Mike Cagney is the co-founder and CEO of Figure which provides consumer financial solutions intended for home improvement, debt consolidation, and retirement planning. The company has raised over $230 million at a $1.2 billion valuation from investors like DCM Ventures, Digital Currency Group, DHVC, Ulu Ventures, DST Global, Thomvest Ventures, Nimble Ventures, and Ribbit Capital to name a few. Prior to this, he founded SoFi which has raised billions and is worth over $4 billion at the moment.
In this episode you will learn:
- Structuring your business and avoiding dilution
- Creating pools of stock for employees
- How to value your business as you grow and raise
- Why you might want your business to be valued lower than some will offer
- Why focus on profitability
- The social media platforms you’ll find Mike on
- His single most important piece of advice for new founders
- The dangers of relying on term sheets
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About Mike Cagney:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello everyone, and welcome to the DealMakers show. Today, we have quite a serial founder. I think that we’re going to be learning quite a bit on scaling, building, financing, and all of that good stuff. But without further ado, I’d like to welcome our guest today, Mike Cagney. Welcome to the show.
Mike Cagney: Thanks. Thanks for having me.
Alejandro: So originally born in Trenton, New Jersey. How was life there?
Mike Cagney: Well, I was only there until I was five, so I don’t remember that much about it other than the slogan for Trenton was, What Trenton makes, the world takes, which I always thought was a horrible slogan for a city.
Alejandro: So, you moved quite a bit. It was Detroit and then South California. Tell us about this.
Mike Cagney: My dad was in the steel industry, so we moved to Detroit. We were there until I was 13 years old. Then he went to McDonnell Douglas, in Southern California. I had the experience to live on the East Coast, the Mid-West, and the West Coast. It was great getting all those experiences.
Alejandro: How did you get into economics and into all of this good stuff around finance?
Mike Cagney: When I was younger, they were talking to us about careers and what career we wanted to pursue. I looked through all the list of career opportunities. The securities career was the highest paying one, and I had mistakenly thought that meant thoroughly security. I came home and told my dad I wanted to be a security officer. He asked me why, and I said, “Because you get paid the most money.” He said, “I think you’re misunderstanding what a security person does.” He had me talk to one of his friends who was in the financial management space and understood a lot about the markets. I became fascinated with them. When I was a little kid, I actually had a future’s account, traded Hog Futures. Obviously, under my father’s name, but it gave me my first introduction to the markets, and I’ve become hooked ever since. Most everything I do, I try to intersect being entrepreneurialism, technology, but also financial markets, macroeconomics.
Alejandro: Right after school, you went to Wells Fargo, and you were there for quite a bit. You were there for six years. Obviously, you’re like a real entrepreneur. You’ve done it many, many times, but what really got you into — let’s talk about corporate America. What did you get out of that, and how did you start getting that exposure in trading, fintech, and all that stuff?
Mike Cagney: It was a phenomenal experience at Wells. In my first job at Wells, I came in, and they put me in a cube and put me in front of a 3270 green-screen terminal, and gave me about six inches of a COBOL code and Fortran code and said, “This is our derivative system. It doesn’t work. Try to figure out what’s wrong with it.” It was actually a really interesting experience to be able to dive in and figure out how technology was being used for these financial products. I started pushing pretty hard. I have an entrepreneurial spirit, so at that point, it was more intrapreneurial, but around the idea of allowing the bank to cut us some capital for us to build a derivative business. To do swaps and interest rate caps and floors for our customers, rather than laying them offsite back-to-back with the street, and was able to convince the bank to start off with a very small amount of capital. We started building that business up, and it became very effective and generated a good profit. So we had increasing amounts of capital that were applied in increasing scope. We began to handle the hedging for the mortgage bank. We began to hedge some of the asset-liability for the balance sheet, but also more and more customer flow. As part of that, we had some leeway to do some proprietary trading, as well. So we were able to take positions on our own account and had done extremely well, luckily positioned through the Asian financial currency crisis in ’97, the Russian currency crisis in ’98. It was a great run; it was a great experience, but what was happening in the late ’90s was Internet 1.0. I remember one of my senior managers at Wells, saying, “Anyone with half a brain would leave this bank and go start a company.” I said, “Well, I think I have half a brain, so maybe I’ll leave this bank and go start a company.” That was my motivation for my first leap out into the entrepreneurial world.
Alejandro: Let’s talk about that first rodeo.
Mike Cagney: I started an enterprise management company called Finaplex. One of the first things I learned was the importance of naming. Finaplex is a bovine growth hormone, popularly abused in the bodybuilding circuit, but I did not realize that until after I had named it Finaplex and got the URL. So, as I said, it’s like a cow on steroids, I guess. It was an interesting experience, and I learned a lot. What I first learned, when I started Finaplex, I really struggled as a CEO. I was 29 years old. I had raised 50 million dollars from a host of very solid investors. It was a little bit of a challenge for me coming out of a trading environment where the motivation for the folks there is primarily economic into an entrepreneurial environment, a startup environment where there are a lot of motivations and reasons why people are engaged. I struggled a lot. I was probably too young to take that responsibility on, and ultimately, brought a CEO to replace me, and then stepped out of that, for both the oversight and daily operational aspect. We had sold that business to Broadridge. On the back of that, I was able to start a hedge fund called Cabezon. I did that in 2006.
Alejandro: As a fun fact about Cabezon, I’m originally from Spain, and Cabezon tends to be very governed.
Mike Cagney: Yeah, and what it means in Latin America is jackass, so once again, the consequence of my naming conventions. I was talking to some Latin American investors, and the conversation was going very well, but they wanted to ask me something. I could tell there was something that was bothering them. They said, “We like you. We like what you’re doing. We just want to understand why you called your company, jackass.” I said, “I didn’t realize that I had. I thought I called it a fish indigenous to the West Coast of California, that does have a big head, hence its name. Again, another lesson in trying to pick the right name.
Alejandro: Got it. How different was it, for example, this experience with the hedge fund with what you were used to with Finaplex.
Mike Cagney: It was coming back to what I did at Wells, which was running proprietary training and taking advantage of market cycles and heavy macroeconomics. It was a good chance for me to regroup in terms of what I wanted to do and what was important to me. But at one point, having stared at Bloomberg screen for so long, and we traded through the crisis reasonably well, I’m watching the Bloomberg screen blink over and over, and I feel like I’m losing a brain cell every time it flashes at me. I said, “I need to do something back on the entrepreneurial side. It didn’t work out as well as I wanted it to the first time around, so I’d like to figure out how to do it again.” The challenge is, when you’re in the day of an operations hedge fund, it’s hard to carve out time to pursue an entrepreneurial endeavor. Being an entrepreneur takes 100% of your time and effort and focus. So, serendipitously, there was a friend of mine that talked to me about a fellowship program at Stanford where you’d take a year at the Graduate School of Business — a lot of flexibility on the classes that you take. I thought it was a great opportunity to try to address some of the areas that I needed to work on in terms of where I struggled on the Finaplex side, but also find some folks that I could work with to build a new kind of entrepreneurial business.
Alejandro: All right. Well, let’s talk about that experience in Stanford, and also, you coming together and putting the band together for the next business.
Mike Cagney: It was a fascinating experience. It wasn’t so much challenging from an academic standpoint because things like corporate finance and statistics and so forth are things that I’ve been pretty well-grounded in leading up to that. It was more the people there and getting a chance to work with a broad, diverse group of people, tremendously interesting and diverse backgrounds, and thinking about, where is there a significant market opportunity. There was a class that we had called — I think it was Designing Entrepreneurial Opportunities or something along those lines. It was basically your ability to incubate a startup within the graduate school business. The GSP doesn’t like you starting companies at school, but I think they kind of look the other way. In lots of circumstances, they feel it’s going to be something successful. We had a business plan. What was interesting was, the original business plan was leveraging high-quality video on demand. The idea that you could run a marketplace where I could show you how to change a bike tire, or you could show me how to bake a soufflé or whatever it might be where because of the compression and the way the video had advanced at that point, we felt there was a really interesting marketplace for it. We built a proof of concept for it and tested it very early on. It became immediately apparent that people weren’t using it for the intended purposes. We pivoted quickly and decided that we would try to do something in the financial services space as an alternative to traditional banking. The idea at the time, we were looking at all our peers at the GSP and looking at the loan rates they were paying and looking at their career prospects and opportunities and saying, “Look. There’s something not right here that these folks should — there are better credits and the rates that they’re paying, there’s an opportunity here. Shouldn’t we be able to get alumni to invest in a fund to help students out and give them a leg-up when they come out of school? That was the original genesis behind SoFi.
Alejandro: Then, what happened after?
Mike Cagney: One of the interesting challenges and one of the stories about SoFi: we launched the business, originally focused on Stanford Graduate School of Business, but very quickly expanded out to other MBA programs. We had some good early traction on getting alumni to invest in funds that would provide capital to these loans and so forth. It was an interesting experience in that one of my early seed investors had come to me. We had done a Series A. I shouldn’t call a seed, but one of my Series A investors and said, “Look. I think this is a really interesting business, but I think we need some significant capital to hypercharge it. Let’s go to Japan, and let’s raise a bunch of money.” We went to Japan, and we pitched several of the large investors there and came back with what we thought was a significant term sheet. I remember sitting in the Tokyo airport looking at it. It was a 100-million-dollar investment, and I kept thinking they meant yen, not dollars. I was trying to recalibrate and make sure it was actually 100 million dollars. I came back to the U.S. and said, “It looks like we’ve got 100 million dollars of capital. I think we should start lending and opening up the refinancing of student loans, which was a product that we felt was super interesting. If you refinance a mortgage, why shouldn’t you be able to refinance a student loan?” We started going through that process and refinancing those student loans. Midway through, I think at that point, we had committed probably about 60 million dollars of capital refinanced loans. The term sheet that we had ended up going away. We were in a situation where we had 60 million dollars of loan obligations that we had to deliver into, and we didn’t have any cash. It created a very tense moment. We were able to pull together between baseline DCMs, some early investors there, a little over 85 million dollars of capital that we were able to use to deliver in for loan obligations, and to provide operating capital to accelerate the growth of the company. It was a good experience to go through because it gave us a lot of understanding in terms of one, just how fickle that venture space is that you can’t commit. Until you have the money, don’t expect that the money is there. But also, some of the dynamics around how to manage investors, how to manage your own cap table. I think we didn’t approach the original cap table and so by very prudently, and it required some relatively painful adjustments as we were building out the business. There were a lot of lessons learned on that front.
Alejandro: What do you mean with the capital structure. Maybe the folks listening can learn a bit about this. Would you mind expanding on that?
Mike Cagney: Sure. When you start a company, and you’re sitting in a room with three people, you say, “Let’s divide the equity up three ways.” Or whatever the case might be. That works in the very beginning because you have an entity that’s on day zero. The agreement is always like, “We’ll have the equity be commiserate with our contribution. We’ll adjust it over time. If you’re doing more, I’m doing less. Then we’ll make those adjustments.” That’s actually a very hard thing to do, and it introduces a lot of challenges. And if you don’t structure your equity where you have a sufficient amount reserved for employees, for example, you’re going to have to figure out how you’re going to create that pool. The challenge we had in our situation was we raised 85 million dollars at a 100-million-dollar pre-valuation, which on the surface, that’s great. It’s a Series B. It’s a 185-million-dollar valuation, but it caused so much dilution, we didn’t have a sufficient employee pool. We went to our investors, and we said, “We need to create an employee pool.” If you create an employee pool post-round, it’s diluted to your investors who come through. The investors said, “You do need an employee pool. You’re absolutely right, but it’s going to come out of you and the founders.” We had a very challenging discussion on the idea that generally, you think that when you get equity, you have it on a perpetuity, even when it’s not vested. The reality is, there can be fluidity there, especially if you’re in a circumstance like the one that we were in. So we all had to kick in equity into an employee pool to ensure that we had enough for the folks that we needed to bring on to grow the business, but at the expense of our ownership.
Alejandro: Wow. For some time, you guys raised quite a bit. Obviously, you’ve left SoFi to start your business now, but so far, how much has the company raised?
Mike Cagney: We raised 1.9 billion when I was there.
Mike Cagney: And they’ve raised another 500 million after that. It’s another lesson around capital, which is the challenge you have if you raise 1.9 billion is you ultimately want to be a price to earnings, not a price-to-book business. To do that, you need a very high ROE. If you have 1.9 billion of E, you need a lot of R. it’s something to take into consideration. Our circumstance was somewhat unique in that billion-dollar-round that we did, that was the first billion-dollar fintech round. It was somewhat forced on us. I’ve talked about this publicly before, but we had talked to SoftBank. SoftBank wanted to invest. We were looking for 200 million of incremental capital for the balance sheet. We thought it would accelerate growth. Mas was very focused on it and said, “I want to put a billion dollars in the company.” My initial reaction was, “I don’t need a billion dollars. How about 200 million.” It was clear that if I didn’t take the billion, it was going to go to somebody else in the space. There was a billion dollars he wanted to put to work in that vertical. We ended up taking it. Actually, it was a significant advantage for us. We were profitable when we took the money in and continued to be profitable as we executed through that. It gave us the ability to withstand a lot of volatility. In 2016 it hit the markets, where some of our peers struggle significantly over that period. In hindsight, it was the right thing to do. At the time, it seems a little bit crazy, and certainly, as you raise that kind of capital, you’re dealing on a first-order basis with dilution, but on a second-order basis with how am I going to generate a return to justify a ROE valuation, a high-priced earnings valuation on this business given so much capital?
Alejandro: The amount of employees — quite a bit of employees. How many employees?
Mike Cagney: When I left, I think we had 1,300.
Alejandro: Wow. How do you go about leadership with so many employees?
Mike Cagney: It’s hard, and we struggled on that. I struggled personally on it. 1,300 people, you have them spread across six different offices and trying to build consistency on culture, communication, transparency is a struggle. One of the challenges that we had at SoFi when we built it out — I’ll say we, but it was really more me. We built it out so quickly, and it grew so quickly that we never had a chance to start with a grounding around what do we want the values of this business to be? How do we want the culture of this business to work? The culture, by default, was executed at all cost. That can be great in short periods of time or short spurts, but over the long-term, it becomes untenable because you get a lot of individuals that are good individual contributors, but might have problems in terms of fitting cohesively within a culture and within an organization. That’s exacerbated with the size of the workforce and the dispersion of the workforce. It was one of the things that when we started Figure, we were focused on, which was, let’s establish what we want in terms of values, how we want the organization to work and perform and what our expectations are of each other, with the understanding that we’re also going to have a distributive workforce. At SoFi, we had a problem in one of our call centers in Galesburg that we ultimately had to take responsibility for, but it underscores the challenge of having the dispersion when you don’t have a strong, cohesive culture to tie everything together. At Figure, we’ve tried to address that, and I think we’ve done it very effectively.
Alejandro: Let’s talk about Figure. You made the decision to move. Let’s talk about that, and bringing Figure to life.
Mike Cagney: It’s interesting because Figure started off as, and still is a blockchain business. We were looking at the blockchain and looking at the financial ecosystem and saying, “Boy, there’s huge amounts of Intermediation in this ecosystem. Shouldn’t we be able to use blockchain technology to release some of that for the benefit of the consumers, for the benefit of capital markets, for originators?” We went out to pursue a blockchain structure. The idea was to take distributed trust and immutable characteristics of blockchain and lever that or combine that with a registry ledger and an exchange. The first challenge that we had — June runs our engineering. She was looking at blockchain technology and saying, “I can’t do this with Ethereum. I can’t do this with Bitcoin. I can’t do this with Quorum or R3, Corda, I need to build something different because what we want to do — what we wanted to do as a first use case was securitization on blotching, wanted to originate a loan, finance it, securitize it, and demonstrate that we could save. Our thesis was 90 basis points of value out of the gate. We ended up taking a version of IBM Hyperledger, and she significantly modified that from an architecture standpoint to get to scale and perform, and built what we thought was a very compelling platform, one that we thought could take 90 basis points of friction cost out of the process of origination through to securitization. We pitched it to one of the investment banks. This was in early 2018. They looked at it and said, there’s no way that the world is ready for this. Let’s do proof of concept. This is ten years out. We didn’t want to wait ten years to demonstrate the efficacy of this technology. So we created figures of financial platform. I didn’t build another financial business because I was eager and enthusiastic to run back into the financial business. I did it because I use Figure as a way to originate assets on Provenance, our blockchain, which then forced that buy-side to participate to come in and buy those loans on blockchain, which then got the sale side to agree to come in and finance those loans on blockchain and kickoff the ecosystem. We ended up building two companies where the first was our intent of what we wanted to deliver, a blockchain solution. The second, was a necessary component to drive adoption onto that blockchain because people weren’t going to show up just for the technology.
Alejandro: Right. So then, how did you guys go about scaling this up? I know that you also raised quite a bit of money for this.
Mike Cagney: Yes. I’m not going to raise two billion again. I shouldn’t say that I’m not because every time I say that I’m not going to raise more money, I raise more money. Some people think I like to raise money because I do it a lot, but I really don’t. We raised 120 million through the first quarter of this year. That was what we needed to get to profitability for the core Figure business and to drive adoption on Provenance. What’s happened is, we’ve done over 700 million dollars of loans, originated on blockchain. We demonstrated, not 90, but 135 basis points of value using that technology in what is a three-trillion-dollar ecosystem. So you’re talking about a massive TAM that’s out there that you can deliver into. We brought significant institutional adoption into the blockchain. So we have 12 stakeholders on Provenance, firms like Franklin Templeton and Experian. We have partners like Jeffries, where we have a billion-dollar warehouse facility with them on Provenance. We sell to 20 different counterparties, banks, and institutions. Now, Caliber is using Provenance for Hylok origination. We’ve got about a half a dozen mortgage originators behind them for both Hylok and firstly, mortgage to leverage the technology. We’re doing work on funds on C.H.A.I.N., putting our funds, but also Aldrich’s Hedge Fund and other funds on the blockchain. Then, doing some crazy work in Asia. In Japan, we’re working with MUFG on a potential municipal bond issue in Somchai. We’re doing some stuff in Singapore on the banking side, both traditional banking and Triad compliant banking. There’s a ton of stuff going on. What we did from a capital standpoint — we’re focused on uneconomic. We’re very focused on hitting profitability. I remember sitting in a board meeting about six months ago, talking about how important it was for me to hit profitability. My board was looking and saying, “Mike, the company’s not even a year and a half old. Why do you care about this? At the time, everyone in the market was focused on revenue and growth, and not so much around profitability. Having been through this a lot, the very best thing about profitability to an entrepreneur is you no longer have reliance on capital markets. And it gives you huge amounts of independence in terms of how you execute and autonomy in terms of where you execute. In October, we actually broke even from an operating basis, which in November, we probably won’t, but in December, we probably will again. So it’s bouncing around a bit, but we’re at striking distance now. What had happened was, one of our existing investors, Morgan Creek had approached us about pre-empting around, and they wanted to increase their ownership in the business. They have been great partners for us, and we wanted to give them a stronger voice in how we were doing things. But also, we had some strategic partners like MUFG that wanted to open up and make room for. We ended up taking a 100-million-dollar round that pushed our total financing to a little over 225 million. I think what’s interesting about this is, the original term sheet that was put in front of us was at a higher value than the 1.1 billion pre that we took. I actually pushed the value down. A lot of people would say, “Well, why on earth would you do that?” Again, having gone through this a lot of times: 1) You want to build valuation cadence as an entrepreneur. You want to feel that by the time you need to raise money again, you’re going to have executed to a point where you can justify a valuation that’s a significant premium over your last round. You want to keep that momentum going from an execution standpoint. 2) You need to be pragmatic about the broader Macro Markets. Obviously, with some of the high-profile challenges, we’ve had on the IPO or not IPO side and some of the challenges in the private market. A lot of entrepreneurs haven’t been through the pain, perils, and trials of a down-round. Those things are miserable experiences to go through. We wanted to make sure that we weren’t overstretching, that we were taking a valuation that we felt was reflective of where we were today and where we felt a very high probability to execute into a significant premium. Should we raise money again, either primary or secondary?
Alejandro: It makes sense. Mike, if you were to go to sleep tonight and you were to wake up in five years, and you wake up in a world where the vision is fully realized of Figure, what would that look like?
Mike Cagney: Figure will be a great financial platform, and hopefully, it’s a ubiquitous household name as a financial solutions provider. I think what we really want is to see blockchain become ubiquitous within the financial ecosystem. What we realize on the blockchain is, part of the value is disintermediating the existing run seeking, the custodians, the administrators, the trustees. Part of it is introducing efficiency to your own operation. So, reduction of staffing expense and timing and delivery. Part of it is creating new product opportunities that weren’t possible before blockchain. For example, we’re doing a transaction in Asia where a lender’s taking Indonesian auto loans into a Singapore SPV and creating fractionalized ownership interest and selling them through their wealth channel in another country. You just wouldn’t be able to do that without blockchain. So, I’d love to see in five years, rather than people saying, “I’m blockchain-enabled, or I’m leveraging blockchain.” I’d like to see it used as ubiquitous as the internet. No one today says, “I’m an internet company.” It’s just a de facto given. I know it’s a short span, five years, but I’d love to see the adoption happen that fast.
Alejandro: One of the questions that I typically ask the guests that we have on the show, Mike, is if you had the opportunity to go back in time and have a chat with that younger self before launching a business, where you had the opportunity to give that younger self one piece of business advice knowing what you know now, what would that be and why?
Mike Cagney: It would be a challenging conversation because much-younger Mike was a jackass, so I don’t know if much-younger Mike would listen to older, seasoned, wise Mike. I think there’s a wealth of learnings that I’ve had the opportunity to experience. I’m very appreciative that I’ve had that opportunity and continue to have opportunities. I think probably the most important thing I would try to impress on younger me is the importance of building the right culture within an organization and hiring to culture, not to ability. I’ve seen the benefit of that at Figure. I’ve seen what happens when everyone’s rowing in the same direction, and you have an organization that rallies behind itself. It’s just a huge impact. That’s probably the single, most important piece of advice I’d deliver. Whether I’d listen to it or not as younger me, I don’t know, but I’d certainly deliver it.
Alejandro: Really cool. For the folks that are listening, Mike, what is the best way for them to reach out and say hi?
Mike Cagney: On LinkedIn, Twitter, either one.
Alejandro: Amazing. Well, Mike, thank you so much for being on the DealMakers show today.
Mike Cagney: Great. Thanks for having me.
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