Jason Guss is the co-founder and CEO of Octane Lending which offers a point of sales financing and insurance platform for niche consumer markets. The company has raised over $100 million from IA Ventures, Contour Venture Partners, Valar Ventures, FinTech Collective, Third Prime, Berenson & Company, and Rider Insurance to name a few.
In this episode you will learn:
- Realizing their business idea was broken just weeks after raising their Seed round
- The importance of building a partner agnostic business
- Realizing that failure is usually a catalyst for the best progress for your business
- How to respond to failures
- One thing he wishes he would have invested more in at the beginning
For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400 million (see it here).
Remember to unlock for free the pitch deck template that is being used by founders around the world to raise millions below.
About Jason Guss:
Jason Guss is the CEO and Co-Founder of Octane Lending, a point of sale financing platform focused on niche secured consumer lending markets.
In his role, Jason Guss leads lender strategy and VC outreach. Jason Guss began his career as an intern at Wiggio in the Summer of 2010, creating advertising campaigns for Cambridge.
Jason Guss then became an Equity Analyst at New Amsterdam Partners, an asset management firm. Following his Time at New Amsterdam Partners, Guss started working at Capital One in September of 2012 as a Strategy Associate. Jason Guss was in charge of developing and analyzing competitive strategies for products, including automobile loans, wealth management, and brokerage business.
In 2011, Jason Guss co-founded Raven Ridge Capital, an event-driven Hedge fund. Their portfolio was notable for trading high volatility events with binary options. The company automated their trades, completing 350 trades over the span of months.
Jason Guss was featured in the Forbes 30 Under 30 (2018) in the Big Money category for co-founding Octane Lending.
Connect with Jason Guss:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello everyone, and welcome to the DealMakers show. Today we’re going to be learning quite a bit about lending; we’re going to be learning about how you shift resources when there are some unexpected events, just like what we have been experiencing with COVID. So, without further ado, I’d like to welcome our guest today, Jason Guss, welcome to the show.
Jason Guss: Thank you so much for having me.
Alejandro: You are originally from Palm Springs in California near LA, so a resort town. How was it growing up there?
Jason Guss: Growing up in Palm Springs was a great experience. I was able to have a very close-knit group of friends. In Palm Springs, there aren’t any universities in the area. It made me not afraid to leave my comfort zone and move far away from my home for college. Actually, upon graduating from high school, I moved to the East Coast for Yale University, and I’ve been there ever since.
Alejandro: It’s amazing because on the West Coast, you have amazing universities, so why the East Coast.
Jason Guss: Yeah, it’s interesting. Even though Palm Springs is technically part of California, it actually feels more like Arizona. It’s the desert. It’s very inland and far away from where most of the larger universities are in California. For me, it was something where I was ready to get a complete change of scenery and totally leave my environment.
Alejandro: Very cool. Obviously, when you went to college, the entrepreneurial thing comes knocking, and I know that you were doing some hedge fund stuff with the roommates, so tell us about this.
Jason Guss: Absolutely. In retrospect, it probably seemed doomed to fail from the start, but it was a phenomenal learning experience for me. A couple of friends and I were obsessed with The Big Short book with the concept in there that effectively binary events, mispriced options couldn’t be incorporated into [3:19]. We came up with a trading strategy that we found compelling where we tried to take advantage of options or what we perceive to be options, mispricing due to companies facing binary events. Effectively folks on three sets of opportunities. One was pharma announcements. Pharmaceutical companies tend to be very volatile, and they also face what’s called PDUFA, which is approval for a drug, and usually, it’s the make or break for a company. You basically model out with the value of the contract would be successful, and you would also be able to understand what the impact to the business would be if they either got delayed or actually was declined by the FDA. So, we used to put on straddles and strangles, different options positions to try to isolate the volatility – kind of go long-vol on those types of events. We also looked at earnings announcements, and then also, companies facing restructuring events or regulatory actions. We launched that business from our dorm room. We pulled some cash that we had saved from summer jobs and also our signing bonuses for the jobs that we had locked up when we were seniors. We ran that strategy ahead of taking our real jobs at fall. The reason why it was such great experience – it ended up not working. Trading strategy didn’t scale, and we didn’t have a concept that in order to run a real business, you have to have large scale. We thought, “Well, maybe we could build this out to be 10 million under management, 15 million under management, and we more or less got laughed out of rooms. But what it taught us is – it was our first experience pitching real business ideas to people who fund those businesses. I learned a lot of how I pitch my company today from those – what I would argue were very low-quality pitches I was doing for the fund-to-funds and other folks who could fund [5:23].
Alejandro: What was the key insight in pitching, especially for the folks that are listening and are thinking of fundraising.
Jason Guss: The number one learning out of it is, you need to talk to lots of different people. You’re going to get a ton of noes before you get a single yes. Then once you get a yes, everything is easy because people who were telling you previously, “We’ll use it as credibility that you’re a real entity,” and then they’ll start saying yes. The most interesting insight was, talk to as many people as possible. The number two most interesting learning that helped us was that your pitch is going to evolve over time, so the tactic that I would do is I would have a list of people who have agreed to speak to me. I learn a little bit about their firms to try to understand who is most likely to want to go forward with this business idea. Then I would reverse rank order with them. So I would talk to the people who I thought were least likely to work with me first because I knew that my pitch is likely to get better over time. I would go through a pitch. Every single time I got a question that I didn’t know the answer to or every time I felt that an answer that I was giving was weak and insufficient, I’d make sure and make a note of it. Then I would make sure the next time I pitched, I had those answers ready or refashioned. So, by the time you get to the fourth, fifth, sixth pitch – there’s an exhaustive list of questions that people typically ask you when you’re fundraising. It really enabled me to not only fine-tune the equity deck and pitch decks that I put together, but also my overall presentation.
Alejandro: Got it. After the hedge fund experience, then you land in Capital One, which was your segue into the entrepreneurial thing, like doing what you guys are doing today with Octane Lending. Tell us about this segue because this experience for you was probably a great experience to shape the way you were looking at things, and this led you to calling people and to come up with different concepts and trying to fund them. So, tell us about this.
Jason Guss: Absolutely. Capital One was a great learning place for me. I worked in Corporate Strategy, which was their inhouse consulting arm. We would do similar projects to what you’d be doing if you were working for, say, Bane, or something along those lines. It taught me how to think through business problems and think through solutions, and then also continue to help shape the way in which I pitch ideas. Effectively, through the pitches with business leaders, you’re trying to convince them to do something new or something different or change something that they’re doing when you have not necessarily the same level of experience or time under your belt as they would. So your pitch really needs to be compelling, and it needs to address the concerns of the people that you’re talking to. So really helping me understand how to dissect business problems, and also how to communicate the solutions. It’s something I picked up from Capital One. Effectively, the genesis story for our company is, I was staffed on a project in Seattle. I had dinner with a friend of mine, and the two of us were talking about how we were interested in starting the company that was in an overlooked market, so not traditional venture capital space, and something that lacked existing institutional investment but also solving a real business problem. It turned out that a co-worker who also became my co-founder had done a rotation in the PowerSports Lending Group. Powersports are motorcycles, ETBs, jet skis, snowmobiles, and those sorts of things. Although the financing process was relatively similar to auto in that consumers purchased these powersports units from dealerships, and then most consumers financed their purchases. None of the lender aggregators that the finance managers who were helping consumers get their loans had any real penetration, so finance managers would apply one at a time through various web portals – very inefficient and tedious. So there was an opportunity that he had discovered to build out used technology to more or less make it fast and easy to apply to various lenders to help consumers get the best rate in the fastest way possible. While we were having dinner, I remembered that this inefficiency had existed, and I had worked a lot in auto where things are much more efficient. I flagged this as a very interesting business opportunity that we wanted to explore. I quit my job a few weeks later and moved out to Seattle, and at the time, I was 23 or 24. We had this interesting powersports idea, but we weren’t necessarily fully ready to commit to it just yet. Ahead of just jumping into this business, we wanted to see if there were other ideas out there that might be interesting. There were a couple of Stanford entrepreneurs who had sold the business for three-quarters of a billion, and they came up with their business problem because they were pain and problem-focused entrepreneurs as opposed to passion for entrepreneurs. You have some people who found a company because they love that thing, and that’s how they discovered the issue and how to add value. There are other people who narrow in on an unsexy industry or unsexy business problem and narrow in on a true business pain that they’re not necessarily passionate about. They’re passionate about fixing the problem, not necessarily the problem and the industry that it’s in. I always thought that was a very interesting concept in the way in which they came up with it is, they went around and just started interviewing people for months. To try to find a business problem, they ultimately stumbled on the problem that ended up becoming their three-and-a-half-dollar business. We thought the version that we could do was to call people off our college alumni network. The three questions that we came up with that we thought would facilitate the best conversation to find a true business problem may not – I truly recommend this for anyone who wants to start a business is, 1) What do you hate most about your job? The reason why that question is interesting is if you hate something about your job, there’s generally a business problem that, if solved, people would actually pay for. 2) We asked, what are the biggest inefficiencies in your market? It was always interesting to hear what people within an industry see as the biggest problems. 3) It’s great to solve a lot of problems, but ultimately you need a customer segment that supports you in some way, so the third thing we would ask is, what would you pay me to build for you? Usually, if someone is willing to pay someone to build something for them, it’s truly a problem that they’re facing at work. So we talked to all sorts of people. We talked to CEOs of power plants. We talked to folks in private equity. We talked to people who worked at the largest newspapers in the country, people who worked in paper mills, retail, and all sorts of different people. We came up with a list of five ideas that we thought were interesting, where we thought there was a real business problem that we thought we could actually solve with our expertise and execute on and with a reasonable amount of capital that we could raise. In addition to the powersports idea, we more or less applied for incubator funding for all of them. Ultimate, Dream Adventures, which was the incubator that we did, picked us up for the powersports idea. In retrospect, knowing what I know now and how much I’ve learned about how to raise capital and running a startup, I’m very thankful that the powersports idea got picked up because it was definitely the most compelling. But, at the time, we took this approach where we let the capital that we raised help give us the credibility for going after a few business ideas that we thought were equally compelling.
Alejandro: Got it. So then, what happened next?
Jason Guss: Similar to what many entrepreneurs experience in an incubator, it’s like you have more or less three months to live or die, and you live by raising your capital. You die if you don’t raise capital, and you do something different. So we set out some milestones that we needed to hit to get a term sheet for a seed round by the time we left our incubator. We were fortunate enough to have found an insurance company that understood the business problem that we were solving in our market. A lot of the problems that we faced were that when we were pitching VC firms, they would like us. They would think the idea we were going after was very interesting, but they would say, “I have no way of understanding this problem because I don’t know this market at all.” So we were going after a market that tends to serve middle America in the south, whereas a lot of VC firms focus on things that affect the coast. So we didn’t really click with a lot of folks when we were first starting. I remember I kept this Excel list of all the people I pitched, and I got over 100 notes.
Jason Guss: Basically, every single person who would talk to me, I would pitch them. We were hustling for introductions. We tried all of our caller’s networks, LinkedIn. Dream had set us up with various VC firms. It was the same story until we met this insurance who knew our business, knew our problem, and said, “Yes. This is a real problem. I know this market opportunity,” and they agreed to make an initial investment in us. That was the credibility we needed to show the VC firms that this was a real problem. We then partnered up with Contour Venture Partners very quickly thereafter, who led our seed round. We closed that in December of 2014. Then, within six weeks of closing that, basically found out that our business case was cracked. Although there was a need to build this aggregator to help finance managers apply to lending sources in one place as opposed to going to various web portals rekeying customer information. That was a need. Unfortunately, though, the sales dynamics for getting lenders on the platform were so unfavorable that there was no real business to be built. The issue was two-fold. One is, lenders who are doing something one way – if they were manual, they wanted to remain manual. They were being successful doing things the way they are, so why would they change the way that they’re doing things? Then, two, the sales cycle for lenders is very, very long, so the chances that we’d actually be able to get enough lenders on our platform before we ran out of capital was very, very low. And there was actually a catalyst to that. We had a lender who is very good on our platform that made up a vast majority of our revenue. It’s probably 70-80% of our revenue was one source. Effectively, I got a call from them, and they were just leaving the market and nothing to do with us. This was in February or March of 2015. It was nothing to do with us. Imagine yourself sitting in a startup office, 500 square feet, six people arm-in-arm on the phones all the time trying to make it work, trying to survive, trying to hustle to get enough traction to get us to the next level. The platform that made up almost all your revenue, your customer that made up most of your revenue, leaves. What do you do? So, I got that phone call, and I hung up. We had all hands. We talked about it, and we said, “Look. We all know that this business model that we’re pursuing lender aggregator doesn’t work, and this is the sign for us to pivot our resources to actually drive the real business values for this market, which is to use technology to power a lender, to serve a space, as opposed to using technology to power a marketplace of lenders. It was that moment that saved the company. If that lender hadn’t left, we probably would have been fumbling along trying to sign lenders for another year, but it would have been longer for us to run out of capital than normal, and we wouldn’t have felt the urge to switch and pivot to where the value is and feel confident enough to dump a business model that we had been building for a very long time and do something totally different that we knew would drive real business value.
Alejandro: That’s amazing. So then, for the folks that are listening, what ended up being the business model of Octane Lending?
Jason Guss: Think of us originally as like Lending Tree. We switched from that business model to be more like a lender itself. The way that our business works today is we own all of our technology, so we own the platform that the finance managers use to close loans. We also own our loan origination system, which is an underwriting platform, and we also own a lender called Roadrunner Financial, which is a wholly-owned subsidiary. Effectively, we use the technology that we build to power that lender to serve the consumers and dealers in our market. We also partner with manufacturers who subsidize our origination flow to help get consumers very competitive rates to help drive more sales.
Alejandro: For a business like this, it’s capital intensive. You were alluding to the amount of capital and the investors that you got on board. How much money have you guys raised to date?
Jason Guss: We raised over 120 million in venture capital. We’ve also raised several hundred million in debt capital, including a 211-million-dollar securitization we completed last year.
Alejandro: That’s interesting because, obviously, this is like a completely different structure from the traditional SaaS business or startup that maybe the listeners are used to hearing about. When you’re on the lending side, you need money to fund the operation itself, not the actual execution of the business. Walk us through this type of structure. How does that work?
Jason Guss: If you’re a bank, you could just use your deposits. If you’re a nonbank lender, you have three options. You could do what’s called the whole loan sale. You originate a loan, and then you sell it to someone else. Someone else is providing all of the capital of the loan, and someone else takes the loss exposure as well, and you get paid an upfront fee or servicing spread. The second type is called warehouse lending. Warehouse lending means a bank lends you capital to lend to someone else. The most common example would be you have $100 of loans. A bank will give you 80 cents against that $100, and then you fund the junior $20, and your $20 sits beneath the bank, so you take all the losses before they take losses, which gives them a much more secure position, which enables them to lend to you cheaper than if you went to external borrowers, in which case, you can make a spread on their capital. That’s probably the most common way that lenders will fund their loans because, as a lender, you don’t want to use your venture capital. You want to use as little of that as possible to fund loans because it’s very inefficient. So using debt capital from other sources is a great way to be able to fund hundreds of millions of loans, for example. The third way that you could fund your business is if you use a combination of the first two methods to accumulate a couple hundred million dollars in loans, usually, or more, and you securitize, which means you issue bonds against those loans. Let’s say you have 200 million dollars of loans. You might issue 180 million dollars of bonds against those loans. Usually, you can only do that type of thing once you have sufficient scale, track record, and capitalization because generally, for securitization, although you could do an [unrated 22:13] securitization. You usually want to get the rating agencies involved. In order to do that, you’d have a lot of track record. If you look at the Fintech space, you see examples of all of these. Generally, as you become more mature in a larger company, you will typically use a combination of these three methods to fund your business. So if you look in the market, [22:38], although they use a combination of warehouse-line securitization, whole loans, they started out primarily in warehouse lines and firms. They started primarily with warehouse lines and, ultimately, securitization. Lending Club started out primarily as whole loans. Businesses that do mortgages, primarily do whole loans. You have common bond in SoFi – use a combination of whole loans, warehouse, and securitization. They use a lot of securitization. Those are the examples out there and the different big players. For us, it’s pretty interesting. We needed to raise this debt capital in order to convince our Series A investors that we would be a viable business. Back in 2016, when we raised our Series A, we had the challenge of not only raising the Series A but also getting another 25 million dollars of warehouse line. So I knew nothing about warehouse lending back then, so I read as much as I could. I talked to as many people as I could, and I got up to speed on the topic. Then I did the exact same thing that I did with the equity fundraise. I came up with a list of about 50 firms. I reversed rank-ordered firms based on how likely I thought it was that they would want to work with me so that I could meet the people who were least likely to work with me first because they’d be the least expensive to give up and mess up. I would pitch, and every time I pitched, if there was a question that I didn’t know the answer to, I would write it down. If there was an answer that I would give that I didn’t like, I would make sure that I wrote that down as well, and the next time, I would have an answer for it, and I would pitch a little bit better. I kept going and going, and usually, by about the fourth or fifth pitch, I was able to do very well. Then, six weeks going from not knowing anything about warehouse lending to holding six term sheets. Once we got the term sheets, we were able to use our different offers to work with the different institutions to narrow in on an offer that worked best for us. Effectively, once you have multiple term sheets, it enables you to get the terms that you believe that you deserve and work best for your business.
Alejandro: That’s amazing. How many employees do you guys have today?
Jason Guss: We’re not at about 200 folks. We’re headquartered out of New York City. We have about 70 in our New York office, about 100 in Dallas, and we have a handful in Houston, in Malmö, Sweden for engineering offices. Then we have a handful of remote employees, as well.
Alejandro: There’s one question that I typically ask the guests that come on the show, and that is if you had the opportunity to go back in time, Jason. Obviously, you’ve been at it for a while with Octane since 2014, and you’ve had all types of experiences. But if you had the opportunity to go back in time and give your younger self one piece of advice before launching a business, what would that be and why knowing what you know now?
Jason Guss: There are two things that I think are most important. The two pieces of advice I would give would be, be resilient. As an entrepreneur, as many listeners know and have heard from others, you hit failure all the time. Oftentimes, depending on how you react to that failure, it could be the make or break for your business. Many of our failures ended up being the best things for our business. They don’t feel like it at the time. They feel awful; they feel very painful, but if you’re able to keep running through these brick walls and be able to pivot to the value, you will be able to push your business forward in momentous ways. I look at our initial business, and it didn’t work. The business model was cracked, and when the lender who made up most of our revenue left, we could have looked at it in two ways. We could have packed up our stuff and gone home, but we forced ourselves to self-reflect, figure out where the value in our platform was that people weren’t connecting with, and then change the business to find that value – responding to failure with action as opposed to inaction. We once had a major manufacturer who we thought we were going to pilot with. It would have completely changed our business at the time. It would have been very large for us. The entire company was working on this launch for about 90 days, and the day before we launched, the manufacturer decided to go with another partner. They got a last-minute bid that undercut us, and they went with someone else. We could have chosen to be devastated and kicked the wall and gone back to business as usual, but we didn’t do that. We tried to reflect: what did we do wrong? How can we change this business so that we aren’t leaving ourselves open to this type of thing again? The big thing that came out of that was one of the most momentous things for our company was acknowledging that partnerships are very important and great for our business, and we always want to do great things for our partners, but also acknowledging that we don’t want the business success to be in the hands of another company. Therefore, we started focusing our business initiatives on how can we make it so that we’re partnership-agnostic, so that we’re glad if we get one, but it doesn’t impact business we don’t. It totally changes our objectives and key results, which is how we set our corporate goals, and effectively completely changed the way in which we go about corporate strategy for our business, and it’s driven a lot of the success and growth that we’ve had over the last year. Then the last thing that I’ll say, which was probably the most surprising to me. I was a relatively young entrepreneur when I started the company with my two co-founders, and I had no management experience. I think a lot of other entrepreneurs are similar to me, where we have great ideas, but just don’t have the experience of managing people. So a piece of advice that I give myself is culture in a company really matters and to never be afraid to ask for help as it relates to management problems and managing people because if you don’t get ahead of managing people issues as they come up, you’ll end up taking up an absurd disproportionate amount of your cycles. Not only that, they’re very, very stressful. I’d like to say that we actually had very few stressful business issues, but we’ve had issues where if we would had spent a bit more time and gotten ahead of it and managed situations better, we could have solved a lot of our stressful people interactions. That’s something that I would have never thought about going into starting a company. It really matters that you are able to work through and have a successful culture from the get-go if you can.
Alejandro: I love it. Jason, for the folks that are listening, what is the best way for them to reach out and say hi?
Jason Guss: Shoot me a LinkedIn message or feel free to email me at firstname.lastname@example.org. Anyone who’s looking for advice on raising equity or debt capital, I’m always happy to be a resource.
Alejandro: Amazing. Well, Jason, thank you so much for being on the DealMakers show today.
Jason Guss: Thank you so much for having me.
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