Read Greylock Partners’ initial investment memo on Blend, which just had a $360 million IPO

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Blend Investment Memo

June 12, 2017

To: Greylock Partnership

From: Jerry Chen, Saam Motamedi

Investment Thesis

We recommend investing $35M or more into Blend. The company is poised to become the definitive financial services cloud company. The company wants to raise $75M to $100M in this round.

Blend is building a SaaS platform for mortgage applications and adjacent consumer loans. Bank and non-bank mortgage issuers are running on legacy systems and are being disrupted by digital issuers like Quicken Loans/Rocket Mortgage and newer companies like SoFi. As a result of evolving customer expectations, regulatory tailwinds, and to drive efficiency, lenders are prioritizing modernizing their application process to be “consumer grade” for both the borrower and the loan officer.

Blend is bringing the mortgage application process to the cloud and turning it from a slow, error prone, paper and manual workflow to an entirely digital experience on web and mobile. They integrate with borrower bank accounts, payroll systems, credit reports, and other data sources on the borrower side, and with the various bank loan origination systems (LOS) on the lender side. Banks are either trying to build this loan application software themselves, or source from other companies like Blend or other financial technology providers like Black Knight and Ellie Mae. Even large banks like Wells Fargo and US Bank are opting to partner with Blend versus build it themselves. The software itself is very complex as it needs to integrate with several banking systems. Once it is deployed, we believe it becomes very sticky given the deep integration and that the bank trains and runs their loan officer team on the new workflow.

In addition to their core mortgage application business, Blend also has the ability to enter adjacent markets like home equity lines of credit (HELOC) and other consumer loans like auto and student loans. Moreover, once they are in the workflow of mortgage and other loans, they can use their platform to sell other services to the consumer like insurance, appraisal services, etc.

There are several risks to the investment, including the high customer concentration and long sales cycles. It can take a year or more to close the major banks and then nationwide roll outs can take a very long time. There are also macroeconomic risks as mortgage volumes may drop when interest rates rise or in a recession.

Team

Blend was co-founded by Nima Ghamsari, who is the CEO. Before Blend, Nima spent several years at Palantir, which he joined in 2008. Blend’s founding team built and ran the Palantir for finance organization. The founders are very well regarded by customers and the company has developed a strong reputation and done a nice job generating a brand as the leading company in this space. They’ve recruited a high quality team from Palantir, Google, Salesforce, etc.

Market

Mortgages

Originating a mortgage is complex. The process involves multiple parties and requires a complicated sequence of data-heavy steps that must be handled accurately under tight time constraints related to the real estate transaction. A loan file can contain over 1,000 pages of documents that come from more than 10 different entities – all of which operate on their own software stacks. Historically, most of the data that’s used to prepare these documents has been gathered manually, with documents exchanged among the different participants in person or via PDFs. The entire process results in significant redundant manual work, time delays, errors, and costs.

Moreover – originators must manage this workflow in a manner that satisfies government regulations, which are particularly stringent following the 2008 financial crisis. Historically, most lenders have operated their origination business using point solutions that were connected (if at all) through customized integrations. This patchwork of systems result in significant inefficiency, a limited ability to monitor the business comprehensively, increased risk of error due to inconsistent data, inability to quickly incorporate changing regulations into work flows, and expensive technical integration and maintenance costs.

Blend is building the customer-facing software layer for mortgage originations – to streamline these manual workflows and bring them online, owning the mortgage life cycle from first touch with the borrower through data aggregation, scoring, disclosures and application processing. Banks will buy and white label Blend’s solution to bring their origination workflow into a single, cloud-based system that borrowers can interact with in the channel of their choice.

What’s driving adoption in mortgages?

The residential mortgage industry is undergoing several important changes which is driving the adoption of Blend and competitive solutions for digitizing the origination process. The customers we’ve talked to have described mortgage origination digitization as a top two priority in their consumer lending org, alongside consolidation of the underlying loan origination systems.

1. The recent wave of full-stack originators like SoFi and Better have driven increased customer expectations around the mortgage application process. Borrowers want to apply for mortgages online and have a consistent experience in the channel of their choice (web, mobile, retail).

2. Regulatory environment post-2008 has escalated requirements around the application as well as data quality/verification. Using solutions like Blend allow banks to offload the application compliance responsibility and ensure higher data quality since Blend can do the verification with the first-party source.
3. The cost of mortgage originations have increased due to the new regulatory requirements post-2008 financial crash; lenders are looking to drive efficiency to the origination process with digital solutions like Blend.
4. Loan officers, who get paid on production, view Blend as a significant work differentiator as it increases their production with their clients. Multiple customers spoke to Blend’s importance in hiring and retaining the best brokers.
5. “Day 1 Certainty” and other initiatives from the 2 major government sponsored entities (GSEs) who buy commodity mortgages (Fannie Mae and Freddie Mac) can help banks deliver near real-time mortgage approval. This is a significant process lift when compared to the 30-60 days an approval can typically take at a large lender.

Product

Blend’s product is a digital origination platform for loans – starting with mortgages. The product is a SaaS application that is white labeled by large bank and nonbank lenders as the “system of record” for mortgages from first touch with the borrower until the loan is funded – at which point Blend dumps the loan into the loan origination system (LOS) it is integrated into.

Blend streamlines this historically manual and paperwork-intensive workflow significantly by allowing borrowers to complete the application completely online, and in the channel of their choice. Blend integrates with a number of data providers to aggregate a borrower’s financial data and then automates necessary disclosures by detecting anomalies in the application in real-time. In combination with an interface for lenders and borrowers to communicate during the application, this helps eliminate significant back and forth and streamline the process. Blend’s loan officer (LO) experience becomes the core workflow where LOs manage their active clients and applications.

As a result, Blend significantly shortens the time it takes to get a mortgage funded, increases loan officer production, delivers loan packets with better data accuracy and creates high NPS borrower experiences.

Customers

As part of our process, we’ve talked to large banks, including both customers and noncustomers of Blend, a few mid-market banks, the channel partners (LOS vendors), among others. In general, customers described 2016 as a break-out year for Blend, citing the thought leadership that the team has established in helping Blend drive a strong reputation as a high quality offering in the space.

Customers are choosing Blend because of their “cohesive” product, existing product and customer experience, GSE relationships, and desire to isolate the origination workflow from the rest of the technology stack.

Summary

We recommend investing $35M or more into Blend. From our analysis, including calls with customers, the team, and industry experts, we believe Blend is well positioned to become an important vertical SaaS company in financial services for mortgages, with the potential to expand to additional products that roll up to their current buyer like lines of credit and auto loans.