On The Brink with Castle Island - Dhruv Patel and Himanshu Sahay (Arch) on Building a New Alternative Lender (EP.390)

Episode Date: January 23, 2023

Arch cofounders Dhruv Patel and Himanshu Sahay  Arch coming out of stealth Key lessons learned from the crypto lending crisis Arch's differentiated offering within crypto and other alternative assets Leveraging crypto rails to build a lender of the future Using experience at top technology companies to build a superior consumer product Learn more at Archlending.com and on Twitter

This is Sean Judge. On today's On The Brink, I sat down with Drew Patel and Hamanshu Sayha, co-founders of Arch. Arch is a new alternative lending platform that includes lending against NFTs and crypto. Today, Arch is coming out of stealth, and we're proud to announce we invested in the company in early 2022. Here's my conversation with Drew Patel and Ammanchu Say. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast.

You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping in two. to stabilize Fannie Mae and Freddie Mac,

the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden, people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin.

Drew, Hamanju, thanks for joining me. Hey, Sean, thanks for having us. Thanks for having you, Sean. I guess just to start would be great to do the born and raised and where you started your careers and what roles you were in there. Truth? Yeah, certainly. So I was born in Arizona and grew up in the Bay Area, California, went to college out there as well where I studied computer science and finance.

My first job out of college was at a hedge fund called Bridgewater Associates in Connecticut. Was there as a quant-like role in the research department? And from there, I moved on to join Brex, a B2B FinTech startup early on and spent three years across a variety of roles, including operations, credit, and capital markets. And I was born in India. I grew primarily in Dubai and moved to the U.S. for university. I studied computer science at Wiltrepoly Technic Institute. And my first job was actually at Tinder back in 2017,

built a lot of Argenzi products there. Moved on to Burt in 2018 and scooters were hot and spent a lot of time there. I just learned a lot about high-growth companies. And then in 2020, moved on to Snapchat where I built and launched our external ad network. And that was my last chapter for this. Awesome.

And then so how did you guys make your way into the crypto industry? How did you get interested in crypto and fall down the rabbit hole? Yeah, for me, I think it was a few different moments. I went to college at Berkeley where there was a blockchain club when I was there. And I first got interested there when I was at the hedge fund that also was in parallel with the rise for Bitcoin to 20K and then the subsequent crash right back down. So both of those kind of sparked my interest, but more so from, a trading perspective. And when Defi had its moment, I believe two years ago at this point,

that's when I got much more interested in just seeing what these new financial rails look like and started playing around with various protocols to understand it more. And for me, it was quite similar. I was trading a lot earlier, but not doing too much else. And then in 2020, with Defi, yield farming and having a lot of time on my hands, I dove a lot deeper and just kind of fell down the rabbit hole from there. I love that defy got you guys both really excited. And yet Here we're going to be talking about something a little bit different. So why don't you guys share a little bit more about Arch, the founding story and what the mission of the firm is?

Yeah. So I can start with the founding story. Essentially, both and Monshu and I have been in tech startups and investing for a while. And as a result, we've experienced firsthand the pain of interacting with financial institutions when you have these sorts of assets that they just fundamentally don't understand, specifically when it comes to lending. And in parallel, over the last decade, there's been a wave of fintech startups that enable individuals to invest in these asset classes. So you can think of angelus for startups, Coinbase for crypto, fractionalized art, what have you. So we saw that there was

kind of this problem that we'd experienced firsthand coupled with this growing number of people that are actually invested in these assets and are facing similar problems. And that's what God is thinking about this problem is based. What we're doing at ARCH is essentially the mission is to accelerate financial progress for these individuals. And we're doing this by building the next generation financial technology company for individuals that have higher income, higher asset bases and are invested across these asset classes that banks don't fund them and understand. And we want to provide them financial services, software, and products. Makes a lot of sense. I mean, it's clearly a huge gap in the market today

is that things like startup equity, things like cryptocurrency and NFTs just aren't viewed as assets that you can kind of do things with in the traditional financial sector. But I guess the elephant in the room here is the biggest crypto news story of the year has been the collapse of a lot of centralized lenders. Without going into details of who those lenders are and who the borrowers were, a lot of people look at it and say, hey, is defy the answer? and does centralized lending work in a startup capacity? So in your opinion, what do you think went wrong there?

And what are some of the key lessons you can learn from this tumultuous period for centralized lenders? Yeah. So I think there was two key issues that caused maybe the collapse of many of these centralized lenders. And those are also two lessons for us. The first was the fact that many of them were lending out or generating yield off of customer assets. And as a result, this is quite risky, especially when you don't know the

counterparties you're interacting with sometimes or the assets are deposited into protocols such as anchor just to earn yield. And there's underlying risk with many of these protocols such that if something goes wrong, customer assets are directly at risk. The second piece was risk management issues. And I think here there's a variety of things. One might be accepting collateral that was highly illiquid, and as a result, when you went to liquidate it, you got prices that were below what you would have expected. And the second piece of that financial management is really having relaxed liquidation measures with outsized borrowers. And what that means is many of these companies had a single loan representing a larger percentage of their loan book, and you couple that

with relaxed liquidation thresholds. That sort of led to holes in balance sheets for many of these companies. So I think for us, the two key learnings are with both of those respects. The first, not touching customer assets, as tempting as it may be to gain incremental yield on customer assets, we're really building for the long term here. And they're stored one to one with our custodial partner, who's BitGo. And the second is making sure that we build out a sustainable and financially prudent loan book. And what that means for us is from the early days, capping the loan size to any one individual, being very conservative with the collateral that we do accept, and really having a variety of safeguards in place on our side to make sure

that we have automated liquidations in the event that we need to. Got it. That makes a lot of sense. It would be helpful, I guess, to just chat further about what the offering is today and how that differentiates from some of the other centralized lenders and the products that they provided. But maybe even also touch upon why it's different from the traditional sense of a lender taking in a customer's assets and then lending those out. So like from an arch structure perspective, how should customers feel a little bit more safeguarded by that?

Definitely. Let's talk about the product first. So our primary product we go to market with today is a lending product. It's a product where users come in and get a single loan against their portfolio of cryptocurrencies and NFTs, and that can mean a single loan against your Bitcoin, Ethereum, Polygon, Solana, what have you, and then maybe even turn your punk for good measure, and we'll give you a combined loan and LTV against it. We're soon going to add lending against public equities as well as against pre-IPO unicorns.

And as we see our customers live across these asset classes and have more demand, we'll keep adding more asset classes to lend against. Additionally, we also have a portfolio tracking product where users can view their aggregate portfolio across their centralized exchanges and non-custodial wallets. And this will also soon have support for other equities in the near term. And then if you think about how we're different from everybody else, I think the first thing that comes to mind is we allow you the ability to cross-collateralized assets. No other lender offers that today where you can get a loan against all these assets of classes together. And then in the not-to-distance future, as we add public equities, and equity in pre-IPA companies,

that I think adds further differentiation with those aspects of classes added into the mix. Specifically, though, with crypto and NFTs today, there are certain differentiators besides this. And the first just comes down to risk management. We don't lend out assets further once we've taken them. So we don't hold assets ourselves. We have a custody partner of BitGo,

which is kind of the default for most lenders today. And they are an insured product. They hold customer assets one to one, and we don't lend them out further through BitGo or anywhere else. We also don't have over exposure to one asset class or to one asset within the asset class and even to one individual entity. We try to follow the old rulebook of having not more than 10% exposure to any one counterparty. Besides that, I think we will in the future allow users to liquid stick collateral to reduce

the interest burden, but this is going to be in a very risk-adjusted manner and we haven't turned it on yet, especially given the volatility in the markets. On the NFT side, we do have much lower and standardized interest rates compared to our competitors. If you look at most NFD lending platforms, they're P2P, which means you can set any interest rate you want and any terms that you want. We don't do that. Our rates are static at 12% of NFTs. You also have instant approvals. You don't have to look for a lender on the marketplace.

You can come apply for a loan and get it dispersed immediately. And the one thing I do want to work on, Sean, which you alluded to towards the end, was essentially how. we're structured from a capital perspective at arch to be different. So I think just for context, the way many of the other folks have done it is they pair lending with an interest-bearing product. And what that allows them to do is receive assets. And the way they pay you interest is they're taking those assets and lending them to other folks, generating interest, and then passing on a portion of that back to customers. The way we're set up different is we do not have an interest-bearing product. So the way we capitalize the loans is currently off balance sheet from equity

who raised from venture institutions, and as well as debt capital, which will be raising and using that for strictly lending purposes. Got it. That's super helpful. And I guess just for folks that are thinking about becoming customers, and I'm sure it ranges a little bit, but what are typical rates, tenor, et cetera? Yeah, so it starts off at 8% for crypto. And it ranges between 8 and 15%. Most crypto will be at 8% and most NFTs, which we have white listed, will be at 12%.

And the 10 year is typically one year max. We will look to expand the duration over time as we grow a loan book. Because even right now, a lot of the initial people we've spoken to are looking to do more than one year and we'll start with a year and then I will roll over into a next loan. Got it. You're building an alternative

lending platform, but you started out specifically within crypto and NFTs? What drove that decision to start there as opposed to startup equity or some kind of other alternative asset that you think is overlooked? Was it market size? Was it appetite and customer research? What was the pain point? Yeah, I think two things.

One was that it is a large and growing market that is completely ignored by traditional financial institutions. The second was really when we build off of crypto rails. to accept crypto and NFT assets, what it allows us to do is accept a host of collateral, accept and collateralize a host of assets that are on chain. And for this example, it sets us up in a structure to lend against a variety of other asset classes. For example, if you work at a crypto native company, your startup equity is in the form of their token. And as a function of us already being able to accept and collateralize this assets, we are now able to lend against their startup

of equity. And we're consistently seeing this trend of real world assets going on chain. And for us, those were the two main reasons why it made sense to start with crypto and NFT assets. Got it. And thinking about where you guys had spent your career at Tinder, Snap, for you, Drew, at Brex, these are multi-billion dollar companies that were built over the last decade or so. I guess specifically with Brex, anything you can draw on your experience there, as you think about navigating complicated consumer finance markets? Yeah, I think a few things. My time there gave me a good understanding and appreciation of what it takes to build a lending

product end to end from an operations perspective, from credit, capital markets. So the main learnings were really just how to build a good, consistent loan book and scale that over time, as well as how you think about automation here because you don't want any human error points where you're relying on somebody to liquidate at a certain point in time and that can lead to losses. So for us, really, the risk mitigation piece as well as the automation of our whole lending infrastructure were two big takeaways from my time there. The last, I would say, was more so of a parallel of strategy. And when you look at Brax and the likes acquiring startup customers that are growing into enterprises before they get to

Amex, it parallels nicely to what we're trying to do with a group of customers and private banking, meaning we're going after customers that are sort of higher income earners and have a sizable asset base. They just haven't met the private banking threshold cutoffs. We're acquiring them earlier with a host of financial products and services with the goal of retaining them as they continue to scale financially and we being the main platform that continues to serve them. That makes a ton of sense. How do you think about like who your target customer is and how do you envision their experience with your product?

Maybe a follow up to that would just be like, why do you think today is really the best time to be building this company? Absolutely. I think we have a number of customer personas that we're going after, but I'll start off with people who are going for today, right? So, as we mentioned, our typical customer is a higher owner, isn't quite at the private banking special yet, which can vary from 10 to 20 million in investable assets. And they typically have some exposure to finance or just the tech industry in general through either working in that or investing in these industries. So as a result of the income they get, they typically have investments in these asset classes. and that today has tended to mean that they have a lot of crypto.

So if I'm going to put a number to it, I'll say it's individuals with between 500K and 10 million in investable assets. It can be someone who's been an early employee at a crypto company, someone who's been an early investor in a protocol or in a token. It can be someone who has had just like exposure to companies to angel investing, through being an early employee there, and as a result, had the asset classes. I think the important thing to note is these people are quite lendable, and they will at some point get to the private banking level where they have access to what we're essentially building, which is an equity line of credit,

which is what you get above a certain level when you get a line of credit against your net worth. So we want to provide that level of liquidity to people who are more financially upmarket and who will eventually get there to the level where that becomes enabled for people. And I think going off of that, there's a few major trends. to note on why we're building the company. And the first is that there's a lot of democratization of investing in alternative asset classes today. There's been a number of platforms that allow

individuals to have portfolio allocations outside of the traditional classes, stocks and real estate. You can now invest in PE funds. You can invest in all kinds of alternative assets. And if you're accredited, you can actually invest in VC funds and so on as well, right? So people who have the asset classes now have these needs of liquidity, and that's where we come in. second is there's a number of fintech infra companies that do KYC, that do banking as a service, that do crypto, payments like Circle, offer blockchain data on and off chain through APIs. And that makes it very streamlined to have a technology first lending product, which maybe wasn't the case five or six years ago. And that's really a tailwind we're going after as well,

where we can do all these things and much more streamlined customer-friendly matter. That's great. That's really helpful. I remember back. when BlockFi was getting started and the first product that they offered was you could post your Bitcoin and they would give you a loan against that. And a lot of the early use cases there were individuals that had a lot of Bitcoin and they wanted to be able to buy a house, but they weren't able to use that Bitcoin to show their bank that they had assets to be able to get a mortgage. So is it something similar for you guys today? Like what are some of the main use cases for people that are taking out loans.

And how do you imagine that will evolve over time? Yeah, I think we see two broad buckets here from our initial users as well as the customer research we've done. The first is for investment purposes. And so individuals don't want to sell out of their crypto holdings. They still believe in the future upside, but see compelling investment opportunities in other crypto projects, other tech startups, stocks, what have you. And so for us, this is a way to enable individuals to do so.

And the second is for larger purchases or expenses that come up in their life, maybe it's a down payment of a house or other expenses that have just come up that they need to manage and not want to sell existing assets in order to meet those. So those are the two use cases we see currently. I think over time, we see more and more of the same just enabling loans against a wider array of assets. as well as longer duration loads, which allows individuals to really plan out maybe longer-term investments that they want to make because they can plan out monthly payments for, call it, two, three, five years and as a result, know the liabilities that they're going to have. I think on a lighter note as well, there's, when I off-camera were talking about this earlier today, there's an individual who has significant exposure to a token that they haven't sold.

and his use of funds for getting a loan was, hey, I just want to go on vacation, man. And I'm like, that's kind of funny. But, you know, I want to do cases. And I think they only continue to evolve and increase as people's need and wants evolve and change. I love it. Yeah, you should just add that to the website.

Come to Arch, go take a vacation. So I appreciate how you guys walked through that you're not lending out customer assets. But the next kind of question becomes, if I'm going to give you my crypto or NFTs, how do I know that they're safe? Are you partnered with certain software companies or vendors today that folks in the industry right now? Yeah, absolutely. So we use a custody partner. They're called Bitco.

And it's a unicorn company. They fully insure customer assets. So we actually don't touch customer assets at any point through the whole cycle. They're sent to Bitcoin. and at the end of the loan, they return back to the customer. And they're still one-to-one. We don't lend them out further. We have no way to, actually.

So it's completely secure there. And then outside of that, we accept payments via circle for all of our loan payments. And then we do KYC for all individuals via persona. Got it. And so it's the two of you in New York. Can you share a little bit more about when you guys got started and who else you're working on this with? Absolutely.

So we started working on this quite casually. I think a while ago, but more formally, we started the company in February of 2022. That was early this year. Outside of Drub and I, we have two other full-time employees, both founding engineers. Tim was most recently at Google for the past five years. He was a senior engineer, worked in Google Lens, and he's also been a very close friend for a long time. Josh was most recently at Angelist, where he joined as an early engineer. If anyone's ever received the taxed docs from Angelus, that was all him.

And then he also was a close friend from a while back here. and I live together in Seattle during one of our internships. And we're looking to actually add a product design into the team. So if you know anybody, if anybody listening to this is interested, please reach out to us. It's just team at arch lending.com. Awesome. Yeah, we'll put that in the show notes. Well, this has been great, guys.

Anything else to share? I know we at the beginning of the episode noted that Castle Island Ventures is an investor in Arch. Maybe, Drew, if you want to share a little bit more about the round and who else invested. Yeah, certainly. So we raised our first round of funding earlier this year when we got started. We raised $2.75 million from Castle Island, Tribe Capital, as well as a few other funds like Pickus Capital and GFC. And to round out the round, we also had a host of founders and executives from well-known crypto and fintech companies such as Brax, Uniswap, and more.

So we're very pleased about that round. And I think the additional thing I would mention is we are hiring on the design front, as well as for folks that want to know where to find us on our site or socials, we can link those in the show notes below. And so I don't know, Sean, if it makes sense to list all these out, but we can put the Twitter and LinkedIn's in the notes. Yeah, we can add them in there. But maybe the best place to start would be at ArchLending. Yeah, yep. outageLending.com at ArchLending. Find us everywhere.

Well, this is great. We have another centralized lender coming into the space at the end of 2022 here. I love it. Well, Drew, Hymanchu, thanks so much for joining me today. This has been great.

Likewise. Thanks for having us, Sean. This was a blessing. Thanks, Sean. Appreciate it. Take care. Thanks for listening to another episode of On the Brink with Castle Island.

To find out more about Castle Island, visit castle island. VC. To listen to all of our podcast episodes, please go to on the brink dashpodcast.com or just click on the tab in our website. Thanks for listening.