Recession-Proof - a podcast by Ramp

Speaker 1:
You are listening to Fin Ops Today, a podcast room Ramp where the world's most innovative finance leaders share what's on their agenda. Here's your host, Ramp's own head of finance and capital markets, Alex Song.

Alex Song:
Hi, welcome to Fin Ops Today. On this week's episode, we're speaking with Tom Egan, CFO and head of capital markets at Divvy Homes. Hey Tom, how are you?

Tom Egan:
Alex, I'm great. Thanks for having me on.

Alex Song:
Yeah, absolutely. Just curious, where are you joining us from today?

Tom Egan:
I'm in Marin County, just over the Golden Gate Bridge from San Francisco.

Alex Song:
Very cool. And Divvy Homes is also based in San Francisco, right?

Tom Egan:
We are based in San Francisco. We don't operate in California. We operate in 16 metros throughout the country, mostly focused in the Southeast, Ohio, Florida, Texas and Georgia, our biggest states, but we are founded here. We're based here and probably 40 to 50% of our employees are based somewhere in the Bay Area.

Alex Song:
Maybe before we delve into the day to day of Divvy and your history there, I'd love to learn a little bit about your own personal history, what you did before Divvy, what led you here and then just a little bit about what attracted you to this opportunity? Sure.

Tom Egan:
So I joined Divvy in the fall of 2018, just after our series a. And before that, I spent about a dozen years on Wall Street, primarily at Lehman Brothers and Barclays Capital in New York and London in high yield. So I spent about six or seven years in the leverage finance origination team in New York. And then I moved over to London and ran the high yield capital markets function for five or six years before coming back to the states in 2017.

Tom Egan:
I was actually trained as a lawyer. I spent about three or four years practicing, primarily corporate law, M&A and some securities law work that I did. And that was before I moved into finance in the mid 2000s. I joined Divvy, as I said, in the fall of 2018 and took over the capital markets function, which for us primarily means asset financing. So we buy and sell single family homes. It's a pretty capital intensive business as one might expect.

Tom Egan:
And so we have to raise capital in order to do that. In order to make it more efficient, we raise a decent amount of debt capital that we use to purchase homes. When I joined Divvy, we had about 75 homes on the platform, we had a 20 million debt facility. I spent the next year scaling that up and bringing down our cost to capital. We added an additional warehouse line over the course of that fall lowing year. And over time, we've continued to work to reduce our cost to capital, ensure we've got sufficient access to capital, as well as diversify our sources.

Alex Song:
Let's go back to that origin story. What attracted you to a company like Divvy Homes? Obviously, you spent a long time in "traditional finance." Was it the real estate aspect of it? Was it the new career opportunity? What led you to these guys?

Tom Egan:
Sure. So when I left banking, I really wanted to find something in fintech. So having spent as much time as I did inside of big institutions, I was pretty convinced that between the inefficiencies, the lack of innovation and just frankly, the sheer scale of the industry, that fintech was really going to disrupt big finance in a significant way. And I wanted to be a part of it. And I wanted to find a way to get involved and use my background and utilize the skillset that I have developed and not start from scratch.

Tom Egan:
So I specifically came after a fintech opportunity and that was what was behind my move from London back to the Bay Area. Divvy in particular, I was introduced to Adina, who's our CEO and one of the co-founders of the business. I was introduced to her through a mutual friend and I immediate sort of fell in love with the team. I think the team was just a bunch of really, really smart people that were very focused on the mission of the business, which was frankly, the other aspect of it that really was attractive to me, was there's a lot going on in tech generally, that is very consumer focused and very...

Tom Egan:
Coming at it from the perspective of the individual founders of the business, which is not necessarily a bad thing of course, but I think what's lacking in a lot of those businesses is an understanding of finance, right? And if you're a fintech business and you're trying to disrupt the financial services industry, it's important to really understand what's happening on that side of the fence.

Tom Egan:
And I think there's a lot of skepticism and cynicism in Silicon valley where regarding the banking industry, which is not necessarily unfounded. But what I found at Divvy was the founders and the board really understood the value and frankly, the importance of debt capital and capital markets expertise to the business and to the success of the business.

Tom Egan:
It wasn't just like, hey, we need somebody to do this and let's just go find somebody. It was like, this is actually going to be pretty critical to the success of the business. And so as a result, I felt like I was going to have a seat at the table. I was going to have real influence on how the business developed. And at the end of the day, it was a product that I just felt like needed to exist. Right? I think a lot of people are solving for problems in tech than they're creating problems in order to solve them.

Tom Egan:
And I think Divvy was actually solving a real world problem and creating access to home ownership in a way that was severely lacking. And that was sort of the last piece of the puzzle that really fell in for me. And between the three of those things and like I said, just a real respect for and excitement about the mission was what brought me to Divvy.

Alex Song:
That's great. That's super illuminating. We're going to spend a lot of time talking about that capital markets effort there. That's going to be an area that resonates with me for sure. But let's go back to the product. Let's go back to the vision. Maybe you can spend a little bit of time telling our listeners what exactly Divvy Homes does. What's the user journey, what's the experience there?

Tom Egan:
Sure. So we are trying to reinvent home ownership and create a new path for home ownership for a lot of folks out there that don't really fit into the traditional boxes, either they can't get a mortgage today or the mortgage product is not designed in a way that is providing the degree of flexibility or optionality that they want. Our flagship product is a three year rent to own. It's a lease with an option to purchase. We underwrite a customer, customer comes to our website, either on their own, through paid advertising or some other channel and or through an agent referral.

Tom Egan:
We underwrite the customer. It takes about 90 seconds to give them a pre-approval. We pair them up with an agent and they go out home shopping, we give them a budget. When they find a house that they like, as long as it is within their budget, it meets our investment criteria, we'll put an offer on the home. If we're successful, we purchase the home. We lease it to the customer under a three year lease with a purchase option that the customer can exercise at any time. And a portion of their payment will go to build up a down payment savings account anywhere from three to 10% of the value of the home over the course of that lease.

Tom Egan:
And so, as I said, it's a three year product. And the customer option is exercisable at any time, there's actually technically two prices embedded in the contract, they're fixed. And so the customer knows from day one, exactly how much they're going to pay on a monthly basis over the course of the lease, what their equity's going to look like at the end or their down payment savings and what the purchase price is for the home. And again, they can exercise it at any time.

Alex Song:
It sounds to me like it's a really nice bridge product, right? It's for someone who wants to identify their dream home, someone who wants to live out the American dream, right? Want to be a homeowner and at the same time, maybe they're lacking money right now. So then that's why you sign this rental contract with them. And you're basically giving them three years of runway to really pull the trigger. Does that sound about right?

Tom Egan:
That's right. I think there's a significant portion of our customer base, who, to your point, doesn't really have the financial wherewithal today, either because of credit or because of down payment savings or in some cases both in order to get access to the traditional mortgage product. But what we found over time is that, that's only, let's say 30 to 40% of our customer base, the other 50 to 60% of it, or 60 to 70% of it is really looking for something else, optionality, right?

Tom Egan:
They're an independent contractor or a gig employee who has seasonal or fluctuations in their income or seasonal income that's really difficult for a mortgage underwriter to underwrite. They've got good credit and they've got good, strong income. They've got good savings, but a traditional mortgage underwriter is not willing to underwrite them. Or it's somebody who's moved to a new city and just wants to spend some time understanding what's out there and really just learn about the city and really get an opportunity to try before you buy so to speak.

Tom Egan:
So our use case has really expanded over time. It's not necessarily purely customers that don't have access to the mortgage product today. It's just that they're looking for something else that the mortgage product, which frankly, if you look back, the mortgage product really hasn't changed all that much in 40 or 50 years, and the rest of society has. And so the way people earn income today, the way that people live today, whether it's household formation or digital nomads, it's not the same as it used to be.

Tom Egan:
And the mortgage product has not really offered that degree of flexibility. And so, yeah, we are that bridge between renting and owning. It's the most acute pain point, frankly, is that transition from renting to owning. And so that's where we started. Over time, we want to build out a comprehensive end to end home buying experience for customers to go from renting to buying, seamlessly through the Divvy platform. So the rent own product is sort of the flagship, but we're building out other aspects of that customer journey.

Alex Song:
That's awesome. One last question on the product. I'm actually kind of curious, when we first met, all those years ago, I remember Divvy Homes was, I think, only active right around maybe Columbus, Ohio, Cleveland, Ohio. Right? Tell us a little bit, where are the metros now? Where you're active, you're buying homes, you're renting them out nationwide I assume?

Tom Egan:
Not quite nationwide yet, but we'll get there. Right now, we're in 16 metros. As I said before, we're sort of focused in the Southeast and Ohio. So Ohio was one of our first markets and it continues to be a very strong market for us. We're in Cleveland, we're in Cincinnati. And we're sort of building out in between. We're in Texas, Georgia and Florida, our three biggest states. And then outside of those, we are in Denver, Phoenix, Minneapolis, St. Louis and Memphis are the other markets outside of those four states.

Alex Song:
Got it. Tom, when I first joined Ramp a year and a half a ago and I took this job, it was shortly after our series A as well. I just remember reaching out to you and you were actually one of the first people I asked for advice because I had never built out a finance team before. Right? And we were very early on in our journey. So I'd be remised if I didn't ask you, tell us about your early journey, joining a small startup, building out the finance function, who did you hire first? Who did you hire second? What did that first couple of hires look like and what does the team look like today?

Tom Egan:
Yeah, it's interesting. When I went through, I was also the first time at the rodeo for me as well. So as I said earlier, I went from a career in banking and giant institutions down to a series A company, I was, I think employee number 15 when I joined. I was the only person in finance broadly, including accounting capital markets or FP&A as well as the only lawyer and so I very quickly took over. My initial mandate was really to focus on the capital markets aspect. I also took over the legal duties, which at the time was really focused primarily on the capital markets as well.

Tom Egan:
So it was executing new deals, signing NDAs with new investors and things like that. My first hire was about six months after I joined, it was a guy who had a lot of FP&A experience and wanted to learn about the capital markets. So it was a really good fit for us, for me in particular, because it was complimentary skillset that he had that I was able to bolster. I think my initial instinct was to find someone that looked a lot like me and had my experience.

Tom Egan:
But what I realized in the recruiting process was that over time we needed to build out a pretty broad functionality within the fun finance org. And capital markets while it was an important aspect of the business and a complex one, that was very much my skillset. And so I felt like it was important to have a complimentary skillset come in. So the first hire, I refer to him as a Swiss army, so he's covered really all aspects of our finance team from start to finish.

Tom Egan:
He came in initially to help me out on the capital market side, but very quickly was able to expand his role and start taking on a lot of the FP&A. And so he was instrumental in helping us model out the business and do a lot of the financial diligence around our series B. And he helped me also build out that function internally. So today he runs strategic finance for us, which encapsulate it's FP&A as well as investor relations and strategic planning.

Tom Egan:
When I joined, we were utilizing an external accounting firm to do our monthly close. During the course of 2019, we hired a controller and we brought our accounting function in house, which I think was one of the things that are probably the best learning or the biggest learning for me as an early stage company. It felt not premature necessarily, but definitely early on. But what you realize is that because accounting ends up being a 12 month lag effectively, because you're doing an audit in the middle of 2021 for 2020 and so you're sort of always looking backward when it comes to accounting.

Tom Egan:
The tentacles of that external firm were really pretty long lasting, right? So it's effectively 18 to 24 months before you've really gotten rid of the legacy. And it's not that they did a bad job, but they fundamentally just didn't understand the business the same as somebody who's internal. And so building out that capability was pretty critical for us. And what you realize is that, a lot of the way that the business is perceived externally by investors is going to be driven by your accounting policies and how you're accounting for the business, whether it's gross versus net revenue or how you're positioning yourself from a gross margin perspective.

Tom Egan:
All of those things are pretty significant when it comes to how you position the business with investors. And so being able to take control over that and have that capability in house is pretty important for us. And so over the course of probably the first 24 months, in addition to just really focusing on driving the cost of capital down and increasing the flexibility and the capabilities and the runway on the capital market side, we've spent a lot of time building out those functions internally. So today, the organization that I run is accounting, finance, legal and capital markets all on legal.

Tom Egan:
I would say, you could sort of go either way with legal being part of it. But I do think that there's a lot of synergies in having accounting, finance, and capital markets, including fin ops, the operational aspect of how we run our business all under one umbrella, because there's a lot of cross-functional collaboration that goes on.

Tom Egan:
And as I said, I think it's pretty important for the narrative that you're telling the capital markets and that's being informed by your FP&A function to also include the accounting aspect because I think it's all sort of a circular conversation that goes on from accounting to FP&A and out to the capital markets. And the way you position yourself is really driven a lot by what's coming out of those two other organizations.

Alex Song:
Interesting, by the way, your early journey, I think for obvious reasons, mirrors of mine almost like for like in terms of timing, who I hired first, who we brought on, the type of expertise, the type of candidates. So you have definitely made not an insignificant impact on Ramp's early journey. So that is obviously [inaudible 00:15:47] appreciate it. Yeah, exactly. But let's talk about the finance team today. How big is the team? Number one, and maybe you can also offer us some insight about how you scale into a finance team.

Alex Song:
Is it as a percent of overall headcount? Is it driven by revenues? Is it driven by the number of homes you guys own? How do you think about building out the team?

Tom Egan:
Yeah, I think what's interesting is that, so the team today is I think 15 and we're in the process of trying to hire, I think as frankly, everybody is, it's been harder to hire than we would've liked, but we're definitely continuing to scale up. Although we have not scaled linearly with the rest of the business. The capital markets function and the finance function more broadly are pretty scalable and I would say it's probably more driven. The complexity of the capital structure is certainly what will drive a lot of headcount needs certainly within capital markets.

Tom Egan:
The accounting function is probably a little bit more linear, particularly as we've navigated early stage, being an early stage company as we're growing, adding new business lines and continuing to consolidate how we operate and just frankly build out our capabilities on the technology side. I think the accounting function sitting where it sits in the organization, which is effectively all the way at the end of the supply chain, so to speak, and being a consumer of the operations of the business and of the product and engineering aspects of the business, almost by definition ends up being probably the last line of defense, so to speak.

Tom Egan:
But it's also probably the last part of the business to get fully automated. And so what we're going to do over the course of 2022 is work very closely with the product and engineering team to continue to make that accounting function more efficient and more scalable. But I would say in terms of head count, accounting is the biggest part of our business. The FP&A team, interestingly, I think it's in the process of transitioning from what I would say is more of a reactive service oriented function to a strategic forward looking function.

Tom Egan:
And I think part of that is just a function of where we are as a business. I think early on in the journey in an early stage company, you're very focused on executing on what's in front of you. And yes, of course you need the vision the plan for it, but there's less of a strategic element. It's much more of a tactical approach to life where you're really just trying to execute on the business plan in order to be able to raise the next round of capital. And then you get to a point which we did middle of last year, where the path opens up and you've got a lot more flexibility because if you get to a point where you're lucky enough to raise a series D and a significant amount of capital like we did, it just opens up the strategic lens a lot more.

Tom Egan:
And so post the series D is when we really started to transition into less of an, if you're FP&A focused, and much more of what we call strategic finance. So it's looking at strategic initiatives, whether it's building new products, partnerships, JVs, potentially M&A, all of those things come into view as part of that transition from, let's say startup to maybe early stage, I don't know where the technical transition point is. But we certainly felt like I said, in the middle of 2021, that shift from let's start looking two, three, four quarters down the road as opposed to two, three weeks or months.

Tom Egan:
And so I think that's really the function, the part of the team that's probably in the most transition right now. And then on the capital market side, I think, like I said, a lot of it has to do with the complexity of the capital structure. So as we've gone on from one warehouse to two, to three, as we've started to layer in off balance sheet capital, a forward flow provider partner, and to scale that channel and as we start to think about accessing the deeper capital markets, that's when you start to add, whether it's ABS or term loans or other things like that, that's when you start to really need to add those capabilities and frankly, a lot more seniority, frankly, in that part of the business.

Tom Egan:
So, I think as the business scales, you end up with a lot more specialization in certain parts of the organization, capital markets being one of them where you really need to start to really focus on really defining roles more specific. And then recruiting people that have a specific background in order to be able to execute against what is becoming a much more specific set of objectives, as opposed to a broad mandate to just make sure we don't run out of money. Now, we've got to really focus on optimizing individual parts of that capital structure.

Alex Song:
How does your data day look? Correct me if I'm wrong. It sounds like a lot of your mind share is probably going toward capital markets, but with respect to maybe accounting, FP&A, strategic finance, legal, right? What would you say are your day to day, how would you split the pie there?

Tom Egan:
Yeah, I mean, it changes quite a bit from month to month, quarter to quarter. I would say right now, a lot of my mind share is certainly within the capital markets org, because we've just got a lot on the plate there. And we're probably the most in need of frankly, resources in that part of the org. My goal over the course of the year is to get capital markets to a spot where I can spend less time there and start to focus more on the accounting and finance parts of the org.

Tom Egan:
Again, legal is sort of its own beast. And we have a GC who's very capable, who I trust to run that org separately. And legal almost by definite, is a bit more of a service function, right? They're reacting to a lot of what the business is doing. So accounting and finance, I plan to spend a lot more time than I do currently with those functions over the course of this year as we start to think about what's the longer term plan. And getting ourselves in a position where we're just a little bit more of a frankly more mature and buttoned up than you would be as an earlier stage company.

Alex Song:
Interesting.

Tom Egan:
Yeah, right now, I'm spending a lot of time recruiting. I'm spending a lot of time with capital markets and then hopefully over the course of this year, I can start to move away and start to spend more time elsewhere.

Alex Song:
Again, a remark that deeply resonates with me as well. I think we're probably all recruiting for this same set of candidates and we're probably all seeing the same bottlenecks right around the town pool and just what areas are most time consuming right now, what areas we need to expand in. So definitely another topic that resonates with me.

Speaker 1:
You are listening to Fin Ops Today, a podcast room Ramp.

Alex Song:
Maybe let's transition the conversation to, I guess, the topic of the podcast which is financial operations. Right? And I want to hear about sort of how Divvy Homes manages financial operations, understanding that you guys are also a little bit of a unique beast, right? You have financial operations and you have capital market operations, right? So would love to hear about how you manage around that, what that day to day looks like, for the team at Ramp for example, I mean, payables, right? That's something that you can never get out of.

Alex Song:
It actually still is a somewhat manual process. You just need to hire people to manage the day to day with capital markets as well, right? Recycling cash, managing around on cash, making a draw request, paid outs, monthly interest payments, your lenders, who's doing all of that stuff on both sides of the business on both the finance side, as well as the capital markets for Divvy Homes?

Tom Egan:
YeaYeah, no, thank God we do not have each asset sh. So it is a really good question. So where we started and I think it informs where we are today, but historically, what I would call facility operations, so that's funding requests, monthly reporting, covenant compliance certificates, draw down and repayment functionality, that's all sat with capital markets historically. And part of it was just frankly a matter of... The function was, the documentation was owned by capital markets and the relationships were owned by capital markets.

Tom Egan:
And so it just felt natural that it would sit there and there was nobody else frankly, internally that was familiar enough with it in order to manage that. That being said, it's always been and continues to be a very strong and fruitful partnership with our product and engineering counterparts. So again, when I first started and there were 75 houses in the portfolio, it doesn't seem like very much. But when you talk about the fact that each one of those homes had a 12 plus month history of payments that you needed to reconcile on a monthly basis, the data starts to add up quite a bit.

Tom Egan:
And as the portfolios expanding exponentially and the history of the each individual line item in the portfolio continues to extend, you end up with an awful lot of data that you got to reconcile on a monthly basis. And so we've leaned very heavily on our partners and the product and engineering team who built a ledger system from scratch to support the business. Our product as we talked about earlier, it sits somewhere in between a straight rental product and a mortgage product.

Tom Egan:
And there are components of both of them that need to be accounted for. And so the product and engineering team built that as a set of custom ledge that we continue to rely on and that has continued to expand to support the business. So that's always been a partnership. In terms of AP and other parts of the financial operations, that tends to sit with the accounting team. So all within my org in some way, shape or form, but again, each one of those components is going to rely very heavily on the support and partnership with other parts of the organization.

Tom Egan:
So the accounts payable is going to rely very heavily on our operations team that's managing the actual assets and the customer relationships in order to ensure accuracy there. The one aspect that does sit outside of our orbit, so to speak is the payments team. So our payments team, not accounts payable but our customer payments, essentially collection of the monthly payments from our customers sits within our operations team. Again, very close partnership with our accounting team, of course, but does sit without outside of that.

Tom Egan:
So it's been a somewhat organic journey, I would say to where we are today. We do have someone whose focus is on financial operations, who sits within the end treasury, and he sits within the accounting org. Although again, I think it's pretty fluid, something of a dotted line up into the capital markets business, because so much of what we would call Fin Ops is related to the capital markets facilities.

Alex Song:
Super interesting. And quickly pivoting into a very specific question actually, which is, do you guys, I guess, purchase these houses under different legal entities? Do you have a number of different, I guess, LLCs, different funding facilities? And is that measured in the four or five range or is it in the 100s? I guess I'm just trying to understand, does each individual asset sit as a different legal entity or are they somewhat consolidated? I'm sure there is account implications there.

Tom Egan:
Yeah, no, thank God we do not have each asset sitting in its own LLC, that would be an absolute nightmare. But we do have different legal entities that purchase and own the homes. Interestingly, one of the things that really took me a while to get my head around at Divvy is the amount of friction involved in moving one of these assets around is pretty significant, especially when you're talking about homes that are in some cases, worth a 100,000, $150,000.

Tom Egan:
Our range goes from call it 75,000 on the low end up to 750 on the high end. And the friction involved in retitling an asset, getting new title insurance, getting a new deed, it can be several thousand dollars per asset, which, if you're owning the asset for 10 or 10 plus years and the asset is a million plus, maybe it's a drop in the bucket. But when you're talking about a house that's worth a $100,000, it's not an insignificant cost. And so what we realized was we needed to set up a structure that was flexible enough to accommodate our allocation strategy and our financing strategy, but also fixed enough that we weren't going to have a lot of friction moving assets around.

Tom Egan:
So we do have individual LLCs that are set up under each one of our financing channels. So there is a distinct pool of assets that supports an individual warehouse line and those assets stay with that financing line in perpetuity. So in the event that we have a customer that extends their lease, that asset will not move, it'll stay in the same box. If we have a customer who elects not to exercise the option and we get a new customer into that home, that asset stays in the same box. It just makes life a lot more efficient from a cost perspective. And we've set up our allocation engine to operate in that way.

Tom Egan:
So we don't originate assets with the intent of ever moving them around, where they go in the first place is where they stay. And that's worked as well for our forward flow partners. So we allocate assets directly to their LLC, to their investment vehicle. We don't take title to the asset, when we originate the asset then close it, it goes directly into their investment vehicle again, to minimize friction and to avoid having to move assets around. And it makes things a lot more efficient.

Tom Egan:
When we did just do a refinancing of one of our warehouse lines, because we use intermediate hold codes, we were able to move the entire box as opposed to moving individual assets. And that, again, just cuts down on the friction involved in moving assets around.

Alex Song:
That's fascinating. All stuff, I'm sure you spent a long time agonizing over as your building it up from the ground up.

Tom Egan:
Yeah. And again, some of it is just again, it happens somewhat organically, but I think the interesting thing about having spent a bunch of years as a lawyer and then a bunch of years as a banker, is that you realize the longer term implications of some of this stuff. And so it forces you to step back and think a little bit more strategically about these things. It doesn't mean that I necessarily got it all right on day one, but it does cause you in some instances to make different decisions with a view through a longer lens, so to speak.

Tom Egan:
And it also helps on the accounting side, if you've got a little bit more clarity. We also have other business lines that are set up as individual LLCs. So our assets are being purchased into one part of the business, but then we also have a brokerage entity. We also have other parts of the business that are run through different boxes. So it makes things cleaner for the accounting team and again, for thinking about how we are perceived and how we position the business externally, it's helpful to have that stick and box chart be pretty clean.

Alex Song:
That makes sense. Ramp is in a very similar situation, right? One product right now, one lender right now, one [inaudible 00:30:32] right now. But obviously, everything is being built with the idea that that will quickly change. We'll have multiple products, we'll need multiple warehouse lenders, at some point, potentially a public ABS deal. And how do we set ourselves up sustainably to support all of that? A lot of which by the way, requires some short term pain, right? And then over time, we'll hopefully be accruing some value from a lot of the upfront work.

Tom Egan:
Yep. Now, that's exactly the way we've gone about it as well.

Alex Song:
Anything with regard to your day to day, whether on the accounting, FP&A or capital market side that you see as I guess, an area of potential improvement? Any pain points right now that you're most focused on improving? What would you say is maybe working the least well?

Tom Egan:
So I think, as I said earlier, the accounting function is almost by definition, going to lag a little bit in its ability to really effectively leverage technology. And so I think that's probably my biggest focus right now, is trying to make that part of the business a little bit more efficient. And to improve our internal controls as we start to work towards accessing public markets, I think it's just something that's important for us to be able to do. And frankly, it will be much more scalable over time.

Tom Egan:
So I think getting those rails in place on the accounting side and frankly legal as well, I think a lot of it is just a matter of policies and procedures that we can really spend time doing that, I think to your point, you got to take some pain upfront to get those things in place. But then once you get them in place, the business overall becomes much more scalable and sustainable. So I think that's the area that I would say is probably the most opportunity for upside there in terms of really taking advantage of our status as a technology company and really utilizing that technology to start to put in place some of these rails to really make that accounting and legal functions much more efficient.

Tom Egan:
And frankly, the business overall, it's not really as much about making the accounting team more efficient. It's more about making the implications for the rest of the business, right? Streamlining the rest of the business and putting us in a position where we can, like I said, access the public markets and have the internal controls that are necessary for that. But a lot of it is going to be an upward push from legal and accounting into the rest of the organization in order to drive some of those policy changes and efficiencies.

Alex Song:
That resonates with me, the issue of public market readiness certainly is one that we actually see quite a bit amongst just Ramp customers and people being very focused on the issue of actually specifically SOCs compliance, right? The idea, is there financial controls? Is there not? How does my software best enable us being the finance teams, right? To do the right things and make sure the right approval flows are there, it's a topic that actually comes up quite a bit. So I'm not surprised that following your massive fundraise last year, that it would also be top of mind for you guys as well.

Tom Egan:
Yeah. And I mean, I think the benefit that we have have of being a pretty prolific debt issuer or consumer of debt, I guess, is that by virtue, the fact that we're dealing with fairly sophisticated parties on the other side, we've already been down... Like we already have a big four firm that audits our books. And so I think we're pretty far down the path in that regard, it's just that next step will just make us that much more streamlined and ready for prime time, so to speak when we get there,

Alex Song:
How many big four audits have you guys gone through and what was that transition period like from pre to post? Any best practices or pitfalls or observations?

Tom Egan:
We had our first big four audit last for 2020. So prior to that, we were being audited by a smaller firm. I would say, I'm not sure there's much in the way of advice other than to say, just start early. We had deadlines in our credit facilities that required us to get the audit done by a certain day. And with our prior auditor, I think just as a function of the scale, we were able to control that timeline a little bit more aggressively than we were with the big four auditor.

Tom Egan:
And I think to some extent, it was just a function of the fact that it was the first audit that they were doing. And so it just required a little bit of a deeper dive. But also, they're just a bigger machine and it takes more time for things to get approved and to go up to the net office and things like that. So I would just say, the only advice I could offer is try to get ahead of it. Not necessarily that you need to do a big four audit sooner rather than later, but when you do make the decision to do it, do as much prep work as you can in advance.

Tom Egan:
And then ensure that they're going to be able to hit your deadlines well in advance of actually, probably not that I'm a fan of false deadlines, but setting a preliminary deadline might be an effective way to manage that workflow. Because we ended up on the day that the audit was due just really hand ringing in order to get it over the line.

Alex Song:
Another topic I am intimately familiar with here at Ramp, given our first debt facility from last year and some of its audits stipulations. Quick disclaimer, we may have to edit out this next segment, but I really want to ask you this because it's super interesting to me. When you are doing the accounting and [inaudible 00:35:55] long these assets and you're are selling a call option to your tenants, to your customers, are you actually accounting for the short call position in your...

Alex Song:
I suppose it's a liability on your balance sheet, are you using a black trolls model and are you writing down the value of that option as date to expiry is contracting? Not to get too granular, but I'm just super interested in how that call option itself is accounted on your balance sheet.

Tom Egan:
So the call option itself is in fact, not accounted for on the balance sheet. Our instinct initially was to hold these assets essentially as inventory and hold them as assets for sale because essentially the thought process was customer can exercise the option at any time. That could be tomorrow. That could be in two years, but we have no control over it. And so we should have these assets sit on our balance sheet as effectively inventory, assets held for sale.

Tom Egan:
And that was the view of our initial auditors. Over time, that's migrated and now we actually account for the assets as long term real estate, just the way you would any other asset. We do have a contingent liability on the balance sheet for the customer down payment. So the actual cash liability that we have associated with the customer cash. So when a customer makes payment on a monthly basis, let's say they pay $1,500, 1,250 of the at is rent. The other 250 of it goes to build up their down payment account. That last 250 is A, first of all, not revenue, and second, it creates a contingent liability on our balance sheet that we account for, essentially, it's a liability back to the customer.

Tom Egan:
If the customer decides to exercise the option, then that cash gets released to us and the revenue gets recognized at that point. If the customer decides not to exercise the option, then that cash would go back to the customer assuming certain conditions have been met and then the liability would be released at that point.

Alex Song:
Got it. Thank you for that deep [crosstalk 00:37:59] digression. It was an area that I've been wondering for quite some time, obviously because your product itself is pretty innovative and obviously, a little bit off market, right from what's available from traditional mortgage lenders and whatnot. So that's super cool. With an eye toward just your day to day, it does sound like there's quite a bit of cross functional collaboration with your product team and whatnot.

Alex Song:
You're building a lot of this functionality in house, any external vendors that you've historically found to be really easy to work with, really helpful, whether it's around tax audit, accounting, ERP, et cetera, anyone you want to call out?

Tom Egan:
I will say as a broad brush, I can say that the folks that we've been the most happy with and the ones that are the most impactful to the business are the ones that really take the time to really understand the business and partner with us in a way that is reflective of the fact that we are a slightly different product and we're not necessarily a cookie cutter. So I think the typical profile for somebody like that tends to be either a software company that's sort of specifically designed for tech companies, right?

Tom Egan:
Or a small company that is willing to be more flexible and thoughtful about how they approach our business. The ones that we typically have the hardest time dealing with are the folks that are big, established, less tech savvy companies that frankly are just less flexible in their approach and less willing to or able to accommodate the nuances of our business.

Alex Song:
Yeah, totally. I want to be mindful of our time. I just want to end maybe with one last question, Tom, what are you most looking forward to in 2022? Is there something that you're very excited about, big announcement, new products? What are you most excited about?

Tom Egan:
I think what's most exciting for me is, as I said earlier, after the fundraise in the middle of last year, it really broadened out our strategic lens. So I think what I'm most excited about is our ability to sort of use that momentum and use that capital and frankly, the notoriety that it's brought us to really drive forward and come up with some really creative ways to address customer pain points. I think we've been really laser focused on the rent to own product and that's a really great product and it works super well for a lot of people, but it's not solving everyone's problems.

Tom Egan:
And so I think we need to just start to broaden the lens and think about how we can really own that end to end experience for the customer and create new products that really solve that end to end home buying experience. And that's, I think what I'm most excited about, obviously not necessarily specific to my org necessarily. But I think as an executive of the company and a shareholder of the company, that's I think where I get the most excitement, is really that new journey that we're going to go on and continue to just open things up for the customer.

Alex Song:
Well, thanks Tom, for your time. And thanks so much for coming onto the podcast today.

Tom Egan:
Happy to do it, Alex. Thanks for having me.

Speaker 1:
Thanks for listening to this episode. If you enjoyed it, please rate and review us on Apple podcast, Spotify or wherever you listen to your favorite shows. It really helps to spread the word. Until next time, this is Fin Ops Today from Ramp.