This episode covers how CoVenture Credit invests in unusual, high-yield loans like e-commerce return financing, payroll deduction lending, and Bitcoin-backed loans. They believe the real opportunity lies in companies that create entirely new loan products with data moats competitors can't copy. Key holdings: Returnly (e-commerce return financing, unique data and high switching costs), Produce Pay (loans to produce companies, tracks inventory via software), and Bitcoin loans (50% loan-to-value, 12%-25% APR, collateral can be liquidated 24/7).
At a Glance CoVenture Credit team members Ali Hamed, Brian Harwitt, and Marc Porzecanski delved into the esoteric high yield lending space during the program. The core thesis is that CoVenture gains a unique advantage by simultaneously monitoring both equity and credit sides in transactions such as
The CoVenture Credit team (Ali Hamed, Brian Harwitt, Marc Porzecanski) delved deeply into the field of esoteric high yield lending on the program. The core view is that CoVenture gains a unique advantage in deals like Returnly by observing both the equity and credit sides simultaneously, and focuses on non-traditional assets such as payroll deduction loans. Ali Hamed believes that the real opportunity lies in companies that use technology to create entirely new credit products and possess an unassailable moat—"Even if the whole world knew what this lender was doing, they couldn't compete."
Ali Hamed argues that first-generation online lending platforms like Lending Club, OnDeck, and Prosper failed to deliver on their promises.
Historical Context: These Lending 1.0 companies promised to lower customer acquisition costs, reduce default rates with new data, and open up yields to retail investors. In reality: customer acquisition costs did not decline (competition drove marketing expenses sky-high); only 3 out of 150 data points actually carried a signal (one of which was FICO); and loans were ultimately still bought by institutions, so "democratization of yields" never materialized.
Mechanism Breakdown: CoVenture looks for companies that "use technology to create entirely new credit products," whose moats come from three dimensions:
1. Switching Costs — Once embedded in a POS system, competitors cannot easily replace it even with lower rates
2. Proprietary Data Points — For example, Produce Pay monitors goods in real-time via inventory tracking software; competitors would need to replace the entire software system to compete
3. Ability to Influence Borrower Outcomes — For instance, if Amazon adjusted its recommendation algorithm to help delinquent merchants increase revenue, this is an ideal case not yet realized
Marc Porzecanski adds: "We earn excess risk-adjusted returns because we enter at a very early stage of the company's lifecycle, whereas Fortress or Blackstone wouldn't get involved until year three to five."
Ali Hamed uses Returnly as an example to show how proprietary data can create a new type of loan product.
Mechanism Breakdown: Returnly started as an e-commerce returns management software. They found that offering "instant refunds" could increase the likelihood of a consumer making another purchase by 4 times. The process works as follows: when a consumer returns an item, they immediately receive a refund credit to buy new goods; Returnly advances the funds first and recovers the money once the original item is returned to the warehouse.
Data Advantage: Returnly can observe individual consumers' cross-platform return behavior ("good returners" vs. "bad returners") and also analyze by zip code or geographic region. The company has processed over 200,000 instant refund transactions, accumulating vast amounts of data. Additionally, as a SaaS system, it has high switching costs—merchants are unlikely to replace their returns management system easily.
Brian Harwitt emphasizes: "This is an entirely new type of loan—e-commerce returns financing, something the world has never seen before. Returnly has globally unique data and extremely high switching costs."
Ali Hamed and Brian Harwitt believe that payroll deduction lending uses a structural mechanism to transform subprime borrowers into prime borrowers.
Mechanism Breakdown: These loans are offered to employees of large enterprises, with repayments deducted directly from payroll (similar to health insurance or tax deductions), sitting "at the very top of the paycheck." This means underwriting is based not on personal credit, but on the likelihood of continued employment—default risk comes from resignation or termination, not from the individual's willingness to repay.
Data Chain: Traditional payday loans can have APRs exceeding 500% and default rates of 30%-50%. In contrast, payroll deduction lending, through structural improvements, makes subprime borrowers perform like prime borrowers, significantly lowering interest rates.
Marc Porzecanski points out: "What you need is a structural change, not just a lower interest rate. Payroll deduction introduces a mechanism that turns subprime borrowers into prime borrowers."
Marc Porzecanski, initially skeptical but ultimately convinced, explains why Bitcoin loans meet the criteria for high-quality collateral.
Mechanism Breakdown: Bitcoin loans are essentially margin loans—borrowers pledge Bitcoin and receive a loan at 50% LTV. The advantages include: Bitcoin is priced in real-time 24/7, can be physically custodied in proprietary wallets, and can be liquidated instantly. If a margin call is triggered, the lender can sell the collateral at any time.
Interest Rate Pricing: Current market rates range between 12%-25% APR. Marc Porzecanski believes this rate is more driven by supply and demand—"demand for these loans far exceeds the supply of institutional capital"—rather than by precise pricing models.
Ali Hamed adds: "The problem for traditional lenders is that even if Bitcoin lending is perfectly rational, once they lose money, they'll be questioned: 'Of course, because it's Bitcoin.' Our LPs, on the other hand, expected us to do these kinds of deals from the start."
Brian Harwitt emphasizes that 60% of great investments happen after the deal closes.
Mechanism Breakdown: CoVenture models the "tolerable default rate"—how high a default rate the portfolio can withstand before losing principal or returns. In a typical deal, loss coverage ranges from 2 to 7 times. For example, in one deal, the base case assumes a default rate of 5%, but the model shows it can tolerate 14%-15% defaults without losing returns, and 30% without losing principal.
Risk Control Tools:
Ali Hamed warns of common pitfalls:
| Position | Guest Sentiment | Key Data |
|---|---|---|
| Returnly | Bullish | Instant refunds boost repurchase rate by 4x; over 200,000 transactions processed |
| Produce Pay | Bullish | Real-time goods monitoring via inventory tracking software; extremely high switching costs |
| Payjoy | Not explicitly stated ("admired from afar") | Smartphone financing, using the phone as collateral |
| Bitcoin Lending | Bullish | 50% LTV; rates 12%-25% APR |
1. Ali Hamed's "Lending 2.0 Three Pillars": The real opportunity lies in companies that simultaneously meet three conditions—create entirely new credit products, possess proprietary data points (capable of reducing default rates by an order of magnitude, not just 100 basis points), and have an unassailable moat (switching costs/data exclusivity/ability to influence borrower outcomes).
2. Ali Hamed's "Inverse Relationship Between Equity and Credit": "If a company's equity is worth investing in, it means it has built a massive loan portfolio, and traditional lenders will enter at very low rates; if the loan portfolio stays small and yields remain high, you never want to own the equity."
3. Marc Porzecanski's "Structural Change Over Rate Adjustment": Payroll deduction lending transforms subprime borrowers into prime borrowers by changing the repayment mechanism—"What you need is a structural change, not just a lower interest rate."
4. Ali Hamed's "Post-Investment Management Accounts for 60%": In credit investing, 60% of the value comes from monitoring, compliance checks, and risk anticipation after the deal closes—"People will try to take advantage of us; the key is to anticipate and defend against it before they even try."
5. Marc Porzecanski's "False Positive Risk Checklist": UCC filings (self-reported data is unreliable), insurance policies (few people actually read them thoroughly), backup servicers (they'll only serve large clients in a crisis)—these things "everyone assumes are fine" are precisely where problems are most likely to arise.
6. Ali Hamed's "Marketing Value of the Rejected": Contacting 2,400 founders annually, but only doing 12 deals—"The best marketing tool is the people we've rejected." CoVenture, like Sequoia, sends detailed analysis reports and improvement suggestions to rejected founders; about one-third of deals come through this channel.
7. Marc Porzecanski's "Short Duration + Low LTV De-correlation": 30-day assets, 50% LTV—"Do you believe this asset can drop 50% in 30 days?" Short duration and low leverage are key to reducing correlation with the macroeconomy.
8. Ali Hamed's "Tomorrow's Small and Medium Enterprises": "Tomorrow's SMEs are not the corner pharmacy, but Airbnb accounts, e-commerce companies, Instagram accounts." — Credit products need to adapt to new forms of business.