North Star metric you check daily?

It's loan transaction volume in the marketplace and TVL, and that will expand into other metrics over time. We're trading upwards of $100 million a day in that marketplace of RWAs, and there's nothing else that looks like that out there. We're very focused on continuing to bring more real-world assets on chain and feeding them into the liquidity and ultimately into the financing side of the business.

So it's in $10 million increments right now—we bring another $10 million of assets on, we get another $10 million of investment interest, and we just go back and forth. That will start accelerating, and I think the size of the Democratized Prime marketplace will become just as important to us as the volume of transactions very quickly.

What was the most difficult period you’ve been through?

We had a situation early on, after we'd done the first $500 million of loans, where an outside law firm came in and said, "These aren't actual HELOCs. You didn't do them right." It's like, "Okay, well, what am I going to do at that point? I've done $500 million of loans, and I have to buy back $500 million?" Of course, we had done them right, and we worked through that relatively easily.

I think COVID was one of the most difficult things because it fragmented the workforce. It forced this remote-first construct, which was challenging for us. I don't think we've figured either side out perfectly yet—we're still hybrid office-remote. That really slowed things down initially in terms of the pace we could move, with everyone separated and everyone having concerns about their family and other issues that were more important than the business. But I think we rebounded from that relatively quickly and ultimately benefited from the macro side of that.

That was a real challenge in building a business. We were only two years into it when the lockdowns happened. A two-year-old startup is just figuring out its DNA, and having everyone remote, where no one can see each other, introduced a lot of challenges.

What was the key driver that made Figure the largest non-bank HELOC lender?

It goes back to when we were at SoFi, and we would sell personal loans to institutional buyers. We'd always come across someone who'd be like, "I don't get this. I don't get why this borrower is taking a personal loan because they own a home. They have sufficient income, sufficient credit. They own a home. The home's got 65% loan-to-value. There's plenty of equity cushion there. Why are they taking a personal loan instead of a HELOC?"

The answer was pretty simple: because a HELOC takes 45 days and a personal loan, we got it down to a couple of minutes at SoFi. It was just incomprehensible, especially for people in finance, to get their arms around that. One of the things I learned very early on at SoFi was how irrational people can be about the value of their time. We figured out early on that we couldn't get someone to refinance a student loan unless they saved like $6,000. It would take 20 minutes of total work, and nobody was making $18,000 an hour. But still that was the threshold to get people to lean in and do it.

We knew we could do a HELOC just as quickly as we did a personal loan. We knew that would actually create a positive credit signal because if I took a personal loan at 18% versus a HELOC at 10%, that says a lot about the borrower if they could take either one.

As a result, we came to market with a five-minute product, and that was the crux of the success. Then very quickly pivoting from direct-to-consumer to business-to-business-to-consumer, where we went to our partners and said, "Look, you can use this product," and took away the capital market risk from them—the ability for them to sell loans. That was then the second leg of that growth that really accelerated.

What keeps you up at night?

One of the biggest things that keeps me up is that there are so many things we should be doing. It's an issue of prioritization and what the opportunity cost of doing X over Y is. If you asked me this question last year, I'd say the regulators, because last year we were in a very different world where the SEC was using enforcement as a policy tool. That was extremely disconcerting. I was particularly always worried: "Am I going to wake up with an arrest warrant?" Fortunately, that didn't happen.

Now that we don't have to worry about that as much—and obviously we have a good relationship with regulators and try to stay very aligned with them—the biggest concern I have is: I always think about the path to success as being sort of this Plinko ball where you don't know what the path is. Are the things we're focused on the things that are going to get us there the quickest, or are we missing something that someone's going to be able to leapfrog in front of us? I stress about that a lot.

A good example right now is we're very focused on credit, and the Robinhoods of the world and the DTCCs are pushing out this whole notion of tokenized equities. I think the way they're doing tokenized equities won't work. I wrote a tweet about that—a long tweet—and got some witty responses from some of the CEOs of those companies. I think it's challenging.

But I could be wrong. Perhaps they're seeking exemptive relief from the SEC in a manner that I didn't. Maybe they're going to get a path to bring equities on-chain, where they get the true value and benefit of blockchain. Maybe it was a mistake for me not to lean into that. Currently, I have a high degree of conviction that that process won't yield the expected results, and lending is yielding the results we anticipated. As I said, I think we will lean into equities, but we're going to do it in a different way—not tokenizing a DTCC security, because I don't understand why you need blockchain for that, but instead doing a blockchain-native equity.

Why IPO now? What will Figure be known for in the future?

Just like we have a Magnificent Seven of Web 2.0 companies, I think we're going to have a Magnificent Something of Web 3.0 companies. I think Figure has a really compelling story and a great narrative. I believe we'll be part of that group. I think being able to get out and tell that story and narrative as to why blockchain matters, why public blockchain matters, and how it is changing the financial ecosystem—even today, where people don't have as much visibility to it—is an incredible opportunity. We want to lean into that. The public forum gives us that ability.

As for the future and what we will be known for, I think the average investor will associate us with Democratized Prime. It's leveling the playing field for lending and borrowing in a way that the market has never allowed before. And not just for things like crypto, but for any digital asset class. I think what we're really trying to do is bring DeFi to the masses, and in doing that, you can't limit yourself to crypto. You've got to open it up to any digital asset. I hope that's where we make our biggest mark.

And that’s it! You can follow and connect with Mike over on LinkedIn and Twitter, and don’t forget to check out Figure Markets’ website.

BRAIN FOOD 🧠 

TWEETS OF THE WEEK 🐣

TOOLS WE RECOMMEND 🛠️

Every week, we highlight tools we like and those we actually use inside our business and give them an honest review. Today, we are highlighting Paddle—a merchant of record, managing payments, tax and compliance needs—we use their ProfitWell tool.

See the full set of tools we use inside of Athyna & Open Source CEO here.

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