Hola Everyone. It’s ya boy Dez, and unlike the 8 investors referenced in this tweet:
I’m in office, I’m online, and I’m bringing you all our second Fintech Founders article, which as I was editing I realized was one of my favorite conversations to date with a founder. Today’s interview was with Yago Zavalia, an HBS grad building in the slightly esoteric arena of litigation finance at Qanlex. I’ll let Yago explain what litigation finance is, but one of the reasons why I loved this interview is because Yago dropped an absolute gem of advice on fundraising.
Here’s what he said:
I often found that a lot of people just don't want to make a mistake in the pitch or have their deck be weird and they just want it to be traditional. And what I would say is, like being a solid seven or a solid eight in every meeting will take you nowhere, you're better off having 85% of the people you talk to thinking you're crazy and wrong and having those few that are going to fund you thinking, "Okay, he might be onto something." So it's a bit more-- this is an outlier game. You have to be an outlier. So if you're trying to do like the classic deck, and you're doing the classic pitch, and you're doing the classic everything, odds are you're not getting funded.
I absolutely loved this advice and I think it’s spot on - my nuance. And in addition to getting some great advice on fundraising, Yago and I talked about what it means to build in inefficient markets, his plans on securitizing litigation finance as an asset class, and why he’s not afraid to cannibalize his own product. If any of that sounds remotely interesting to you, read on. If not - that’s okay too. As Yago said himself, in this world of venture and fintech you have to be willing to bet on (or write about!!) outliers. As always, let’s dive right in.
Yago, can you introduce yourself? Tell us a little bit about your background as well as tell us a little bit about what you're building at Qanlex?
Absolutely. My name is Yago Zavalia, I am a mechanical engineer—I have a Bachelor's in Engineering with a Master's in Mechanical Engineering, but I've always been a programmer. I'm actually a very bad mechanical engineer, haha. I'm supposed to know about engines, and motors, and cars, and for me cars are either squared or rounded, and that's about all the diversification in cars I can tell. But it's always been about efficiency for me, and I'm a programmer, and programming is efficiency by excellence. And I've always worked in automation. Then after five or six years working in automation, I went to get an MBA at Harvard where I started working on Qanlex, which is where I'm working right now and we’re trying to modernize litigation finance.
Can you explain what litigation finance is for the audience?
Absolutely. The basic concept behind litigation finance is that every lawsuit is a financial asset, whether you like it or not. It has a risk profile and a payout profile but it just doesn't have a market to trade in, and that's what we're here to kind of solve. And what we do really is, in litigation finance, you come in and you value this asset that companies are not valuing for themselves, and you finance them against it.
So for example, if company A sues company B, they won't put that on their balance sheet just because they don't think of it as an asset or a receivable yet, however, if you advance capital against it for them, it is a win-win because they get capital in their balance sheet without a liability. What we do is give them an asset, which is the capital we provide without the liability because the asset we are discounting is not on the balance sheet, so it's very beneficial for companies. It unlocks value.
Is Qanlex set up as a fund with a limited set of LPs? Is it a marketplace where any individual can go and provide liquidity and become an LP?
Well, we are a very weird creature. What we do right now is through our tech we originate these new types of assets, and we finance them. And right now, we do it as an asset manager, so on top of our equity investors we have LPs and we operate through those funds that we raise. I think that's just because right now this is the best way to monetize this opportunity but eventually, it's going to be like any other asset class or any asset class that can be securitized.
It's just like when the mortgage industry started, you had people financing other people against their houses, and then what you have now within mature industries, you have the originators that find and underwrite the mortgages, and then you have banks that buy them, and then you have a security on top of them, so basically everyone in the market can basically finance someone on their house. That's what we think our vision for the industry is, that this is going to be a security.
So how do you think about going from that process from A to B, whether it's single-asset or single-fund structures to the securitization aspect because in effect, that's basically pulling it up to where there's a very deep and liquid market for secondary investors?
Yeah, definitely. And it's also a bit like we're going to be eating our own lunch, because one of the great things about this market right now is that it's incredibly inefficient. The markets in which we operate, we are the only players so that means we basically name our price. One of our biggest challenges right now is even evangelizing our clients; our clients don't even know they have an asset. This is a con for us because you want them to know they have an asset; it's easier to bring them on if they do but it's a great benefit because once they do understand they have an asset you basically name your price. So, we want to operate in an inefficient market but just like with arbitrage, the more you arbitrage, the more you close that arbitrage gap; in an inefficient market, the more you operate and the more you generate, the more efficient the market becomes. So, when we say we want to take this industry into a securitized industry, it'll by definition mean that the alpha we generate will diminish and that is why we want to bet on technology to still be ahead of the rest. But yeah, it is a bit counterintuitive as in we want to keep it inefficient and very illiquid because it's good for us, but we also want it to become a security where everyone can trade in so the industry itself grows.
Can you give the audience a sense of the markets that you're operating in and how big it is?
Yeah. Wwe started in one country, 2.5 years ago give or take, right now we're operating in 12 countries. We’re operating in Argentina, Chile, Peru, Colombia, Mexico, Bolivia, Paraguay, Uruguay, Spain, Puerto Rico, Nicaragua, and Brazil. In each of these countries what we basically do is we plug and play our software into new regions, and our engineers are constantly looking to new virtual judicial systems to which to plug our algorithm, basically, so that our top of funnel gets broader and basically our sourcing gets better.
And is there any infrastructure that's necessary for you to move money across those different borders? Or are there existing infrastructure products that you leverage that have enabled you to build more quickly?
No, not really. Like for example, two weeks ago we finalized our first deal in Peru and what we do is we sign a derivatives contract in New York, and we sign a transfer of litigious rights in the country where it operates, meaning that we now own the asset, basically; or a lien on real assets either in that country or in the US. It’s kind of like betting on the future price of diamonds in the Congo but doing it all in New York and that's what we do. So even if you cancel that contract outside the US, you still technically have rights to the underlying asset in Peru or wherever the lawsuit originated.
You mentioned at the beginning that part of your training by background is an engineer and you have this interest in automation. Can you kind of give the audience a sense of what are the core aspects or processes that Qanlex automates in this litigation finance process?
Oh, yeah, absolutely. So, the way a traditional litigation finance fund would operate, they would have a commercial team and a legal team and their objective would be to find deals. So, either they talk to a company and tell them basically, "Hey look, there's this new asset, if you ever sue someone, we can finance you against that," whatever. Or the legal team can find a lawsuit, read through it, if they like it, then contact the company. What we do is we avoid both of those inefficiencies because we leverage the fact that in the last couple of years the judicial systems have gone online, so we have a software that reads through all the ongoing lawsuits and it reads every document within them, it does data extraction and then it analyzes all the data it extracts, and it basically ranks the lawsuits where it would be most attractive to invest. It tries to predict when they're going to end and their chances of winning. So what it does is, it basically ranks whatever ongoing lawsuit it has, and then it automatically contacts those that it deems most attractive. And that’s why for us, the broader the top of funnel, the better the top 10 assets we have will be. So, our commercial team, really, all they have to do is wait for responses to this automatic contact. Right now, we have a response rate of 25%, which for an automatic mail is just ridiculous. The thing is that it's so highly targeted that it would say, for example, let's say, FirstMark sues Coca-Cola, the subject of the mail would be, “Firstmark V Coca-Cola”, so that just means that you would open it for sure, and then you open it and say, "Hey, we read through your lawsuit against blah and we think you might be interested in financing of this." And then we have do some A/B testing of follow ups, but basically, 25% of people respond saying, "Let's have a call"
Yeah, that's amazing. How did your time at HBS impact your perspective on entrepreneurship?
Well, it definitely made it feel like it was more possible and more achievable than it felt before HBS. But I would argue it made the journey easier, HBS has insane tools. I was lucky enough to be part of a cohort of 60 startups at HBS, and they provide insane tools from capital to mentorship to networking to VCs. They make the process of starting a startup, a process that all in all, is very hard, they make it easy. And that has to be combined with the fact that I was lucky enough to run into this idea when I did, right? Otherwise, I wouldn't have just made a start-up just because of the sake of making a startup. I feel like when you hear about litigation finance, what I feel is like, I do not understand how this is not a market yet; so that's what we're creating.
Can you explain more of that aspect of luck, because I think this is an underreported topic in anyone's career - the importance of luck and serendipity?
Yeah. I think any successful person saying, "It works, follow your dreams," is a bit like a lottery winner saying, "It works, liquidate your asset, buy lottery tickets." Right? I think luck is a big part of it. And I don't know how philosophical you want to get, but luck impacts you all the way, right, you don't even choose your family, your parents, your upbringing; you don't even choose your skills, you don't even choose to run into the right arguments that convince you and turn you into who you are. So, I'm a non-believer in free will all the way, so I think it's basically all luck. But in a more traditional sense, I was, yes, very lucky to go to HBS, I was very lucky my co-founder, who's a lawyer, and he has an MS in Applied economics, and the smartest person I know, thought of me to develop the technology. And also on the commercial end, because as smart as he is, we separate; he does legal and clients and I do tech and investors. And it just works. We're very lucky.
Yeah. And my last question for you is, what advice do you have for any aspiring entrepreneur? A lot of the ethos and what we're trying to do here at This Week in Fintech and for my own newsletter All Things Venture, is to share the learnings people have while they’re in the journey, while they’re in the day-to-day grind. And you're very early on in your journey, but for someone who's at that idea stage, that paper napkin stage, they're looking at you and they're like, "Holy shit, he's in 12 countries! How did you do it?”
Yago: Hahah, yeah, no, no, it has been crazy. I think the biggest thing I would say is-- well, I mean, what enables you really to do this is getting the funding, right? It's what really allows you to dedicate yourself to this. And what I have found is when getting the funding, you're doing your deck and you're working on your pitch, and I often found that a lot of people just don't want to make a mistake in the pitch or have their deck be weird and they just want it to be traditional. And what I would say is like being a solid seven or a solid eight in every meeting will take you nowhere, you're better off having 85% of the people you talk to thinking you're crazy and wrong and having those few that are going to fund you thinking, "Okay, he might be on to something." So it's a bit more-- this is an outlier game. You have to be an outlier. So if you're trying to do like the classic deck, and you're doing the classic pitch, and you're doing the classic everything, odds are you're not getting funded.
Right. No, that is great advice. It is an outlier game. Yago this was awesome. Thank you for everything
Yago: Thank you Dez!
