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Our investment in Vesta
When I started my career on Wall St trading mortgage-backed securities in the early 2000’s, I learned first-hand how the process of underwriting and originating loans had a major impact on the prices institutions were willing to pay for the collateral, and in turn, the rates which lenders were able to extend to borrowers (better prices, lower yields). The most sought after highest performing collateral, traded at premium prices, performed better than the market, and generated the lowest yields. Many of the greatest financial institutions of today were built by creating a premium mortgage relationship with their customers by offering the most competitive rates, and a trustworthy and seamless experience.
The mortgage industry is highly complex, cyclical in nature, and sensitive to interest rate fluctuations and consumer sentiment. It also operates with razor thin margins on incredibly large volumes. Building and operating a mortgage business in this market is a feat unto itself but building a lender that can compete with incumbents is even harder. It requires navigating state licensing and insurance rules, in addition to managing: title and insurance, brokers and loan officer networks, processing applications, and risk systems. To succeed requires this while still pushing product innovation and competitive rate sheet pricing before finally exiting the loan for a profit. At the nexus of this complex network sits the most valuable and complex piece of IP the industry has, the LOS (loan origination system).
Housing plays a significant role in the US economy, making up close to 20% of GDP, and can either cripple (2008) or be a major driver of growth (2020). Furthermore, it sits at the center of key fundamental and critical components of how we save, build wealth, create memories with our family, security, and unlock upward mobility. During the pandemic, we saw mass migration to and from suburbs and big cities, which broke previous mortgage records with over $4.3 trillion in mortgages originated, and over $2.8 trillion in annual refinancing’s.
Historically, much of this system has been built atop antiquated technology from the 1980’s which has slowed progress, hindered innovation, access to affordable rates, and stifled competition. While modern innovation in other industries favors unbundling and open architecture, today’s mortgage process does not. It is long and painful, weighed down by antiquated technologies and highly manual operations that were built to lock customers in with high break fees and costly integrations. This has forced a growing divide between the modern, digitally native mortgage companies with more efficient and profitable workflow engines, and their antiquated peers who continue to lose market share.
It’s not so often that a massive, non-obvious opportunity in a highly fragmented industry with historically low NPS scores is met by incredibly talented founders with the passion and experience to disrupt it. Vesta is building the infrastructure that will power the next generation of financial services, and is starting with the backbone of the mortgage industry, the loan origination system.
Having experienced firsthand the significant constraints of the current mortgage infrastructure as early employees at Blend (Conversion Capital portfolio company) working in product and engineering, cofounders Mike Yu and Devon Yang are uniquely positioned to understand what is possible when you leverage modern technology and process against a decades-old problem.
The core technology can be broken into three categories, each with its own complexity: a next generation system of record, an automation engine and task management system, and lastly, an open platform to power future technology companies in mortgage.
In late 2020 at the height of the pandemic, Conversion Capital led the $5m series Seed round in Vesta, and I was honored to join the board. Today, we are excited to announce the company has raised an additional $30m in a series A, led by our friends at A16Z, to further fuel its growth and transform the industry.
When investing in fintech, we look for companies that solve hard problems, are led by exceptional teams, and leverage software as a core advantage. Vesta exhibits all of these traits which is why we’re thrilled to have them join Conversion’s portfolio of category defining fintech companies including Blend (NYSE:BLND), Qualia, Figure, Wisetack, and Ramp.
At Conversion, we are energized by the role that technology plays to replace outdated systems in large markets with historically poor customer sentiment. Mike Yu and Devon Yang have assembled an incredible team and we are excited to be long term partners with Vesta as they enter their next phase of growth.
Christian Lawless