Brian Dally

Speaker A: Hi everyone. Welcome to another edition of FinTech Talks. My name is Sanjeev Khalida and I am so excited to have our guest on today. Brian. Brian, would you mind please introducing yourself? Yeah.

Speaker B: My name is Brian Dalle, I'm co founder and CEO of Ground Floor. Great to be with you.

Speaker A: Great to have you here. And um, can you talk a little bit about your background and sort of how you got to this point?

Speaker B: Well, I know we were talking before we started about our roots in Silicon Valley. Uh, I graduated from business school and law school in the late 90s and uh, went directly to Silicon Valley having done a little bit of entrepreneurial work during school. I mean the web was happening, uh, and I really got bitten by the bug out there, you know, to, about looking at new concepts, new ways of thinking about uh, providing value. What I became passionate about was building mass consumer products. So uh, if you fast forward through my career, I worked on a lot of different mass consumer products, particularly in the Internet and wireless realms. Uh, when uh, I got back to the United States from a time abroad, uh, doing that, uh, I started a wireless company called Republic Wireless that was uh, very disruptive and a lot of fun and got really big really fast. And I think that experience, when it came time to start my next company and I exited that, I uh, really wanted to do that in another realm. And I'm glad I picked finance for that. Uh, that was the genesis of Ground Floor was looking at how we could build a mass market product in the financial world for millions, hundreds of millions of individuals to use. Uh, and that's sort of how I got to start ground floor, uh, 13 years ago, 2013.

Speaker A: That's quite a background and loved hearing some of those names that I hadn't heard of in a while.

Speaker B: Some people who turned out to be quite famous in the end.

Speaker A: Yes, exactly. Having worked on infrastructure, like a technology infrastructure side of things, the early stage, and now working on I'd say financial, uh, infrastructure like, you know, are there any differences, similarities?

Speaker B: Yeah, I mean one of the, Looking back on my career entrepreneurially, one of the, I don't think it's an accident. I think there's some sort of uh, correlation or probably causation here to the fact that I went to law school and business school. I seem to have been drawn into these businesses where if you're willing, like most entrepreneurs have to do product market fit.

Speaker A: Right.

Speaker B: In our case at Ground Floor we had to do product market regulatory fit. And the reason that, that felt so comfortable to me in navigating that at Ground Floor, especially in the early days where it took us four years to get our first qualification from the securities and Exchange Commission to sell this product to everybody. And almost every platform that sounded Ground Floor was just doing for accredited investors because they couldn't figure out how to hack that. Yeah, right. But Nick and I did figure out how to hack it with a product that worked for the consumer.

Speaker A: Right.

Speaker B: Product market fit. But also worked for the regulator. And I think, you know, I drew upon a lot of experience previously. I worked in, um, when I was in England, I went there because of the 2005 Gambling act, uh, in the UK and started a mobile gambling, uh, company that was, you know, regulated and legal and, you know, not, not offshore. You know, odd, uh, thing. We're doing things the right way, you know, with the regulator. And if I think about how wireless is set up is also a regulated business. So I'm very comfortable, you know, as is my co founder, creating customer value through regulatory innovation. And that's a big part of, I think, why Ground Floor has been so distinctive in our space.

Speaker A: That's great. And so the Isle of Man didn't. Was not, uh, calling to you when you were building that camp.

Speaker B: Interestingly, they did base some operations on those offshore islands, but they were still regulated in order to sell the services in the uk. So there were important components that were offshore, but they were still regulated.

Speaker A: Yeah. Actually, could you go a little bit more into what is Ground Floor and why you're doing what you're doing?

Speaker B: Look, our original vision, we didn't know what kind of product we would build to do this, but we thought that the 2012 Jobs Act. My co founder, Nick Bargava, worked on title three of the Jobs act, which is the part that liberalized capital formation for small businesses through equity, crowdfunding and similar types of means. We thought that the JOBS act would create a trend, help to create a trend that would enable retail investors, individuals, um, just like you and me, or people who are maybe just getting started investing, who don't, don't qualify as an accredited investor, to tap into private market alternatives. What we didn't know, as we listed 26 different potential asset classes, we saw a third of them were real estate. And I'm glad we went that direction because in the world of alts, you know, uh, I think our early customer discovery work, people were interested in alternatives to public markets, but they were nervous.

Speaker A: Yeah.

Speaker B: About how esoteric the asset might be. Is it real? Is it a scam? So the great thing about real Estate, I'm glad we went this direction is, it's tangible. We found our way to residential real estate, which is, you know, familiar to people. I mean, two thirds of Americans at any given time, maybe 60% now own a home or 80% have owned a home. You know, there, there's some pretty big numbers. Like we all know what houses are. We watch house flipping shows. And that's our first market, our first beachhead market was to make business purpose loans to individual real estate. Individual real estate investors who were renovating properties all over the country. You know, we have aging housing stocks, so they're solving an important problem. But the reason we got into that business was just to manufacture the investment product. And the investment product became very popular because it repays on average in nine to 10 months. It's a loan, not equity. Right. So the first product we ever offered was, was not owning a slice of a house that might go up or down in value. Yeah. You look at some of these platforms where you can do that now and you realize like a third of those properties that were financed in 21, 22 are underwater.

Speaker A: Yeah.

Speaker B: And you're making less than you would have made in the money market. Right. If you're, if you're making money at all. Meanwhile, the debt on similar types of investment properties has performed 8 to 10% on net after losses. And we, you know, after losses and fees. So it's, I'm glad we found our way to it. You know, I think we were purposeful about building something that we thought would have mass appeal and also perform really well over the long term and be something quite different from what people were doing on their own. So we're now broadening, we broaden within real estate into other categories. Residential real estate, we're now breaking out of residential real estate, we're now breaking out of real estate Right. In the coming, in the coming years. So, but that's where we, that's where we cut our teeth. And if you go to ground floor today, you can see some real estate and a couple of non real estate investments that you can participate in. And they're formatted in a really unique way that uh, that we've opened to everybody. Uh, and I think, I think it points the way to the future for how retail investors are going to adopt private market alternative investments.

Speaker A: That's a great, great background. And, and also to put a bit of a, a parallel track to this when, when you were um, working on Ground Floor, I was actually a Google wallet and I was looking at crowdfunding um, specifically that. That job act. Jobs act like. And, and, um. And in retrospect, I think what you said about the tangible and sort of like. And even like a debt instrument versus like something else, I think it, It. It just makes a lot of sen.

Speaker B: Look, you know, you can be the bank.

Speaker A: Yeah.

Speaker B: You know, you can do what banks do. Banks take money, they pay you very little for it. They turn around, they lend it out for really high rates, and then they have security. Like, we have a lien on these properties.

Speaker A: Yeah.

Speaker B: Uh, so if the borrower doesn't pay, we want to work it out with them. We don't want to foreclose. But if we have to foreclose on their investment property, we will. And good news is there are always other investors who want to step in and take over. Right. Those properties are in demand. So I think that's one reason our loss ratios have been so low, the net yields have been so high.

Speaker A: Yeah.

Speaker B: The cash flow on it and liquidity is unparalleled.

Speaker A: Uh, in the alternatives world, obviously hats off to you. But it sounds like a very complicated business, to be perfectly honest. It's. It is like, you know, dealing, getting retail investors, getting institutional investors managing the risk. Uh, like, like how, you know, it's been hell.

Speaker B: It's been hell raising institutional money for it. You know, when I went to Silicon Valley in, you know, 2017, we raised a small Series A in, um, 2015, when we first got our regulatory, our initial sort of thumbs up from the sec, we used that to raise some money.

Speaker A: Yeah.

Speaker B: And then, of course, two years later, you're off trying to raise more money and show your progress. And Robinhood was happening. NEA had invested in Robinhood. People were like, oh, so this could be like Robinhood for private markets. That's interesting. How many users do you have? And what we would say, well, not the million or two that Robinhood has. You know, we were much, much smaller. And we were told to, well, hey, look, I'm sure you'll get there when you get there, like, come on back. And I think the problem is alternative lending fell out of favor. So people thought that, you know, the failure or the. What happened with Lending Club or some of the other failures along the way. Um, Lending Club survived to their credit. Uh, but many did not. I think soured institutional investors, and they weren't sure that it was a venture backable kind of space. And I think for what they perceived, they were right. I think what time has shown is that the retail investor is a powerful force that became Very obvious with the GameStop phenomenon, uh, people now are very interested in retail investors. I um, think what few people understood is, is how vertical integration, you know, having an origination platform, an asset management platform and the investment platform, you can't just, you can't just take an investment platform and just go buy somebody else's deal flow because you don't control it. You're not a buyer in size, you're not a credible buyer. You know, there's no competitive advantage in that business. And so, um, we kind of did it through necessity, but we built this vertically integrated deal flow pipeline. And that's exceedingly complex and you have the regulatory component to it where that's a moving target. And then of course consumers don't really understand. A lot of consumers are financially literate, so investing is a new thing for them. Uh, investing in debt is a little bit of a, that's a mind shift, you know. And so once people experience the product, game on. But getting them to experience the product and demonstrate the kind of growth. Fast forward now institutions buy our credit, right? So we always said it was institutional grade and now we can prove that because we're in the securitization markets. We're about to do our third bond, uh, I think next, uh, week we close and God, um, willing, and I think we've made a lot of progress. But you're right, it's an extremely complex business. It's also become a very good sized business over time.

Speaker A: You know, given that the success that you've had with real estate, like can you talk to me a little bit about the thinking of now you're looking beyond real estate?

Speaker B: Yeah, I mean, I think, look, real estate is a, uh, compelling asset class and it's large. Right. We started dabbling with some other products that are m. Different use cases within real estate. You know, sort of cash flow advances to short term landlords, for example, who run Airbnb portfolios, or to multifamily operators who want to, uh, at a small scale who don't want to raise debt or equity, but are willing to sort of commit some of their future cash flows. And so it was really at Fintech Meetup where we really met our first batch of partners. Uh, and thank goodness Fintech Meetup exists because when you go to a big show like Money 2020 which has been so successful, you get drowned out. But at Fintech Meetup a lot larger. Now four years ago, we navigated that and met so many great partners, you know, well, for product but also for distribution, both and I think both are kind of exciting areas. I think we, we noticed that our customer wanted to buy more product from us.

Speaker A: Yeah.

Speaker B: And we started to build share of wallet by expanding the types of products that we offered.

Speaker A: Yeah.

Speaker B: And letting people go out further on the, on the risk curve. For example, now you can invest in a second lien on some of these properties that yield 18%. It's a higher risk, there's more volatility to it, but there's some really nice yield to that. Right. If you build a portfolio, uh, of those products. So we've started to branch out, and I think we have something unique to offer to this market. We have a very unique position. We've been through Covid. We've been through the 22, 2022, 2023 rate hike cycle, and yet we've just continued to clip 8 to 10% yields on our core products, uh, and continue to grow the company. You know, we've, it's, it's kind of, um, incredible what we've weathered. And I think our unique approach can be applied to other products. So retail investors want more product, but they don't really want to take whatever the large asset managers have in mind to sell to them. Like, these are big brands that are very compelling and credible. But I don't think my opinion and my observation that an interval fund that's usually sold through private wealth advisors is appropriate for the Robinhood WallStreetBets crypto native type investor, because there's a middleman. The middleman collects a lot of the return. Uh, the middleman controls what happens to your money. And I'll just point out that Blackstone's reit, one of the largest in the world, if not the largest Starwoods reit, through these dislocations, they all couldn't meet their minimum redemption requests. They could, they couldn't meet their minimum, let alone the full extent of the request. And retail investors are going to pick up their pitchforks, you know, and skewer these asset managers. And most of them don't want the headache and they don't see why it's worth it and don't have the. We were built from the ground up for a $10 minimum investment.

Speaker A: Yeah.

Speaker B: You know, so we're, you know, attitudinally, culturally, technology wise, we're ready to handle that. And I think we also built skills in the regulatory realm and financial engineering realm to build product that corresponds more closely to pro. To what people get in the public markets. You told me, you know, if you're, if you Said, oh, you can invest in, you know, tech stocks, but you have to buy my fund. Yeah, that's the only way. You gotta give me the money. I choose the stocks. I tell you when you get your money back, I charge whatever fees I want. You know, I manipulate the nav so it's at one level when you buy and another level when you sell. That's what's actually happening in these markets. And retail investors aren't stupid. Yeah, they're not stupid. And they're less stupid every year. So, uh, they're smarter every year. And so I think good, um, luck to the big branded asset managers foisting these products on retail investors because people like Ground Floor are building superior structures that are better for the retail investor and more in line with investor taste for the long term. And I think the only thing barring hypergrowth in this area is distribution at this point. Product breadth and distribution.

Speaker A: That's a, that's an interesting take and uh, I'm glad that FinTech meetup was amazing. It was great. And um, can you talk to me a little bit about how you were able to be so successful at fintech Meetup?

Speaker B: We did two things really well. One, we took a good size group. For us, we're not a big trade show company. We might go to one or two here. Um, but we invested in a booth and we uh, we decided to sponsor the event and we um, you know, we uh, you know, we took I think five, five or six people that year. Same as we'll do that. I think this year we're ticking seven, um, years so that people could man the booth and then also take meetings. And we took a lot of meetings. Like the meetings are great. The matchmaking M system is great. I really encourage people to invest in that, you know, their time and energy into it. Yeah, um, you research who is out there, you know, put in the meeting requests. I got some amazing meetings, you know, with investors and people who could be distribution partners, people who had product that they thought might be great for retail investors. And we're going to do the same thing this year. Right?

Speaker A: We're.

Speaker B: But this year we're ready to do it on even bigger scale. So I think. But, but we learned a lot from that first foray, you know, a few years ago. Uh, and it's my favorite event. I mean I don't go to a lot of events, I just don't do, ah, doesn't usually. The ROI is not usually there, but on this one it is that uh,

Speaker A: I love hearing that. And uh, Especially as an entrepreneur myself, I know that time is so limited. It's like you got to make the most of it.

Speaker B: Oh, it's the energy, you know, it's like it can just be such an energy suck some of these events and uh, you know, hopefully you hope to get on a panel or something to try to make it a little more worth it and you hope to catch up with people in the industry. But the thing I like about FinTech Meetup is that you guys do a lot of work to help facilitate the connections. I think it's really well done.

Speaker A: Thank you for being a supporter and thank you for being at the event. Uh, one thing that um, I wanted to ask you is you've had the business for 13 years, uh, and obviously the investment environment has changed and the investor expectations and, and has changed as well too. Like what do you sort of see in the future? Like uh, like in any trends that, that sort of have you.

Speaker B: Yeah, I, we think a lot about that. I think um, I think people are. One important trend is all of our portfolios are going to look more like the Yale foundation model. Uh, you know, where there's a 25% allocated to alternatives. The question is which alternatives? And I think that's going to be driven a lot by format. Yeah, I think people are experimenting. You know, they're. So if you're on SoFi and you see one of these big asset manager alternative funds or sort of a private market liquidity fund that's investing in space X or something, there's a lot of people dabbling with that and trying to learn like what that's like the take that I'll share here, uh, a lot of people won't like it is. I think a lot of that stuff is going to look like the mutual fund industry of the 80s, you know, when there were front end fees, back end loads, high fees in between, a lot of frustration, you know, not a lot of investor control. And I think that's just frankly outmoded. And I think every, every year in the past since COVID uh, which was a D mark I think in the retail investor psychology, every year from there on, uh, is I think going to be another year where people have higher expectations about the opportunity that they should have the level playing field, they should have the ability to kind of control their own. For the self directed investor to control their own destiny. I think they're going to require that their financial advisors open up these products and don't just resell, you know, asset manager, big name asset manager, brand Fund, you know, to them, but, you know, diligence and do the work to help them sort through alternatives that are structured in a more, uh, in a more appropriate way for them. And so I think advisors are going to have more choice. I think they're going to be bringing more of this product to consumers. I think consumers can become quite discerning not only about who's offering it, but how does it work and what do they get. And does it map to something that is familiar to them, like public stock market investing?

Speaker A: Yeah, that, that is fascinating. And, and it's like, um, I don't. To your two point. I think that presents a lot of opportunity and, uh.

Speaker B: Well, and ah, I think it's a, it's an enormous market. I mean, it's, you know, it's bigger than any one company, you know, could command for sure. There's a lot of operating leverage in one company handling, you know, a bunch of these categories, which is why we will, in the coming decade look very different, you know, from where we are today. I mean, if we're, if we are 90%, you know, real estate today, real estate might end up being 20% of what we do. Uh, maybe 30.

Speaker A: Yeah. Wow. Wonderful times ahead, I imagine. And uh, I mean, it's Ashburner.

Speaker B: To be, to be this excited 13 years in, I think, is a bit of a surprise to me. But I'm as fired up now as I was when I started the company.

Speaker A: Really. I love that. And uh, thank you for joining us today, Brian. And, uh, let's definitely make it a point to meet up in person in Vegas in a few weeks.

Speaker B: Oh, I look forward to that for sure. Uh, we can talk more about who we know in the early days of Silicon Valley.

Speaker A: Fun. Sounds great. Thank you, Brian.

Speaker B: Yeah, thanks for having me.