Chris Bixby: Mortgage Tech Firms Challenged to Navigate Current Economic Headwinds


PERSON OF THE WEEK: Where is the mortgage technology sector headed in 2023? In a recent interview with MortgageOrb, Chris Bixby, managing director of venture capital strategies of Rice Park Capital Management, gives us an insider’s view of the mortgage technology landscape from an investor’s perspective.

Rice Park Capital is a private investment firm managing various investment vehicles and venture capital funds on behalf of institutional investors, family offices and high net worth individuals. Bixby is responsible for sourcing, underwriting, structuring and managing investments in early to mid-stage technology companies operating in the real estate-based finance, equity, services and payments sectors. 

Q: New, venture-backed mortgage technology companies have struggled to gain traction and several of the ones that have gone public recently have seen a significant decrease to their valuations. Why is that?

Bixby: From a market share perspective, there have been three significant reasons: 

  • Significant decline in the real estate market; 
  • Limited barriers to entry caused glut of funding and several competitive solutions chasing the same problems; and
  • Growth was challenged as buying cycles increased and revenues were flat to declining. 

Across the board, the markets have been challenged – from fintech and venture-backed companies to the real estate and mortgage market. The increasing interest rate environment produced macro-economic headwinds that have been difficult to navigate for both incumbent players and new entrants.

Proptech firms that have gone public have seen their valuations decline due to the macroeconomic environment, but also due to structural issues in real estate and mortgage that new entrants were unable to navigate. Many of these firms positioned themselves to take on the big incumbent players and replace existing technology that was already embedded and utilized by many mortgage companies. In practice, they struggled to obtain market adoption. When origination volume was $4 trillion+, there was a fair amount of capital chasing companies to help them solve smaller problems. When the market dried up, it became much more competitive for vendors and new technology players to exist. 

In many cases, the founders of these companies were not necessarily industry insiders and had a difficult time navigating the complex world of real estate and mortgage. Insiders would have had a better understanding of market dynamics which could have prevented the challenges associated with continued growth and heightened competition.

Q: You mentioned being an ‘insider’, why is that important for your investing strategy? 

Bixby: Insiders have a pulse on what is realistic in terms of problems and gaps within the real estate and mortgage ecosystem and what is necessary to build a successful platform. While real estate and mortgage is a massive industry, the total addressable market (TAM) for technology companies within the market is much smaller than what meets the eye. Based on some of our analysis, the top handful of incumbent technology companies in mortgage represent a majority of their tech spend within the industry.

From a B2B standpoint, innovation is going to have to happen by solving specific pain points within the existing infrastructure. Identifying the right companies, backing the right companies, and helping them grow requires a deep understanding of mortgage regulations and compliance. 

Being an “insider” is a competitive advantage for both startups and investors in the industry. We have noticed that the ability to make direct connections and introductions within what is ultimately a reasonably small network can add significant value to the company. We spend a lot of time at industry events and building an advisory board that can help with strategic and tactical support for our investments. 

Q: Historically the mortgage industry has been slow to adopt technology solutions. Why do you think that will change going forward?

Bixby: Mortgage is a relationship-driven industry, from the loan officer’s relationship with the borrower, the lender’s relationship with the secondary market investors, and in terms of building the business with technology partners. Because it’s built on relationships, mortgage has leaned into people to help with the various parts of the origination and production process. 

Now that we are going through a major downturn in the mortgage industry, mortgage companies are reflecting on their business to understand how to better utilize technology to react more quickly to market-swings. Independent mortgage banks (IMBs) are doing ~ 60% of the volume they did a year ago and they are going through unbelievable pain from a fixed-cost perspective. Many companies have tried to retain key team members within their organizations but they are at the point of recognizing that they need help with their existing cost structure. Technology can really provide solutions to make cost structures more flexible going forward. We have seen IMBs actually increase their activity in terms of evaluating new technology partners and software vendors to help them solve various gaps within their organizations. 

Q: How have you adjusted your investing approach based on the headwinds in the industry? Are there still opportunities to build growing and profitable companies in mortgage technology?

Bixby: There are definitely opportunities to build growing and profitable companies – despite the challenging time we find ourselves in. These start-ups need to solve specific problems that can be actioned today and achieve one of the following: 1) support new revenue opportunities, 2) significantly reduce costs, or 3) help address and meet various compliance and regulatory requirements. 

We have always operated with the goal of investing in companies that may achieve profitability within our investment period. We are more focused on this than ever and ensuring that the companies we invest in have the runway to become sustainable. 

We’ve noticed that there are fewer other venture capital and private equity firms that are actively investing in this mortgage technology market. We see this as an opportunity to support businesses and help them scale in this market. We are doubling down on our efforts to be active in the market and help companies achieve their growth targets.

Q: How has the market changed the dynamic for your portfolio companies? How are the mortgage companies adjusting their buying process and reevaluating counter-party risk?

Bixby: As B2B investors, we put ourselves in the shoes of the technology buyers at mortgage companies. We seek to appreciate what these buyers care about, what sorts of problems they are trying to solve, and what they are looking for in technology partners and vendors. 

Anyone with exposure to the mortgage market has felt the pain in their portfolio. At our firm, we have been helping our portfolio companies shore up capital, monitor growth metrics, and strategically evaluate new revenue opportunities in their markets. We have also been working with them to reengage with their counterparties to take advantage of the relationships to build new opportunities and reinvest in those relationships, especially as other technology software providers have been pulling back. 

Mortgage companies are more focused on the liquidity situation for startups to understand if they have ‘staying power’. They have been asking questions like ‘will this company exist in 5 or 10 years? And does this company have the capital necessary to finish their product development roadmap?’

We think that companies need to be more open with the counterparties that they’re selling to about their situations – and that this is going to be a major change in the industry given the recent banking failures. 

Q: What are some of the specific bright spots you are seeing in the industry from a technology perspective? 

Bixby: We have definitely continued to see the expansion of AI and machine learning in the industry, which we believe will continue to have a positive impact. We invested in Capacity, an AI-led support automation business because of the strength of their AI platform and ability to tailor it for the mortgage industry. There will be a lot more attention here over the company years as technology companies will work to build integrations with the large AI players to apply their models specifically to the mortgage industry. 

There has also been a lot of attention in the secondary capital markets with respect to utilizing blockchain and other data to better analyze loans and do more around portfolio management. 

Finally, we have seen more and more companies focused on improving affordability and access, starting with the underwriting process through the use of technology.

We are seeking to play a key role as an active investor and are focused on Rice Park investing in the transformative technology that is going to help revolutionize the mortgage industry over the next 5-10 years. We are focusing on investing in the players in technology that we believe are shaping the future of the industry and taking a front row seat in this market.

Note: This information has been prepared by Rice Park Capital Management and is subject to change at any time without notice. While all of the information presented herein is believed to be accurate, we make no express warranty as to the completeness or accuracy of the information. Past performance is no guarantee of future results.

Rice Park Capital Management is an investment adviser registered with the U.S. Securities & Exchange Commission.

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