March 13, 2024 • 42 mins
Redefining the Landscape with Participate.
At Participate, we seamlessly blend the age-old tradition of banking with the dynamic pulse of technology, revolutionizing both syndications and participations in the financial world.
We Stand For...
Inclusive Banking: From syndications to participations, we equip financial institutions to handle loans of all sizes, broadening their horizons and unlocking unprecedented opportunities.
Democratized Lending: Whether it's a sizable syndication or a modest loan, we ensure that every transaction is executed with precision, enabling banks to expand their portfolio without limitations.
Digital Prowess: Our platform's real-time, cloud-based capabilities streamline processes, ensuring efficiency without compromising on reliability.
Relationships at the Core: In the age of automation, we prioritize human connections, understanding that the essence of banking is rooted in trust and collaboration.
Staying Ahead: The financial realm is ever-evolving. Participate ensures institutions remain at the forefront, equipped with cutting-edge tools tailored to their needs.
Community Champions: Drawing inspiration from our parent, BankLabs, we're dedicated to fortifying community-driven banking. With Participate, institutions can face modern challenges while upholding their foundational values.
Embrace the future of finance with Participate – Where every loan, big or small, gets the spotlight it deserves.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Intro/Outro (00:00):
Welcome to Building the Future, hosted by Kevin
Horek. With millions oflisteners a month, Building the
Future has quickly become one ofthe fastest rising programs with
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(00:20):
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visit building the futureshow.com.
Kevin Horek (00:27):
Welcome back to the show. Today, we have Matt
Jonner, the president ofParticipate. Matt, welcome to
the show.
Matt Johnner (00:34):
Thanks, Kevin. Appreciate you having me back.
It's been a few years.
Kevin Horek (00:37):
Yeah. I'm excited to have you back on the show. I
was looking before we startedchatting. You were on the show
October 2017, so lots hashappened. I I'm curious to know
where you're at now.
I'm excited to learn about yournew product, participate. But
maybe before we get into that,can you give us a little bit of
(00:58):
a background on yourself, maybewhere you grew up, where you
went to school, and then we'lldive into Banklabs and then
participate?
Matt Johnner (01:05):
Yep. Sounds great. Yeah. So, grew up in Upstate New
York in the AdirondackMountains, very remote area on
Jo Indian Lake, And, we still goback there every every, summer.
Beautiful place, but quite cold,and New York doesn't have a ton
of economic opportunity.
So went to Texas A&M University,subsequently went over to the
Middle East and West Africa as apetroleum engineer for Baroid, a
(01:29):
division of Halliburton. Andthen made my way back to the
United States, went to work forRoss Perot senior in 1994 at
Perot Systems, and that's how Igot here to Dallas and and still
here in Dallas.
Kevin Horek (01:42):
Very cool. So walk us through Banklabs' history
participate, and then let's diveinto that.
Matt Johnner (01:51):
Yeah. Sounds good. So Banklabs was created by Mike
Montgomery, my partner who's ourchairman and CEO. And, he is a
long time community banker andbemoaning the lack of technology
especially on the commercialside for banks and how,
community banks really are thecrown jewel of the US financial
system. And so he wanted tosupport them from a strategy and
(02:16):
technology perspective and andhow do we help those community
banks succeed?
And we view community banks as adefinition of not a matter of
size or location, but, a matterof doing business. Do you
utilize in market relationshipbased bankers? If so, then you
could be a $600,000,000,000 bankor a $1,000,000,000,000 bank and
and really, try to be thatcommunity bank. But most of the
(02:38):
banks in the US are, you know,80 plus percent are are not
those. They're, truly orientedmore around the community.
And so we develop at Bank Labs,multiple products and an
innovation framework, that helpcommunity banks generate more
loans, generate more deposits,generate more noninterest fee
income, or improve theexperience for the borrower.
Kevin Horek (03:01):
Okay. That's that's really cool. So walk us through
coming up with the idea forparticipate and then what
exactly is it.
Matt Johnner (03:09):
Yeah. Participate is our second product out of the
Banklabs franchise. The firstproduct that Banklabs came out
with in January of 2000 16 wasconstruction loan automation, a
product called construct. Webootstrapped that over 6 and a
half years to have80,000,000,000 in construction
loans on the platform and over a100,000. Yeah.
It's it it was a lot of fun, alot of gray hair, bootstrap. So,
(03:33):
as you know, not easy to do, butgreat team. We're proud of them,
learned a lot together and andultimately sold that product,
not the company, but the productconstruct to Abrigo in August of
2022. Part 2 or product 2 out ofthe Banklabs Innovation Lab is a
(03:54):
product called participate,which is what we're a 100%
focused on now. And we launcheda new co, a new company in June
of 2023, whereby Banc Labs tooka minority investment from Jam
Fintop, some great investorsthat raised their money from
their limited partners who are,primarily banks that want,
(04:16):
research and development labs,wanna be, able to influence new
technology products and seewhat's coming out, but also, you
know, make a good financialreturn like any private equity
investment.
So June 2023, just to recap,Banklabs spun out a new co
called Participate. Bank Labs isa majority owner, and Jamfintop
are the minority owners inconjunction with employee
(04:37):
ownership.
Kevin Horek (04:39):
Okay. So let's dive a little bit deeper into
participate. And what exactlydoes it do, and how does it
automate kind of loan trading?
Matt Johnner (04:48):
Yeah. Participate automates the process of loan
participation. Meaning, when abank or nonbank lender wants to
do a loan, but it's too big ormaybe they have too much
concentration risk with thatborrower, or they have too many
of those loan types, maybecommercial real estate, for
example, then, it's been quitecommon, to manually participate
(05:13):
out loans to other buyers, toother downstream participants.
And historically, that's beendone by you a lender calling
your buddies down the street,who you went to banking school
with, or you play golf with orwhatnot. Pretty much a good old
boy network, which inherently isnot bad, but it does create a
lot of inefficient processes forthe lender who in this
(05:33):
environment have to call 20banks before they can get 1 or 2
to agree to buy a piece of thatloan.
And if that originator can't dothat loan, then, they run the
risk of losing that borrower toa bigger competitor. And if you
if you lose borrowers time aftertime then you start to lose
lending teams. And if you loselending teams as a bank that's
really really bad. So weautomate that front office
(05:56):
process with a cloud basedsecure process. We have 2
patents on it already.
When the loan closes, what makesus really unique is we do the
back office loan participationservicing and automation. So
when a loan is sold successfullyfrom 1 originator to 3 or 4
downstream participants, then wegive everybody shared real time
(06:17):
cloud based balances,transaction history. Our system
manages all the email and in appnotifications to the buyers when
the buyers need to fund thatloan or they're getting payments
for their pro rata share. Wemanage all the variable interest
rates, etcetera. So from abusiness strategy perspective,
it allows banks to keep lending,keep their lenders lending,
(06:40):
generate that non interest feeincome, to build a more
profitable bank, also allowsthem to do new loan types if
they're the buyers and maybethey've ever done before.
So if you're a a bank that has aheavy commercial real estate
portfolio, and you know you wantsome commercial and industrial
loans, c and I loans, or maybeag loans, or maybe fringe loans,
(07:01):
then what participate allows youto do as a buyer is to buy into
those loans where you don't havelenders that know how to do
those loans. So your lenders mayknow how to do commercial real
estate loans, but they may notknow, how to do c and I loans or
have those relationships. Soparticipate allows the buy side
to diversify their loan mix,reduce their concentration rate,
(07:22):
and get into high quality loans.
Kevin Horek (07:25):
Okay. So how do you mitigate people's risk by
investing in these types ofloans?
Matt Johnner (07:33):
Yeah. So first of all, we work with banks
primarily, also credit unions,some foreign credits, and more,
and more private lenders. So wework with high quality
originators that are highlyregulated for the most part with
regard to banks, credit unions.And, so the originator is
originating that loan. We're nota broker dealer.
(07:55):
We're facilitating theintroduction of the originators
with potential buyers, and ourtechnology is transacting it. So
we're not a broker dealer inthat case.
Kevin Horek (08:05):
Okay. So then how do you monetize the platform?
Matt Johnner (08:08):
Yeah. Great question. So we charge a
software as a service fee forthe value of the automation to
the originators who areoriginating in the front end
when you're selling off a loan,if it's a new loan or an
existing on balance sheetcredit, there's no reason you
can't use participate to selloff some of your existing loans.
Okay. And when it closes, thenwe automate all the back office
(08:31):
work and that can happen forover 7 years.
These term loans can last. Okay.So for the value of all that
automation and the bank nothaving to hire new people as
they scale their loans orallowing folks to retire or move
tasks off folks to more valuabletasks, then participate has a
lot of value there. So we chargea software as a service fee for
(08:52):
that. Additionally, we charge a,bps fee of, a basis points fee
on the portion of loans sold.
And we have a couple models thatour clients can play with to
either have a higher or lowerSaaS fee or bips fee based on
what their personality is andtheir their objective is. Okay.
Kevin Horek (09:13):
So for people that have maybe never done these
types of loans before that arelooking to get into this, How
much time and effort isparticipate actually saving
them? Because that's where yourreal value is. Correct? Or am I
missing the boat on that?
Matt Johnner (09:29):
No. Absolutely. So there's a ton of efficiency with
it, and it's also the secondpiece of value is we bring we
bring buy side clubs. So wecurate clubs of new buyers that
were never known to thoseoriginating banks or credit
unions.
Kevin Horek (09:43):
Right.
Matt Johnner (09:43):
So that that, curated buy side capital stack
is what we're providing, notjust the automation. So banks
are are are saving hours andhours and hours of lenders
calling their buddies down thestreet trying to find people to
buy into this loan. Our,technology allows you to publish
a loan in as little as 15minutes.
Kevin Horek (10:04):
Oh, wow. Okay.
Matt Johnner (10:05):
How to digitally transact esignature, integrated
legal agreements, integratedsubscription management, secure
document sharing. So just atremendous amount of time
savings for the lender, thelending assistant, assistant,
the credit officer. And thenwhen the loan closes, just a ton
hours and hours and hours a weekand month of savings for the
loan ops staff who no longerhave to keep their own
(10:26):
spreadsheets of what each of thebuyers pro rata share is each
time they get a borrower paymentfor principal and interest. So
tons of time on efficiency asyou pointed out, you nailed
that. And then in addition, forlenders that wanna originate
loans and have run out of theirtypical buyers, We're,
introducing them to new buyers.
So we're providing new capitalstacks, new capital streams, and
(10:49):
we're now layering in more andmore intense technology to
evaluate lenders balance sheetsand make recommendations of what
they should consider selling andbuying to optimize, you know,
their net income, their netinterest margin, their
noninterest fee income, thattype of thing.
Kevin Horek (11:06):
Interesting. Okay. So do I need to be in a certain
geographic region, or how doesthis kinda work?
Matt Johnner (11:14):
Yeah. No. We're all we're a 100% across the
United States right now. We'respeaking to the US for now, but
I think we're in 42 statesalready. Oh, wow.
Is acting, for our originatingclients or managing their loans.
It's been a a very fast process,and we're we're trying to
leverage what's calledMetcalfe's law, the the value of
(11:36):
a network expansion. It's howmobile phone networks and, you
know, the Cisco, Internetequipment worked in the in the
in that day and age. It's wherewhen we sign one originating
financial institution, weautomate all their existing loan
participations they did beforethey knew about us. So we load
all those in a day, and thatallows the back office to
(11:59):
immediately begin benefitingfrom our software on the 30, 40,
50, a 100 deals they had thatpredated us.
And so what we do is we thenleverage that network effect. We
we give free access to thosebuyers of our client for those
legacy loans who now get realtime balances, real time
transaction history, emailnotifications, in app in app
(12:22):
notifications. So that's part ofthe reason we've been able to
grow so quickly is leveragingthat network effect or what what
is called Metcalfe's law.
Kevin Horek (12:31):
So I I actually think there's really good advice
in there. So just for so youbasically will go, You you're in
42 states. I wanna get to thatin a second. You obviously had
to go through a bunch of, like,hurdles just to be live in every
state. But I think what's reallyvaluable that you just mentioned
(12:52):
is if you spend your own timeand resources importing their
current and past deals becausethen they can see how easy to
use the system is.
They wanna use your system, keepusing your system, and then
anything new, they're bringinginto the system. Is that fair to
say?
Matt Johnner (13:11):
Yep. 100% correct. And it's not just the originator
that's seeing the benefit.
Kevin Horek (13:16):
Right.
Matt Johnner (13:17):
In the regulatory environment, the buyers are
required by the federal,regulators to also keep a
balance of what they think theyshould be paid by the
originating institution. So whatthey think they should get paid
for principal and interest. Andbear in mind, a lot of these are
variable interest rate loans, soit changes every time a payment
is made. And the coretechnologies, do not do much in
(13:40):
terms of this functionality.Almost none of them can do
notifications.
Most of them can do theprincipal and interest split
when a borrower drops off apayment in a bank, but that's
it. So 99.5% of a loanparticipation or loan
syndication or club deal ismanaging our software, and it
gives those downstream buy sidefree access to their balances.
(14:01):
So imagine you're a VP of loanops at a buyer, whether you're a
credit union or a bank, and youhave to keep your own
spreadsheet for all thetransactions that your folks
have bought from thatoriginating financial
institution. It's a it's a lotof work, and there is almost
never a scenario where at theend of the loan, everybody's on
(14:21):
the same page and balances. Sothen there has to be forensic
accounting, sometimes there'ssettlement fees or charge offs,
Somebody owes somebody money.
And then think about thereputational risk if you're
constantly having to, negotiatewith the balances at the end of
a loan. It creates friction. Atthe end of the day, that's what
we're trying to fix. We'retrying to democratize loan
(14:42):
trading, by reducing friction inthe loan trading process both on
the front and the back, and youhave to have both. You can't
just have a bunch of lendersdoing more loans than ever
before if the back office can'tkeep up, if they have to rely on
spreadsheets.
So you have to have both of anoffice and the back office, and
we believe now and we're seeingthat more and more loans are
(15:03):
happening smaller, not justbigger. So we believe if we take
a you know, we're taking a pageout of Uber's book where if you
reduce friction and improve theexperience, then you can
encourage thousands of timesmore loan trades a year than
ever before.
Kevin Horek (15:17):
Yeah. Interesting. That no. That makes a lot of
sense. So what advice do yougive to people that are looking
to do well, because there's alot of, like, legal stuff that
you need to do to go into thedifferent states and, obviously,
building software thataccommodates all these different
conditions is a challenge.
(15:38):
So how did you figure that outand sort all that out, and and
what advice do you give topeople that are maybe looking to
do something multistate likethis?
Matt Johnner (15:46):
Yeah. So first, we're not broker dealers. We're
technology firm, and that'sthat's a dramatically different
regulatory environment. Right.Broker deal have to be
registered.
We do not as a technologycompany. Our tech is just
facilitating the transaction. Sothat's the biggest difference.
So when we when we sign a clientand they're in 3 states, then
(16:07):
immediately we have transactionshappening in 3 states. So it's
that another example of networkeffect or or, you know, the the
tag along on Metcalfe's law.
Kevin Horek (16:17):
Right. Okay. Interesting. So walk us through
a a little bit more of someother features and functionality
of the platform. Like you said,it takes can take, you know, as
quick as 15 minutes to get on.
You know, what's what is my 3months, 6 months, 2 year, 3
year, 5 year, 10 year look likein the platform?
Matt Johnner (16:40):
Yeah. So first, it's cloud based. We're SOC 2
audited. We're in AWS SOC 2 datacenters. We undergo third party
web penetration tests.
So first, security andscalability is always entry fee.
It goes live in 1 hour, so it'snot a big lift like a core
conversion or a a loanorigination conversion. We can
(17:03):
have all the originating bankslegacy loans loaded in a day, 2
days max, which allows for theback office to benefit on deals
that were never done with us.When a lender does do a new
deal, they can, load essentiallythe loan data and documents and
(17:23):
publish it to whichever banks ornon banks they want to look at
it. So they decide who it goesto, we don't decide.
So the originator is in fullcontrol, they then decide and
they can do so via in our systemclubs. So you build clubs or
we'll build clubs for you oflike minded buyers. So here's a
club of CRE buyers, that don'tlike construction loans, or
(17:48):
here's CRE buyers that likeconstruction, but not
hospitality, or here are clubsthat want c and I loans or ag
loans or franchise loans orequipment finance loans or high
FICO consumer loans. So we doany loan type commercial or
consumer of any size. So youcould put a $1,000 loan on there
today or a $100,000,000 or$400,000,000 loan.
Kevin Horek (18:08):
That's cool.
Matt Johnner (18:08):
And break it up infinitely, automatically into
many pieces. Once that'spublished to that one or many
clubs, those folks on thedownside are notified they log
into the system via their mobilephone or laptop, they see the
details and if they wanna seethe full loan package, then they
have to sign, integratedelectronic NDA and non
(18:29):
circumvent, which now allows theprospective buyers to see who
the borrower is, see thedocuments. Until that point
until that point of signing theNDA and noncirc event, they
can't see the docs or data,which keeps the originator safe
from the buyers potentiallygoing around to the borrower
directly. Once all that happens,then they the buyer evaluate,
(18:50):
the loan, typically take it tounderwriting or loan committee.
They come back, they subscribethrough our system telling how
much they want to participatein.
Once that's accepted by theoriginator, then we do all the
legal master participationagreements in the software with
esignature, and then it'sclosed. Once it's closed,
instantaneously seconds later,the loan ops team at the
(19:13):
originating bank gets the backoffice value, and they can do a
funding request from the thedownstream buyers to fund that
original advance to the borroweror whatnot. And then all the
back office stuff happens, allthe automated notifications and
balances and transaction historyand all the stuff we talked
about.
Kevin Horek (19:31):
Okay. Very cool. So you you mentioned you sold a
product. What advice do you giveto people that, you know, are
are going through that, or orwhat did you wish you know knew
now that you're on the otherside of that?
Matt Johnner (19:48):
Oh, boy. I'm not sure how revolutionary this
advice is gonna be, but, youknow, starting companies is
hard. Yep. Bootstrapping is evenharder, but very rewarding. If
you can bootstrap one piece ofadvice, do it.
If you're in a position to nothave a a very expensive cost of
(20:08):
living personally or if you havesaved money up and you can get
away with bootstrapping, thenyou definitely are gonna be
better off if you're successfulby retaining equity. So that's
probably number 1 is if you canbootstrap, do so. Number 2, you
know, product market fit. Is itjust a great idea you have, or
can you vet it really quicklybefore investing a lot of money?
(20:31):
So, answer, you know, thequestion, who cares?
Who cares about your productenough to pay for it? 3rd,
really smart guy here in Dallasgave me some great advice when I
asked him his business advice,and he said, get in front of an
avalanche. So look forindustries that, if you get in
front of, we'll sweep you up andcarry you forward, whatever that
(20:54):
may be. So, you know, thingslike that. And then on the the
sell side when we're selling, wedid have an investment banker.
They did, get many peoplelooking at it. We were very
happy with our partner at Abrigoand, really have just, completed
our transition as of the end of2023. So, that's the last piece
(21:15):
of advice is, you know, reallytry to have consistent, good
dialogue throughout the processof not just selling, but when
you've sold, supporting thatbuying entity, having a good
relationship with them becauseyou never know if you're gonna
do business with them in thefuture. And I think that applies
for the buying entity, not justus as a seller. So, outside of
(21:38):
that, probably longerconversation over a beer or
coffee or something.
Kevin Horek (21:43):
Fair enough. How did you come up with the idea
for participate and and thenvalidate that idea then?
Matt Johnner (21:49):
Yeah. So Mike Montgomery, who's our founder,
chairman, and CEO, long timebanker. He's on a bank board.
His grandfather, was heavilyinvolved in banking advisory for
the Federal Reserve out ofBoise. His, dad started 3 banks
in Idaho and Utah and sold them.
Kevin Horek (22:09):
Oh,
Matt Johnner (22:09):
wow. So, you know, heavyweight community banking
family. He's on the board ofSouthern Bancorp, which is a one
of the original communitydevelopment financial
institutions started by thengovernor Clinton and the Walton
family. And so he has a goodpulse on what's going on, not
just today, but historically.And he always bemoaned the lack
of, speed and flexibility thatbanks had to adjust their
(22:32):
balance sheet.
What if you have to sell off 3or 400,000,000 SCRE? Do you have
an automated process and anetwork of buyers to go to in
minutes, not use spreadsheetsand smiling for dollars?
Likewise, if you're a bank thatonly does commercial real estate
loans, that's really, a risk foryou because it highly
concentrates you in one loanclass where you really should be
(22:55):
diversifying. But, you know, ifyou're a CRE Bank, CRE lenders
don't know a lot of CNIborrowers. So, you know, we
needed a way, and he had thevision not only to make a
spreadsheet based process moreefficient, but also to provide
alternative capital stacks andallow for educational,
components to help, banks thatreally should have other loan
(23:18):
types, but don't have thelending skill set or those
credit skill set or the opsskill set of that loan type to
be able to buy into those loans,easily and and with high
quality.
Kevin Horek (23:28):
Interesting. Yeah. You actually said something that
that's actually reallyinteresting that I think people
don't really think about and, islike, if you can automate
something as simple as, like, aspreadsheet process, there some
of those industries are1,000,000,000 of dollars. And,
like, it's interesting becauseI'm I'm working on a product
(23:48):
right now that it's doing thatin the dental space, which could
easily be applied to the eyecare space and, like, a bunch of
other medical spaces. But whenyou think about it, you're just
like, well, they just usespreadsheets.
We'll just put but if youactually take you look way back
and you look kind of high levelat it, it's like, well, what is
the spreadsheet really doing?And if you can automate that and
(24:11):
you can save people tens of1,000 a month and, you know, you
charge them, you know, 100 or afew $1,000 a month for that,
it's a no brainer. Right? Andit's kind of like that avalanche
that you're talking about, andand I think some people don't
think about things like that.They're like, I need to build
the the next sexiest app.
It's like, well, sure, maybe,but that's really challenging.
(24:34):
But if you can really automateor really speed up a process
that's very manual in, like, asimple piece of software. Well,
I guess spreadsheets can be verycomplicated, but I think you
know where I'm going there. It'slike Purpose. That's could
potentially where a lot of thebig money is, right, and
actually getting acquired.
Matt Johnner (24:52):
Yep. Yeah. And, you know, the other back to that
other piece of advice is build acompany to last. Build a company
that can be profitable andscale, and you may never be
profitable, to a certain extenton purpose. If you see your
operating metrics, your keyperformance indicators growing,
whether it's demos that have aconversion rate to sales or
(25:13):
whether it's number of loanstransacted on our platform, as
long as you're seeing the growthYeah.
It's okay to keep spendingmoney, but only as long as you
feel like you can turn off thespigot at some point and and
turn to profitability to be incontrol of your own destiny.
And, obviously, that doesn'thappen in a couple years. It
takes generally 7 to 10 years tobuild a company that is
(25:35):
qualified to sell or keep incash flow in a meaningful way.
So, you know, it's a journey.
Kevin Horek (25:42):
No. Fair enough. How did you start making
relationships with the companiesthat you potentially wanted to
buy the product?
Matt Johnner (25:50):
Yeah. We were in discussions with Abrigo about a
potential partnership.
Kevin Horek (25:54):
Okay.
Matt Johnner (25:55):
In addition to them, we were talking to various
others, in some cases, potentialcompetitors. We're talking to,
investment groups, you know,private equity firms. So it was
it was building relationshipsover time. You know, a lot of
these folks call us. We getcalled by private equity and
(26:15):
venture capital quite a bit.
So that's with regard to thepast. Going forward with this
new company participate,Jamfintop are great partners.
They've they're, our minoritypartners, and they're they're
way more than just capital. Theywe talk to them almost every
day, with, they're makingintroductions to their limited
(26:38):
partners, or they're makingintroductions to potential
hires. We hired, like, oneperson just recently that they
introduced.
So, likewise, those folks getcalled on a lot by larger
private equity firms that wannado recapitalizations. They're
developing relationships withstrategics. I think Fiserv is
(26:59):
one of their limited partners. Qtwo is one of their limited
partners. So big industryplayers.
So I think what we'll see is,you know, a lot of interest from
our own relationships that wedeveloped, a lot of
relationships, that will comeout of Jamfintop, and then I
think there'll be always thosenew folks that reach out to us
that we hadn't really thought ofin a serious way that that like
(27:21):
our story and feel like, youknow, combined, we would be
better.
Kevin Horek (27:25):
Okay. Makes sense. So you bootstrapped a company.
You took on an investmentpartner or participate. What
were the pros and cons, and whatmade you do you didn't bootstrap
participate?
Matt Johnner (27:38):
Yeah. No. Great question. So Construct, we
bootstrapped and, you know, ifyou looked at our burn rate per
month, back then I thought itwas a ton, you know, we didn't
pay ourselves much and writingcapital call checks and, that's
always a nervous time,especially when you have to
explain this to your wife.Right?
But, you know, the what werealized on construct is maybe
(28:03):
we moved a little too slow.Maybe we should have invested
more whether that was our ownmoney or taking outside capital.
When it came to participate, wehad that experience and that
history, both good and whatcould we have done faster or
better, you know, always beingintrospective. But participate
itself is a completely differentanimal, because of the network
(28:25):
effect, because of how fast thiscan go, because it doesn't have
to be just loans. It could bedebt.
It could be deposits, because itdoesn't have to be just the
United States. It can be, youknow, international. We realized
that this was just a much biggeropportunity and that we are
gonna need some help to grow itto the level of success that we
believe we can and that thedeserves and that our team
(28:48):
members deserve. So, we realizedthat it was time. And,
incidentally, Jamf and Top hadcalled us.
They had heard about constructand had heard about participate.
They wanted to get into thisspace. They had researched some
of our early competitors, andso, it was just really perfect
(29:08):
timing. We were thinking weprobably needed a good partner,
and at the same time, theyreached out to us because they
wanted to be in this space. Sogood timing.
Kevin Horek (29:17):
Yeah. No. That's that's interesting. It is
interesting if you can geteither your first clients or a
partner to help you build thisthing whether they put in cash
or not, but if they can helpeven just in the connection
space or beta testing or beingone of the first users, that is
almost like more valuable thanthe cash in a lot of cases.
Right?
Matt Johnner (29:38):
Absolutely. I'm you nailed it. The concept of
preselling, I mentioned productmarket fit when you ask, you
know, what nuggets of advice orwhatever would I have.
Preselling is really what I wastrying to say there, which is
what you were just saying. It'sbefore you get too far in a
product, really, you could be inprototype, know, build a
prototype in a week.
(29:58):
Right? You should be showingthat prototype of your, friendly
prospective clients and askthem, is this enough for you to
pay for? And if not, what arethe 3 things? And I always say 3
things because you don't wannalet clients go nuts.
Kevin Horek (30:13):
Yeah.
Matt Johnner (30:13):
Because they may or may not have the right vision
for the industry because they'vebeen doing the same thing that
they've always done. Right? So,you know, presale a prospective
couple clients, get them to paysomething. Even if it's of, you
know, $500 a month, it doesn'tmatter. As long as they're
willing to pay for it and gothrough the the purchase process
and, you know, send you an ACH,then that's gold.
Kevin Horek (30:39):
So how do you manage your product road map
with some of that feedback? And,you know, obviously, you have
clients of different sizes andsome of the bigger ones might
even offer to pay you to addsome features. How do you manage
that road map with featurerequests?
Matt Johnner (30:56):
Yeah. So in an in a new white space product like
participate, it's it's very newin terms of front office, back
office, cloud, as well ascapital stacks. You know, these
clubs we're curating of newcapital. It's very new. There's
very little out there, andalmost all the banks, including
the the big boys, do this onspreadsheets or legacy
(31:18):
technology that only does a partand then they have to use
spreadsheets for the rest,depending upon whether you're
talking front or back.
So when you're in an environmentlike ours and participate, you
have to really drive the visionfor the product. You know, you
have to drive 80% of the thearchitecture and the feature
functionality. So, with theremaining 20% roughly coming
(31:42):
from our clients that may haverequests. So we get requests all
the time, advice from ourclients, which is gold. We love
that.
We love our clients. We wantmore and more requests from
them. And then our product team,they take all these different
requests, whether it's fromclients or our customer success
team or our sales team or ourmarketing folks or our
engineering team, and theybuild, basically, business
(32:08):
requirements, user stories. Wefollow an agile method of
development, constantly pushingout code. Engineers always get
our head of engineering alwaysgets what he wants when it comes
to infrastructure, scalability,security.
That's always entry fees, sothat's always part of our
product road map. And, you know,our head of product and his team
just takes all that input fromall of our stakeholder leads,
(32:31):
and we figure out what is gonnaadd the most value. Generally, I
always supply, you know,security and scalability, number
1. After that, that's implied.The number 1 is revenue.
Does this generate more revenue?Is this a module that can
generate more revenue from ourinstalled client base, or is
this a set of features functionsthat would allow us to price our
(32:51):
product more? So revenue isalways number 1. Number 2 is
efficiency would allow us todrive efficiency and thereby win
more and more clients with amore demonstrable return on
investment. And then 3rd is kindof like a mystery.
You know, it's always a littledifferent, and it it could vary
by product. But revenue andefficiency are always, you know,
(33:14):
1 and 2 with after the entry feestuff.
Kevin Horek (33:17):
No. That that makes a lot of sense. So I'm curious
because a lot of people that yousaid have been doing this in
spreadsheets and kind of maybesome older technology, how do
you get them to actually switchand use this modern way of doing
things? Because that can bereally, really challenging. Like
(33:38):
because everybody's like, well,this is quicker and faster.
Everybody's just gonna use it.And it's like, maybe, but
sometimes that can take a lotof, you know, coaching and to
get them to actually switch andsee the value. So how have you
managed that?
Matt Johnner (33:53):
Yeah. Not easy. So change is hard. Getting people
to change is hard as everybodyknows, especially in banking.
Bankers are known to be evenmore change resistant than other
industries.
So the way I look at the worldis it's like being a little bat
flying around a cave. You'relooking for resin. Right? So I'm
flying around the cave,messaging, pinging prospective
(34:15):
clients when we're first comingout with a new product. Hey.
This is gonna make you moreefficient. It's gonna allow you
to do more loans. And early on,we got good resonance, you know,
pings back on efficiency. Butwhat we learned was with our
lending message, we scared someof the loan syndications leaders
(34:35):
and lenders that thought, ohgosh. This is gonna disaggregate
me.
This is a marketplace where itdoesn't need me as a human
lender, and that's not the casewhatsoever.
Kevin Horek (34:45):
Right.
Matt Johnner (34:46):
But when we pinged and we got residents back, that
message wasn't being deliveredthe way we intended or wasn't
being received the way weintended. So we like a good bat,
when you see, you know,resistance and resonance, you
adjust your message a littlebit. So we kept going with the
efficiency on the back office,and we made more of a play on
efficiency on the front officeand said, hey, mister loan
(35:08):
syndications guy or gal. Now youcan do 10 times more loans and
make 10 times more profit forthe bank and 3 times more profit
for you and your team in termsof incentive comp for doing more
loans, bigger loan book, morenoninterest fee income. So in
terms of getting, the industryto change, it's having a great
vision.
(35:29):
It's having a valid productmarket fit. But be a little bat,
fly around the cave, ping andlook for resonance and adjust as
fast as you can.
Kevin Horek (35:38):
Yeah. You actually touched on something that's
actually really important is ifyou can prove to them that they
can make more money, their thechances of them trying it and
adopting it are gonna be a lothigher than just saying, well,
it speeds up your job. Right?Like, sure, that's a byproduct
of that, but let's be honest.Most people are like, if you can
(35:58):
make me more money, I'minterested right away.
Right?
Matt Johnner (36:02):
Yep. Yeah. So we we focus on the institution and
the individual. So we have areturn on investment calculator
that shows for every about50,000,000 of loans that you
sell off, you make about2,400,000 in additional income
for the bank or credit union.
Kevin Horek (36:21):
Right.
Matt Johnner (36:21):
And if you apply your own incentive comp metric,
Sally or Jimmy, of what you as alead lender get, in terms of
your incentive comp on your loanbook you originate, then you're
looking at this type of compincrease for you and your team.
So we try to apply it at theinstitutional level and the
individual level ofcompensation.
Kevin Horek (36:43):
Smart. Interesting. So you touched on something
throughout our conversation sofar about security and and
scalability, which I think isarguably just as important. But
how do you actually practicethat? Because security is
becoming very, very important,especially in certain
(37:05):
industries, but I think foreverybody.
So how do you make sure that's afocus and that you don't kind of
sidestep that just to rush out afeature or or or something?
Because that can be reallychallenging in itself.
Matt Johnner (37:18):
Yeah. So culture, setting a consistent culture of
how important security is,especially in banking Sure.
Having the right leadership,being consistent in our
messaging with that leadership.So our our head of engineering
and our chief technology officerand our head of dev ops and our
head of product and our our ourchief architect. So all those
are individual guys and gals onour team.
(37:40):
And being consistent in oursupport of their leadership
towards building a highlysecure, environment technically,
but also a culture. Beingparanoid, you know, there's
always gonna be somebody better,faster, stronger out there
pinging away. We got, like,23,000 hack attempts, I think.
Oh, wow. You know, penetrationattempts last month alone.
(38:02):
Oh, wow. You know, we we have tobe on our toes. We build most of
our own stuff. We almost neveruse, well, we've never used open
source outside of, you know, aweb server type of deal. So we
try to build as much as we canto control our environments.
We're very wary of third partyAPIs or middleware APIs because
(38:26):
of our, reliance on them, to bedefending against many hack
attempts that could get to manyendpoints. You know, 3rd party
web penetration tests, Wevoluntarily do those. It's not
required, but, certainly, wethink it makes sense to have our
own teams, testing themselvesthrough 3rd parties. So, we have
(38:49):
a great third party, webpenetration firm that tests us.
SOC 2 audits.
Again, we sign up our own SOC 2audits, not just out of the data
center, yadayada yada. Soculture, leadership, consistent
support for that leadership toreally execute and test
(39:09):
constantly.
Kevin Horek (39:11):
Yeah. No. I think that's actually really good
advice because, yeah, like, it'sinteresting, especially at early
stages in a start up. Securitycan be, like, one of the last
things on people's mind where ina lot of cases, it should almost
be the first thing in certaincases.
Matt Johnner (39:28):
Yeah. No. It's look, building something from
scratch is not easy and there's,you know, there's, scope,
schedule, and resources. Pick 2,you can't get all 3. So what's
most important to you when youstart a company, you grow a
company, or you have a maturecompany with regard to new
products?
You can choose scope to be themost important and schedule to
(39:48):
be second and resources third,or you can choose resources,
scope, and schedule. Butinevitably, you can't have all 3
at the same time. So you have toyou have to decide, is it speed
to market that you want? Is ityou only have 2 developers or an
architect and a developer? Oryou have lots of resources and
schedules most important, thenmaybe scope gets trimmed down.
(40:11):
So, you know, we're constantlybalancing those.
Kevin Horek (40:15):
Sure. The one thing and I'm curious to get your
thoughts on is just because youthrow more designers,
developers, people at a problem,doesn't necessarily mean you're
gonna be rolling out softwareand features a lot quicker. Has
that been your experience, orwhat are your thoughts around
that?
Matt Johnner (40:31):
Yeah. It's true a lot of the time, and some of the
times more resources do makesense. So if you look at our
technology, it's, you know, corearchitecture, you have feature
functions. We have a lot ofintegration to loan origination
systems and core bankingsystems. We have, the
opportunity to build out newrevenue generating modules, so
(40:54):
completely kinda, well, notcompletely, very very self
contained modules that stillhave to interact with the
mothership, but can be done isis a little bit more isolated.
You know, but, yes, for sure,there is a limit to how
effective you can be, if you'retalking about a set of features
(41:14):
or functions. I mean, you canonly get so many things done
with a with a a bigger team. Itgets in the way after a while.
Kevin Horek (41:21):
No. That that makes a lot of sense. But, Matt, we're
kinda coming to the end of theshow. So how about we close with
mentioning where people can getmore information about yourself,
participate, and any other linksyou wanna mention?
Matt Johnner (41:32):
Yeah. Absolutely. So participate, you can learn
more at participate loan dotcom. That's participate loan dot
com. And that is the latestinnovation from Bank Labs, which
you can learn more atbanklabs.com.
And if you wanna reach out to medirectly, feel free. My mobile
is 214-208-0436. 214-208-0436.My email is
(41:59):
matt.chaunnerjohnneratbanklabs.com.
Matt.chonner@banklabs.com.
Kevin Horek (42:06):
Perfect, Matt. Well, again, I appreciate you
taking the time of your day tobe on the show, and I look
forward to keeping touch
Matt Johnner (42:13):
with you and have a good rest of your day. Great
to see you again, Kevin. Reallyappreciate it.
Kevin Horek (42:16):
You as well. Thank you. K. Bye.
Intro/Outro (42:19):
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Kevin Horek (00:27):
Welcome back to the show. Today, we have Matt
Jonner, the president ofParticipate. Matt, welcome to
the show.
Matt Johnner (00:34):
Thanks, Kevin. Appreciate you having me back.
It's been a few years.
Kevin Horek (00:37):
Yeah. I'm excited to have you back on the show. I
was looking before we startedchatting. You were on the show
October 2017, so lots hashappened. I I'm curious to know
where you're at now.
I'm excited to learn about yournew product, participate. But
maybe before we get into that,can you give us a little bit of
(00:58):
a background on yourself, maybewhere you grew up, where you
went to school, and then we'lldive into Banklabs and then
participate?
Matt Johnner (01:05):
Yep. Sounds great. Yeah. So, grew up in Upstate New
York in the AdirondackMountains, very remote area on
Jo Indian Lake, And, we still goback there every every, summer.
Beautiful place, but quite cold,and New York doesn't have a ton
of economic opportunity.
So went to Texas A&M University,subsequently went over to the
Middle East and West Africa as apetroleum engineer for Baroid, a
(01:29):
division of Halliburton. Andthen made my way back to the
United States, went to work forRoss Perot senior in 1994 at
Perot Systems, and that's how Igot here to Dallas and and still
here in Dallas.
Kevin Horek (01:42):
Very cool. So walk us through Banklabs' history
participate, and then let's diveinto that.
Matt Johnner (01:51):
Yeah. Sounds good. So Banklabs was created by Mike
Montgomery, my partner who's ourchairman and CEO. And, he is a
long time community banker andbemoaning the lack of technology
especially on the commercialside for banks and how,
community banks really are thecrown jewel of the US financial
system. And so he wanted tosupport them from a strategy and
(02:16):
technology perspective and andhow do we help those community
banks succeed?
And we view community banks as adefinition of not a matter of
size or location, but, a matterof doing business. Do you
utilize in market relationshipbased bankers? If so, then you
could be a $600,000,000,000 bankor a $1,000,000,000,000 bank and
and really, try to be thatcommunity bank. But most of the
(02:38):
banks in the US are, you know,80 plus percent are are not
those. They're, truly orientedmore around the community.
And so we develop at Bank Labs,multiple products and an
innovation framework, that helpcommunity banks generate more
loans, generate more deposits,generate more noninterest fee
income, or improve theexperience for the borrower.
Kevin Horek (03:01):
Okay. That's that's really cool. So walk us through
coming up with the idea forparticipate and then what
exactly is it.
Matt Johnner (03:09):
Yeah. Participate is our second product out of the
Banklabs franchise. The firstproduct that Banklabs came out
with in January of 2000 16 wasconstruction loan automation, a
product called construct. Webootstrapped that over 6 and a
half years to have80,000,000,000 in construction
loans on the platform and over a100,000. Yeah.
It's it it was a lot of fun, alot of gray hair, bootstrap. So,
(03:33):
as you know, not easy to do, butgreat team. We're proud of them,
learned a lot together and andultimately sold that product,
not the company, but the productconstruct to Abrigo in August of
2022. Part 2 or product 2 out ofthe Banklabs Innovation Lab is a
(03:54):
product called participate,which is what we're a 100%
focused on now. And we launcheda new co, a new company in June
of 2023, whereby Banc Labs tooka minority investment from Jam
Fintop, some great investorsthat raised their money from
their limited partners who are,primarily banks that want,
(04:16):
research and development labs,wanna be, able to influence new
technology products and seewhat's coming out, but also, you
know, make a good financialreturn like any private equity
investment.
So June 2023, just to recap,Banklabs spun out a new co
called Participate. Bank Labs isa majority owner, and Jamfintop
are the minority owners inconjunction with employee
(04:37):
ownership.
Kevin Horek (04:39):
Okay. So let's dive a little bit deeper into
participate. And what exactlydoes it do, and how does it
automate kind of loan trading?
Matt Johnner (04:48):
Yeah. Participate automates the process of loan
participation. Meaning, when abank or nonbank lender wants to
do a loan, but it's too big ormaybe they have too much
concentration risk with thatborrower, or they have too many
of those loan types, maybecommercial real estate, for
example, then, it's been quitecommon, to manually participate
(05:13):
out loans to other buyers, toother downstream participants.
And historically, that's beendone by you a lender calling
your buddies down the street,who you went to banking school
with, or you play golf with orwhatnot. Pretty much a good old
boy network, which inherently isnot bad, but it does create a
lot of inefficient processes forthe lender who in this
(05:33):
environment have to call 20banks before they can get 1 or 2
to agree to buy a piece of thatloan.
And if that originator can't dothat loan, then, they run the
risk of losing that borrower toa bigger competitor. And if you
if you lose borrowers time aftertime then you start to lose
lending teams. And if you loselending teams as a bank that's
really really bad. So weautomate that front office
(05:56):
process with a cloud basedsecure process. We have 2
patents on it already.
When the loan closes, what makesus really unique is we do the
back office loan participationservicing and automation. So
when a loan is sold successfullyfrom 1 originator to 3 or 4
downstream participants, then wegive everybody shared real time
(06:17):
cloud based balances,transaction history. Our system
manages all the email and in appnotifications to the buyers when
the buyers need to fund thatloan or they're getting payments
for their pro rata share. Wemanage all the variable interest
rates, etcetera. So from abusiness strategy perspective,
it allows banks to keep lending,keep their lenders lending,
(06:40):
generate that non interest feeincome, to build a more
profitable bank, also allowsthem to do new loan types if
they're the buyers and maybethey've ever done before.
So if you're a a bank that has aheavy commercial real estate
portfolio, and you know you wantsome commercial and industrial
loans, c and I loans, or maybeag loans, or maybe fringe loans,
(07:01):
then what participate allows youto do as a buyer is to buy into
those loans where you don't havelenders that know how to do
those loans. So your lenders mayknow how to do commercial real
estate loans, but they may notknow, how to do c and I loans or
have those relationships. Soparticipate allows the buy side
to diversify their loan mix,reduce their concentration rate,
(07:22):
and get into high quality loans.
Kevin Horek (07:25):
Okay. So how do you mitigate people's risk by
investing in these types ofloans?
Matt Johnner (07:33):
Yeah. So first of all, we work with banks
primarily, also credit unions,some foreign credits, and more,
and more private lenders. So wework with high quality
originators that are highlyregulated for the most part with
regard to banks, credit unions.And, so the originator is
originating that loan. We're nota broker dealer.
(07:55):
We're facilitating theintroduction of the originators
with potential buyers, and ourtechnology is transacting it. So
we're not a broker dealer inthat case.
Kevin Horek (08:05):
Okay. So then how do you monetize the platform?
Matt Johnner (08:08):
Yeah. Great question. So we charge a
software as a service fee forthe value of the automation to
the originators who areoriginating in the front end
when you're selling off a loan,if it's a new loan or an
existing on balance sheetcredit, there's no reason you
can't use participate to selloff some of your existing loans.
Okay. And when it closes, thenwe automate all the back office
(08:31):
work and that can happen forover 7 years.
These term loans can last. Okay.So for the value of all that
automation and the bank nothaving to hire new people as
they scale their loans orallowing folks to retire or move
tasks off folks to more valuabletasks, then participate has a
lot of value there. So we chargea software as a service fee for
(08:52):
that. Additionally, we charge a,bps fee of, a basis points fee
on the portion of loans sold.
And we have a couple models thatour clients can play with to
either have a higher or lowerSaaS fee or bips fee based on
what their personality is andtheir their objective is. Okay.
Kevin Horek (09:13):
So for people that have maybe never done these
types of loans before that arelooking to get into this, How
much time and effort isparticipate actually saving
them? Because that's where yourreal value is. Correct? Or am I
missing the boat on that?
Matt Johnner (09:29):
No. Absolutely. So there's a ton of efficiency with
it, and it's also the secondpiece of value is we bring we
bring buy side clubs. So wecurate clubs of new buyers that
were never known to thoseoriginating banks or credit
unions.
Kevin Horek (09:43):
Right.
Matt Johnner (09:43):
So that that, curated buy side capital stack
is what we're providing, notjust the automation. So banks
are are are saving hours andhours and hours of lenders
calling their buddies down thestreet trying to find people to
buy into this loan. Our,technology allows you to publish
a loan in as little as 15minutes.
Kevin Horek (10:04):
Oh, wow. Okay.
Matt Johnner (10:05):
How to digitally transact esignature, integrated
legal agreements, integratedsubscription management, secure
document sharing. So just atremendous amount of time
savings for the lender, thelending assistant, assistant,
the credit officer. And thenwhen the loan closes, just a ton
hours and hours and hours a weekand month of savings for the
loan ops staff who no longerhave to keep their own
(10:26):
spreadsheets of what each of thebuyers pro rata share is each
time they get a borrower paymentfor principal and interest. So
tons of time on efficiency asyou pointed out, you nailed
that. And then in addition, forlenders that wanna originate
loans and have run out of theirtypical buyers, We're,
introducing them to new buyers.
So we're providing new capitalstacks, new capital streams, and
(10:49):
we're now layering in more andmore intense technology to
evaluate lenders balance sheetsand make recommendations of what
they should consider selling andbuying to optimize, you know,
their net income, their netinterest margin, their
noninterest fee income, thattype of thing.
Kevin Horek (11:06):
Interesting. Okay. So do I need to be in a certain
geographic region, or how doesthis kinda work?
Matt Johnner (11:14):
Yeah. No. We're all we're a 100% across the
United States right now. We'respeaking to the US for now, but
I think we're in 42 statesalready. Oh, wow.
Is acting, for our originatingclients or managing their loans.
It's been a a very fast process,and we're we're trying to
leverage what's calledMetcalfe's law, the the value of
(11:36):
a network expansion. It's howmobile phone networks and, you
know, the Cisco, Internetequipment worked in the in the
in that day and age. It's wherewhen we sign one originating
financial institution, weautomate all their existing loan
participations they did beforethey knew about us. So we load
all those in a day, and thatallows the back office to
(11:59):
immediately begin benefitingfrom our software on the 30, 40,
50, a 100 deals they had thatpredated us.
And so what we do is we thenleverage that network effect. We
we give free access to thosebuyers of our client for those
legacy loans who now get realtime balances, real time
transaction history, emailnotifications, in app in app
(12:22):
notifications. So that's part ofthe reason we've been able to
grow so quickly is leveragingthat network effect or what what
is called Metcalfe's law.
Kevin Horek (12:31):
So I I actually think there's really good advice
in there. So just for so youbasically will go, You you're in
42 states. I wanna get to thatin a second. You obviously had
to go through a bunch of, like,hurdles just to be live in every
state. But I think what's reallyvaluable that you just mentioned
(12:52):
is if you spend your own timeand resources importing their
current and past deals becausethen they can see how easy to
use the system is.
They wanna use your system, keepusing your system, and then
anything new, they're bringinginto the system. Is that fair to
say?
Matt Johnner (13:11):
Yep. 100% correct. And it's not just the originator
that's seeing the benefit.
Kevin Horek (13:16):
Right.
Matt Johnner (13:17):
In the regulatory environment, the buyers are
required by the federal,regulators to also keep a
balance of what they think theyshould be paid by the
originating institution. So whatthey think they should get paid
for principal and interest. Andbear in mind, a lot of these are
variable interest rate loans, soit changes every time a payment
is made. And the coretechnologies, do not do much in
(13:40):
terms of this functionality.Almost none of them can do
notifications.
Most of them can do theprincipal and interest split
when a borrower drops off apayment in a bank, but that's
it. So 99.5% of a loanparticipation or loan
syndication or club deal ismanaging our software, and it
gives those downstream buy sidefree access to their balances.
(14:01):
So imagine you're a VP of loanops at a buyer, whether you're a
credit union or a bank, and youhave to keep your own
spreadsheet for all thetransactions that your folks
have bought from thatoriginating financial
institution. It's a it's a lotof work, and there is almost
never a scenario where at theend of the loan, everybody's on
(14:21):
the same page and balances. Sothen there has to be forensic
accounting, sometimes there'ssettlement fees or charge offs,
Somebody owes somebody money.
And then think about thereputational risk if you're
constantly having to, negotiatewith the balances at the end of
a loan. It creates friction. Atthe end of the day, that's what
we're trying to fix. We'retrying to democratize loan
(14:42):
trading, by reducing friction inthe loan trading process both on
the front and the back, and youhave to have both. You can't
just have a bunch of lendersdoing more loans than ever
before if the back office can'tkeep up, if they have to rely on
spreadsheets.
So you have to have both of anoffice and the back office, and
we believe now and we're seeingthat more and more loans are
(15:03):
happening smaller, not justbigger. So we believe if we take
a you know, we're taking a pageout of Uber's book where if you
reduce friction and improve theexperience, then you can
encourage thousands of timesmore loan trades a year than
ever before.
Kevin Horek (15:17):
Yeah. Interesting. That no. That makes a lot of
sense. So what advice do yougive to people that are looking
to do well, because there's alot of, like, legal stuff that
you need to do to go into thedifferent states and, obviously,
building software thataccommodates all these different
conditions is a challenge.
(15:38):
So how did you figure that outand sort all that out, and and
what advice do you give topeople that are maybe looking to
do something multistate likethis?
Matt Johnner (15:46):
Yeah. So first, we're not broker dealers. We're
technology firm, and that'sthat's a dramatically different
regulatory environment. Right.Broker deal have to be
registered.
We do not as a technologycompany. Our tech is just
facilitating the transaction. Sothat's the biggest difference.
So when we when we sign a clientand they're in 3 states, then
(16:07):
immediately we have transactionshappening in 3 states. So it's
that another example of networkeffect or or, you know, the the
tag along on Metcalfe's law.
Kevin Horek (16:17):
Right. Okay. Interesting. So walk us through
a a little bit more of someother features and functionality
of the platform. Like you said,it takes can take, you know, as
quick as 15 minutes to get on.
You know, what's what is my 3months, 6 months, 2 year, 3
year, 5 year, 10 year look likein the platform?
Matt Johnner (16:40):
Yeah. So first, it's cloud based. We're SOC 2
audited. We're in AWS SOC 2 datacenters. We undergo third party
web penetration tests.
So first, security andscalability is always entry fee.
It goes live in 1 hour, so it'snot a big lift like a core
conversion or a a loanorigination conversion. We can
(17:03):
have all the originating bankslegacy loans loaded in a day, 2
days max, which allows for theback office to benefit on deals
that were never done with us.When a lender does do a new
deal, they can, load essentiallythe loan data and documents and
(17:23):
publish it to whichever banks ornon banks they want to look at
it. So they decide who it goesto, we don't decide.
So the originator is in fullcontrol, they then decide and
they can do so via in our systemclubs. So you build clubs or
we'll build clubs for you oflike minded buyers. So here's a
club of CRE buyers, that don'tlike construction loans, or
(17:48):
here's CRE buyers that likeconstruction, but not
hospitality, or here are clubsthat want c and I loans or ag
loans or franchise loans orequipment finance loans or high
FICO consumer loans. So we doany loan type commercial or
consumer of any size. So youcould put a $1,000 loan on there
today or a $100,000,000 or$400,000,000 loan.
Kevin Horek (18:08):
That's cool.
Matt Johnner (18:08):
And break it up infinitely, automatically into
many pieces. Once that'spublished to that one or many
clubs, those folks on thedownside are notified they log
into the system via their mobilephone or laptop, they see the
details and if they wanna seethe full loan package, then they
have to sign, integratedelectronic NDA and non
(18:29):
circumvent, which now allows theprospective buyers to see who
the borrower is, see thedocuments. Until that point
until that point of signing theNDA and noncirc event, they
can't see the docs or data,which keeps the originator safe
from the buyers potentiallygoing around to the borrower
directly. Once all that happens,then they the buyer evaluate,
(18:50):
the loan, typically take it tounderwriting or loan committee.
They come back, they subscribethrough our system telling how
much they want to participatein.
Once that's accepted by theoriginator, then we do all the
legal master participationagreements in the software with
esignature, and then it'sclosed. Once it's closed,
instantaneously seconds later,the loan ops team at the
(19:13):
originating bank gets the backoffice value, and they can do a
funding request from the thedownstream buyers to fund that
original advance to the borroweror whatnot. And then all the
back office stuff happens, allthe automated notifications and
balances and transaction historyand all the stuff we talked
about.
Kevin Horek (19:31):
Okay. Very cool. So you you mentioned you sold a
product. What advice do you giveto people that, you know, are
are going through that, or orwhat did you wish you know knew
now that you're on the otherside of that?
Matt Johnner (19:48):
Oh, boy. I'm not sure how revolutionary this
advice is gonna be, but, youknow, starting companies is
hard. Yep. Bootstrapping is evenharder, but very rewarding. If
you can bootstrap one piece ofadvice, do it.
If you're in a position to nothave a a very expensive cost of
(20:08):
living personally or if you havesaved money up and you can get
away with bootstrapping, thenyou definitely are gonna be
better off if you're successfulby retaining equity. So that's
probably number 1 is if you canbootstrap, do so. Number 2, you
know, product market fit. Is itjust a great idea you have, or
can you vet it really quicklybefore investing a lot of money?
(20:31):
So, answer, you know, thequestion, who cares?
Who cares about your productenough to pay for it? 3rd,
really smart guy here in Dallasgave me some great advice when I
asked him his business advice,and he said, get in front of an
avalanche. So look forindustries that, if you get in
front of, we'll sweep you up andcarry you forward, whatever that
(20:54):
may be. So, you know, thingslike that. And then on the the
sell side when we're selling, wedid have an investment banker.
They did, get many peoplelooking at it. We were very
happy with our partner at Abrigoand, really have just, completed
our transition as of the end of2023. So, that's the last piece
(21:15):
of advice is, you know, reallytry to have consistent, good
dialogue throughout the processof not just selling, but when
you've sold, supporting thatbuying entity, having a good
relationship with them becauseyou never know if you're gonna
do business with them in thefuture. And I think that applies
for the buying entity, not justus as a seller. So, outside of
(21:38):
that, probably longerconversation over a beer or
coffee or something.
Kevin Horek (21:43):
Fair enough. How did you come up with the idea
for participate and and thenvalidate that idea then?
Matt Johnner (21:49):
Yeah. So Mike Montgomery, who's our founder,
chairman, and CEO, long timebanker. He's on a bank board.
His grandfather, was heavilyinvolved in banking advisory for
the Federal Reserve out ofBoise. His, dad started 3 banks
in Idaho and Utah and sold them.
Kevin Horek (22:09):
Oh,
Matt Johnner (22:09):
wow. So, you know, heavyweight community banking
family. He's on the board ofSouthern Bancorp, which is a one
of the original communitydevelopment financial
institutions started by thengovernor Clinton and the Walton
family. And so he has a goodpulse on what's going on, not
just today, but historically.And he always bemoaned the lack
of, speed and flexibility thatbanks had to adjust their
(22:32):
balance sheet.
What if you have to sell off 3or 400,000,000 SCRE? Do you have
an automated process and anetwork of buyers to go to in
minutes, not use spreadsheetsand smiling for dollars?
Likewise, if you're a bank thatonly does commercial real estate
loans, that's really, a risk foryou because it highly
concentrates you in one loanclass where you really should be
(22:55):
diversifying. But, you know, ifyou're a CRE Bank, CRE lenders
don't know a lot of CNIborrowers. So, you know, we
needed a way, and he had thevision not only to make a
spreadsheet based process moreefficient, but also to provide
alternative capital stacks andallow for educational,
components to help, banks thatreally should have other loan
(23:18):
types, but don't have thelending skill set or those
credit skill set or the opsskill set of that loan type to
be able to buy into those loans,easily and and with high
quality.
Kevin Horek (23:28):
Interesting. Yeah. You actually said something that
that's actually reallyinteresting that I think people
don't really think about and, islike, if you can automate
something as simple as, like, aspreadsheet process, there some
of those industries are1,000,000,000 of dollars. And,
like, it's interesting becauseI'm I'm working on a product
(23:48):
right now that it's doing thatin the dental space, which could
easily be applied to the eyecare space and, like, a bunch of
other medical spaces. But whenyou think about it, you're just
like, well, they just usespreadsheets.
We'll just put but if youactually take you look way back
and you look kind of high levelat it, it's like, well, what is
the spreadsheet really doing?And if you can automate that and
(24:11):
you can save people tens of1,000 a month and, you know, you
charge them, you know, 100 or afew $1,000 a month for that,
it's a no brainer. Right? Andit's kind of like that avalanche
that you're talking about, andand I think some people don't
think about things like that.They're like, I need to build
the the next sexiest app.
It's like, well, sure, maybe,but that's really challenging.
(24:34):
But if you can really automateor really speed up a process
that's very manual in, like, asimple piece of software. Well,
I guess spreadsheets can be verycomplicated, but I think you
know where I'm going there. It'slike Purpose. That's could
potentially where a lot of thebig money is, right, and
actually getting acquired.
Matt Johnner (24:52):
Yep. Yeah. And, you know, the other back to that
other piece of advice is build acompany to last. Build a company
that can be profitable andscale, and you may never be
profitable, to a certain extenton purpose. If you see your
operating metrics, your keyperformance indicators growing,
whether it's demos that have aconversion rate to sales or
(25:13):
whether it's number of loanstransacted on our platform, as
long as you're seeing the growthYeah.
It's okay to keep spendingmoney, but only as long as you
feel like you can turn off thespigot at some point and and
turn to profitability to be incontrol of your own destiny.
And, obviously, that doesn'thappen in a couple years. It
takes generally 7 to 10 years tobuild a company that is
(25:35):
qualified to sell or keep incash flow in a meaningful way.
So, you know, it's a journey.
Kevin Horek (25:42):
No. Fair enough. How did you start making
relationships with the companiesthat you potentially wanted to
buy the product?
Matt Johnner (25:50):
Yeah. We were in discussions with Abrigo about a
potential partnership.
Kevin Horek (25:54):
Okay.
Matt Johnner (25:55):
In addition to them, we were talking to various
others, in some cases, potentialcompetitors. We're talking to,
investment groups, you know,private equity firms. So it was
it was building relationshipsover time. You know, a lot of
these folks call us. We getcalled by private equity and
(26:15):
venture capital quite a bit.
So that's with regard to thepast. Going forward with this
new company participate,Jamfintop are great partners.
They've they're, our minoritypartners, and they're they're
way more than just capital. Theywe talk to them almost every
day, with, they're makingintroductions to their limited
(26:38):
partners, or they're makingintroductions to potential
hires. We hired, like, oneperson just recently that they
introduced.
So, likewise, those folks getcalled on a lot by larger
private equity firms that wannado recapitalizations. They're
developing relationships withstrategics. I think Fiserv is
(26:59):
one of their limited partners. Qtwo is one of their limited
partners. So big industryplayers.
So I think what we'll see is,you know, a lot of interest from
our own relationships that wedeveloped, a lot of
relationships, that will comeout of Jamfintop, and then I
think there'll be always thosenew folks that reach out to us
that we hadn't really thought ofin a serious way that that like
(27:21):
our story and feel like, youknow, combined, we would be
better.
Kevin Horek (27:25):
Okay. Makes sense. So you bootstrapped a company.
You took on an investmentpartner or participate. What
were the pros and cons, and whatmade you do you didn't bootstrap
participate?
Matt Johnner (27:38):
Yeah. No. Great question. So Construct, we
bootstrapped and, you know, ifyou looked at our burn rate per
month, back then I thought itwas a ton, you know, we didn't
pay ourselves much and writingcapital call checks and, that's
always a nervous time,especially when you have to
explain this to your wife.Right?
But, you know, the what werealized on construct is maybe
(28:03):
we moved a little too slow.Maybe we should have invested
more whether that was our ownmoney or taking outside capital.
When it came to participate, wehad that experience and that
history, both good and whatcould we have done faster or
better, you know, always beingintrospective. But participate
itself is a completely differentanimal, because of the network
(28:25):
effect, because of how fast thiscan go, because it doesn't have
to be just loans. It could bedebt.
It could be deposits, because itdoesn't have to be just the
United States. It can be, youknow, international. We realized
that this was just a much biggeropportunity and that we are
gonna need some help to grow itto the level of success that we
believe we can and that thedeserves and that our team
(28:48):
members deserve. So, we realizedthat it was time. And,
incidentally, Jamf and Top hadcalled us.
They had heard about constructand had heard about participate.
They wanted to get into thisspace. They had researched some
of our early competitors, andso, it was just really perfect
(29:08):
timing. We were thinking weprobably needed a good partner,
and at the same time, theyreached out to us because they
wanted to be in this space. Sogood timing.
Kevin Horek (29:17):
Yeah. No. That's that's interesting. It is
interesting if you can geteither your first clients or a
partner to help you build thisthing whether they put in cash
or not, but if they can helpeven just in the connection
space or beta testing or beingone of the first users, that is
almost like more valuable thanthe cash in a lot of cases.
Right?
Matt Johnner (29:38):
Absolutely. I'm you nailed it. The concept of
preselling, I mentioned productmarket fit when you ask, you
know, what nuggets of advice orwhatever would I have.
Preselling is really what I wastrying to say there, which is
what you were just saying. It'sbefore you get too far in a
product, really, you could be inprototype, know, build a
prototype in a week.
(29:58):
Right? You should be showingthat prototype of your, friendly
prospective clients and askthem, is this enough for you to
pay for? And if not, what arethe 3 things? And I always say 3
things because you don't wannalet clients go nuts.
Kevin Horek (30:13):
Yeah.
Matt Johnner (30:13):
Because they may or may not have the right vision
for the industry because they'vebeen doing the same thing that
they've always done. Right? So,you know, presale a prospective
couple clients, get them to paysomething. Even if it's of, you
know, $500 a month, it doesn'tmatter. As long as they're
willing to pay for it and gothrough the the purchase process
and, you know, send you an ACH,then that's gold.
Kevin Horek (30:39):
So how do you manage your product road map
with some of that feedback? And,you know, obviously, you have
clients of different sizes andsome of the bigger ones might
even offer to pay you to addsome features. How do you manage
that road map with featurerequests?
Matt Johnner (30:56):
Yeah. So in an in a new white space product like
participate, it's it's very newin terms of front office, back
office, cloud, as well ascapital stacks. You know, these
clubs we're curating of newcapital. It's very new. There's
very little out there, andalmost all the banks, including
the the big boys, do this onspreadsheets or legacy
(31:18):
technology that only does a partand then they have to use
spreadsheets for the rest,depending upon whether you're
talking front or back.
So when you're in an environmentlike ours and participate, you
have to really drive the visionfor the product. You know, you
have to drive 80% of the thearchitecture and the feature
functionality. So, with theremaining 20% roughly coming
(31:42):
from our clients that may haverequests. So we get requests all
the time, advice from ourclients, which is gold. We love
that.
We love our clients. We wantmore and more requests from
them. And then our product team,they take all these different
requests, whether it's fromclients or our customer success
team or our sales team or ourmarketing folks or our
engineering team, and theybuild, basically, business
(32:08):
requirements, user stories. Wefollow an agile method of
development, constantly pushingout code. Engineers always get
our head of engineering alwaysgets what he wants when it comes
to infrastructure, scalability,security.
That's always entry fees, sothat's always part of our
product road map. And, you know,our head of product and his team
just takes all that input fromall of our stakeholder leads,
(32:31):
and we figure out what is gonnaadd the most value. Generally, I
always supply, you know,security and scalability, number
1. After that, that's implied.The number 1 is revenue.
Does this generate more revenue?Is this a module that can
generate more revenue from ourinstalled client base, or is
this a set of features functionsthat would allow us to price our
(32:51):
product more? So revenue isalways number 1. Number 2 is
efficiency would allow us todrive efficiency and thereby win
more and more clients with amore demonstrable return on
investment. And then 3rd is kindof like a mystery.
You know, it's always a littledifferent, and it it could vary
by product. But revenue andefficiency are always, you know,
(33:14):
1 and 2 with after the entry feestuff.
Kevin Horek (33:17):
No. That that makes a lot of sense. So I'm curious
because a lot of people that yousaid have been doing this in
spreadsheets and kind of maybesome older technology, how do
you get them to actually switchand use this modern way of doing
things? Because that can bereally, really challenging. Like
(33:38):
because everybody's like, well,this is quicker and faster.
Everybody's just gonna use it.And it's like, maybe, but
sometimes that can take a lotof, you know, coaching and to
get them to actually switch andsee the value. So how have you
managed that?
Matt Johnner (33:53):
Yeah. Not easy. So change is hard. Getting people
to change is hard as everybodyknows, especially in banking.
Bankers are known to be evenmore change resistant than other
industries.
So the way I look at the worldis it's like being a little bat
flying around a cave. You'relooking for resin. Right? So I'm
flying around the cave,messaging, pinging prospective
(34:15):
clients when we're first comingout with a new product. Hey.
This is gonna make you moreefficient. It's gonna allow you
to do more loans. And early on,we got good resonance, you know,
pings back on efficiency. Butwhat we learned was with our
lending message, we scared someof the loan syndications leaders
(34:35):
and lenders that thought, ohgosh. This is gonna disaggregate
me.
This is a marketplace where itdoesn't need me as a human
lender, and that's not the casewhatsoever.
Kevin Horek (34:45):
Right.
Matt Johnner (34:46):
But when we pinged and we got residents back, that
message wasn't being deliveredthe way we intended or wasn't
being received the way weintended. So we like a good bat,
when you see, you know,resistance and resonance, you
adjust your message a littlebit. So we kept going with the
efficiency on the back office,and we made more of a play on
efficiency on the front officeand said, hey, mister loan
(35:08):
syndications guy or gal. Now youcan do 10 times more loans and
make 10 times more profit forthe bank and 3 times more profit
for you and your team in termsof incentive comp for doing more
loans, bigger loan book, morenoninterest fee income. So in
terms of getting, the industryto change, it's having a great
vision.
(35:29):
It's having a valid productmarket fit. But be a little bat,
fly around the cave, ping andlook for resonance and adjust as
fast as you can.
Kevin Horek (35:38):
Yeah. You actually touched on something that's
actually really important is ifyou can prove to them that they
can make more money, their thechances of them trying it and
adopting it are gonna be a lothigher than just saying, well,
it speeds up your job. Right?Like, sure, that's a byproduct
of that, but let's be honest.Most people are like, if you can
(35:58):
make me more money, I'minterested right away.
Right?
Matt Johnner (36:02):
Yep. Yeah. So we we focus on the institution and
the individual. So we have areturn on investment calculator
that shows for every about50,000,000 of loans that you
sell off, you make about2,400,000 in additional income
for the bank or credit union.
Kevin Horek (36:21):
Right.
Matt Johnner (36:21):
And if you apply your own incentive comp metric,
Sally or Jimmy, of what you as alead lender get, in terms of
your incentive comp on your loanbook you originate, then you're
looking at this type of compincrease for you and your team.
So we try to apply it at theinstitutional level and the
individual level ofcompensation.
Kevin Horek (36:43):
Smart. Interesting. So you touched on something
throughout our conversation sofar about security and and
scalability, which I think isarguably just as important. But
how do you actually practicethat? Because security is
becoming very, very important,especially in certain
(37:05):
industries, but I think foreverybody.
So how do you make sure that's afocus and that you don't kind of
sidestep that just to rush out afeature or or or something?
Because that can be reallychallenging in itself.
Matt Johnner (37:18):
Yeah. So culture, setting a consistent culture of
how important security is,especially in banking Sure.
Having the right leadership,being consistent in our
messaging with that leadership.So our our head of engineering
and our chief technology officerand our head of dev ops and our
head of product and our our ourchief architect. So all those
are individual guys and gals onour team.
(37:40):
And being consistent in oursupport of their leadership
towards building a highlysecure, environment technically,
but also a culture. Beingparanoid, you know, there's
always gonna be somebody better,faster, stronger out there
pinging away. We got, like,23,000 hack attempts, I think.
Oh, wow. You know, penetrationattempts last month alone.
(38:02):
Oh, wow. You know, we we have tobe on our toes. We build most of
our own stuff. We almost neveruse, well, we've never used open
source outside of, you know, aweb server type of deal. So we
try to build as much as we canto control our environments.
We're very wary of third partyAPIs or middleware APIs because
(38:26):
of our, reliance on them, to bedefending against many hack
attempts that could get to manyendpoints. You know, 3rd party
web penetration tests, Wevoluntarily do those. It's not
required, but, certainly, wethink it makes sense to have our
own teams, testing themselvesthrough 3rd parties. So, we have
(38:49):
a great third party, webpenetration firm that tests us.
SOC 2 audits.
Again, we sign up our own SOC 2audits, not just out of the data
center, yadayada yada. Soculture, leadership, consistent
support for that leadership toreally execute and test
(39:09):
constantly.
Kevin Horek (39:11):
Yeah. No. I think that's actually really good
advice because, yeah, like, it'sinteresting, especially at early
stages in a start up. Securitycan be, like, one of the last
things on people's mind where ina lot of cases, it should almost
be the first thing in certaincases.
Matt Johnner (39:28):
Yeah. No. It's look, building something from
scratch is not easy and there's,you know, there's, scope,
schedule, and resources. Pick 2,you can't get all 3. So what's
most important to you when youstart a company, you grow a
company, or you have a maturecompany with regard to new
products?
You can choose scope to be themost important and schedule to
(39:48):
be second and resources third,or you can choose resources,
scope, and schedule. Butinevitably, you can't have all 3
at the same time. So you have toyou have to decide, is it speed
to market that you want? Is ityou only have 2 developers or an
architect and a developer? Oryou have lots of resources and
schedules most important, thenmaybe scope gets trimmed down.
(40:11):
So, you know, we're constantlybalancing those.
Kevin Horek (40:15):
Sure. The one thing and I'm curious to get your
thoughts on is just because youthrow more designers,
developers, people at a problem,doesn't necessarily mean you're
gonna be rolling out softwareand features a lot quicker. Has
that been your experience, orwhat are your thoughts around
that?
Matt Johnner (40:31):
Yeah. It's true a lot of the time, and some of the
times more resources do makesense. So if you look at our
technology, it's, you know, corearchitecture, you have feature
functions. We have a lot ofintegration to loan origination
systems and core bankingsystems. We have, the
opportunity to build out newrevenue generating modules, so
(40:54):
completely kinda, well, notcompletely, very very self
contained modules that stillhave to interact with the
mothership, but can be done isis a little bit more isolated.
You know, but, yes, for sure,there is a limit to how
effective you can be, if you'retalking about a set of features
(41:14):
or functions. I mean, you canonly get so many things done
with a with a a bigger team. Itgets in the way after a while.
Kevin Horek (41:21):
No. That that makes a lot of sense. But, Matt, we're
kinda coming to the end of theshow. So how about we close with
mentioning where people can getmore information about yourself,
participate, and any other linksyou wanna mention?
Matt Johnner (41:32):
Yeah. Absolutely. So participate, you can learn
more at participate loan dotcom. That's participate loan dot
com. And that is the latestinnovation from Bank Labs, which
you can learn more atbanklabs.com.
And if you wanna reach out to medirectly, feel free. My mobile
is 214-208-0436. 214-208-0436.My email is
(41:59):
matt.chaunnerjohnneratbanklabs.com.
Matt.chonner@banklabs.com.
Kevin Horek (42:06):
Perfect, Matt. Well, again, I appreciate you
taking the time of your day tobe on the show, and I look
forward to keeping touch
Matt Johnner (42:13):
with you and have a good rest of your day. Great
to see you again, Kevin. Reallyappreciate it.
Kevin Horek (42:16):
You as well. Thank you. K. Bye.
Intro/Outro (42:19):
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