Interview with Karus Co-Founders Aaron Travis, CEO, and Jamie Harrison, COO
Welcome everybody to another edition of AETL Alts coming to you live today with a really, really interesting, auto finance software company that we are gonna dive deep into, auto finance lending and everything in in this space. I'm really delighted to welcome, 2 guests to my show. They are, the cofounder, CEO, and COO, of, of Karus, which is k a r u s. So, let me start by introducing, these two gentlemen. So joining me today is Aaron Travis, cofounder and CEO, and Jamie Harrison, cofounder and COO.
Andres Sandate:Welcome to ATL Wells.
Aaron Travis:Thanks, Andre. It's really appreciate it, and, thanks for having us on ATL Wells. We're excited to talk about what's happening in consumer auto finance and how AI is being applied.
Andres Sandate:Yeah. For sure. Well, thanks for taking time, and I know when you're building a company and as busy as as you guys are, as we exchanged, you know, preparation notes the last, month or 2 for the show, I appreciate you guys, you know, taking some time. There's a lot of stuff that we wanna talk about, including, you know, the auto finance space, you know, the hot hot topic of AI and credit underwriting, the credit markets, and, you know, just overall, where you guys are seeing opportunities, and and who are, I guess, customers and and users of of software, product that you guys are building, and and you both have a tremendous amount of experience. So we're gonna unpack a lot over the next 45, 50 minutes, but I always like to ask my guests to talk about their inception story or the backstory.
Andres Sandate:The tagline of ATL Alts is the story behind the numbers. So maybe I'll first start with you, Aaron. Maybe tell us a little bit about your background, and then I'll go to Jamie, and then, love to come back to you, Aaron, about how you guys met and, how you started building Karas.
Aaron Travis:Sounds great. So just very briefly, first half of my career in New York and San Francisco, traditional investment banking, and second half, series of of start ups, very early stage using data to make the markets more efficient, I'll say, with a focus on consumer credit. We had one credit technology company that was that was focused on unsecured consumer credit. So think of our partners as Upstart, SoFi, LendingClub, Prosper, some of the original, unsecured marketplace lenders. Now that that company was acquired by our major mutual fund complex.
Aaron Travis:But towards the end of that being an independent company, we had noticed that a lot of these unsecured consumer loans were taken out for an automobile purchase, and that was fascinating to us. So we looked at at a bit of the data and saw some things that it that said that it performed well. Now fast forward to really sort of the beginning of the of the pandemic, and I was thinking about how to apply predictive technologies, so think m l a I and a lot of data, of course, to consumer lending for for automobiles. And I looked at unsecured consumer, and it was about the 6th the size of auto, but I could hardly really even rattle off 5 innovative, disruptive, predictive technology based auto consumer lenders. So it seemed like a huge opportunity.
Aaron Travis:Now we're gonna get into some of the challenges, and there's a reason why there's not as many focused on it. And a lot of that has to do with indirect lending and the dealer network, but that's really the the inception story. We we we got some data. We built some preliminary models a little over 3 years ago. We back tested those against the incumbents.
Aaron Travis:So think a lot of the the auto ABS is first, And we saw what looked like a lot of inconsistencies and inaccuracy. So we said there's a problem here that needs to be solved.
Andres Sandate:Yeah. Fantastic. Now, Jamie, let me come to you, and I wanna, help our our listeners understand how the 2 of you came together because part of our audience is is investing in start ups. They're looking for opportunities in in private credit. They're looking at opportunities in specialty finance.
Andres Sandate:They're investing in software businesses, and we have a lot of founders. And the team that is assembled here at Caris to build this organization, like any start up, it's it's critical. It's important. So maybe you could talk a little bit about your background, how you guys came together, and and, what got you interested in this space?
Jamie Harrison:Yeah. You you bet. And before I jump in, Andres, we're Aaron and I are are super excited to be on with you here today. And, I I will speak really briefly for our, our 3rd cofounder, Paul Kossoff, who's who's not on, and and Paul is our technical cofounder. And, you know, it it actually ties right into how do we all meet.
Jamie Harrison:And and Paul and Aaron actually got to know each other, as they're both, graduates of, Georgetown and, share that that common theme within
Andres Sandate:their lives and
Jamie Harrison:Oh, boy. Go and, share that that common theme within their lives. And Go Hoyas. That's right. That's right.
Jamie Harrison:So You
Andres Sandate:grew up a Hoyas fan. That's awesome.
Jamie Harrison:But, Paul had previously had a, AL, AIML dev shop called Spheric AI out of his hometown of Cincinnati, and, Aaron had worked with him on some past projects and was just super impressed with his ability to, put, you know, scalable AI solutions in place for large financial services companies. And, after seeing some of the work that that Paul had done on some of those projects, it led Aaron to, get in touch with him and, that kinda rounded out some of the founding team. But but more so for Aaron and myself, you know, Aaron had just talked about, his previous company, Random Forest Capital, and kinda what they were doing with respect to personal loans. Funny enough, Andres, I was actually at the mutual fund that bought that strategy. So at the time, that was the 5th largest asset manager in the world based out here on the West Coast down in, in the on the peninsula.
Jamie Harrison:A lot of folks might know which asset manager that is. Sure. I was over there helping them build their, their venture team and their equity group. So we actually took a a strategy of, writing late stage checks out of the out of the mutual funds and the kind of pre pre IPO crossover rounds that then morphed into us, standing up dedicated funds to move down the spectrum at the time. You know, this was kind of post, anything kinda series b and onwards.
Jamie Harrison:Again, you have the stages and the and the investment rounds to date have kinda morphed a little bit from a from a stage perspective. But at the time, you know, that was companies that were doing anything, north of $5,000,000 in ARR. But through that, I got to meet, you know, dozens and dozens and dozens of different founders out here in the Bay Area. A lot of those focused on really innovative Fintech strategies. But importantly, again, I had a front row seat to the acquisition of Aaron's previous company, and that led, me to get in touch with Aaron.
Jamie Harrison:And, you know, we really started even prior to Caris, you know, we built a great rapport. I was friends with, his other cofounders at the time, and it led us to kinda start, you know, throwing some ideas back and forth. But most importantly, I think a a light bulb moment for me, Andres, was, you know, here I was sitting within the world's 5th largest asset manager. I'm seeing them, you know, adopting and embracing a new, a new strategy that, again, it was in fact powered by machine learning and artificial intelligence, and it gave them the ability to play and and buy assets in what was an asset class that otherwise, you know, mutual fund complex really probably traditionally wouldn't wouldn't really have some exposure to. And so for them to do that, not only with confidence, but at scale, really gave me kind of a it was it's a it was a formative moment for me, I'd say, in which I said, okay.
Jamie Harrison:Wait. These technologies and if you can go about strategies to pursue assets and price assets in some of these more nuanced asset class classes the right way, you can, in fact, build really large enduring and scalable businesses. And and that's really kind of a you know, as as Aaron had said, that was part of the inception along with kind of us taking a deep look under the hood, at consumer auto more specifically knowing some of the nuances around that asset class compared to personal loans, compared to mortgages, compared to some others, and and that was really some of the driving factors there.
Andres Sandate:That's great. I, so I I before we jump into the business and, you know, some of the things that that Caris is known for and where you're getting traction, there's 2 areas that I wanna wanna spend a little bit of time on. The first one is just the overall backdrop for Fintechs. Okay? And specifically Fintech lenders over the last, call it, 24 months.
Andres Sandate:You've seen, I I don't know if we wanna use the term reset, but we've seen a lot of, challenges in the Fintech lending market as the credit environment, the capital markets, for debt in particular, and just the overall funding environment on the equity side has changed, for start ups. So you all are a start up. You're you're getting traction. You've got a lot of institutional, call it, pedigree, and and and you just outlined that. Let's just start with a high level 10,000 foot view of the overall environment for Fintech lenders because that there maybe there's a misunderstanding about the whole, you know, the whole space could get easily painted as not performing or their models blew up or they they they can't effectively operate in this higher rate environment that we're in.
Andres Sandate:So maybe I'll I'll come to you, Aaron, first. That's the first thing I wanna tackle before we get into the business.
Aaron Travis:Yeah. Sure. So I'll I'll try and kinda make this concise because this could be a very long conversation, which we always love to have. I'll I'll start with sort of Fintech lenders in general. You're probably gonna put them into 2 buckets.
Aaron Travis:So you're gonna have your balance sheet lenders, which are, some of the folks like like an Upstart or Upgrade or SoFi, that we all know and love. And then you're gonna have your, enterprise SaaS or technology vendors, which is where Keras is Keras sits. And both in both of those buckets, they're they they can have some similar narratives and are building similar tools either for another lender originator or for their own lending and originating. And then there can be a spectrum as far as whether the technology is partnered with or licensed out. But, getting back to sort of the point that you made around the last 24 months.
Aaron Travis:For almost any fintech, it has been very difficult. I know everyone who's listening to this knows that very well. Cost of capital, if you do have a balance sheet, has gone through the roof. Being able to raise equity dollars has become much more difficult. And so efficiency of lending or efficiency of the of the underlying business has become much more important.
Aaron Travis:Now in that environment, we we went to market, right, in in the in the beginning of 2023 or maybe you could say mid 23. And through our GTM motion, we really didn't have access or we had to operate as if we didn't have access to unlimited rounds of capital to plug, money burning holes, which, frankly, for the last 10 years, a lot of folks were in that position. So so some really inefficient businesses were built. Right? And we're seeing that come to to the forefront here with some really sort of shocking wind downs in the last 6 months of of fintechs that thought seemed as if they got to scale.
Aaron Travis:But spending just one minute on the predictive technology, MLAI, in being able to assess credit risk. Yeah. And the the narrative that you hear over and over, finding good credit where there's bad, Caris, we take very much of a different approach, and 21, 22, maybe even parts of 20 with the government stimulus and everything that happened with the pandemic. You have a lot of models that are trained on data that is just is is data that we've never seen before. So the models are not calibrated correctly, and that's coming through in the performance.
Aaron Travis:Interesting. So when you have sort of this when you have this technology that you've built that you've built with one simple thing in mind, we can predict defaults, and we know how to assess credit because we have all the data, and we have these very complex predictive models that we've built. And then the performance is at times even worse than rules based or manual underwriting or other types of underwriting. That's been something that we've had to work through, all of us, our peers, and, of course, Caris. And and I and I'll just say this, we don't take that approach, this kind of feature rich approach where we say if this person has this feature, they're gonna have, this much propensity less, to to default.
Aaron Travis:What we are doing is we're using a lot of data, some sophisticated predictive modeling techniques to optimize lending, and we'll get into that a little bit more.
Andres Sandate:Oh, interesting. Okay. So the second thing I wanted to ask you is the asset backed market. Right? So you you talked about mortgages.
Andres Sandate:You talked about consumer lending. You you guys are operating in auto finance. Right? These are, you know, for the everyday, consumer. Like, if they need a mortgage, if they wanna get a loan for a vehicle, if they wanna remodel their kitchen and need a, a loan to do that project or go down to the home improvement store and, you know, buy a bunch of appliances.
Andres Sandate:I mean, this asset based market, asset backed finance market, is absolutely massive. I've seen reports that it could be upwards of $20,000,000,000,000 with a t. And so against the backdrop of banks increasing regulation, banks looking to partner with larger asset managers, I feel like banks have largely moved out of the origination business. They've largely moved out of the underwriting business, or it's just morphing. You come along with the technology that allows them to make better decisions, improve, if you will, how they're underwriting, And I'm sure the size of the banks and the, underwriters and originators of, of the auto loan paper vary.
Andres Sandate:But let's just talk about that, against the backdrop of just how massive these markets are. It would seem on the surface you're helping them become more efficient and and better at making these underwriting decisions using AIML. Is that a fair assessment?
Aaron Travis:Yeah, Andres. It is. But but let me flip the script on that a little bit here. And so you've had the bank you're right that they have been pulling back and part of that sort of the massive the end of this massive credit cycle. And it and it ended in a pretty jarring fashion.
Andres Sandate:And a lot of regulation and, you know, just a lot of variables. Right? A lot of factors.
Aaron Travis:Correct. But when you think about Carus' customers or some of these innovative technologies let me give you a great real world example, and this was all publicly released. One of our customers is is an auto dealer group that had never lent anything to anybody. They've been around for a couple generations. They're they're called hgregg.
Aaron Travis:Like I said, it's publicly released. They used our software and our platform to launch auto consumer lending. So they're lending to the customers that come into their dealer. Those are customers that would have I'm simplifying this a little bit. But those are customers that would have gotten those loans from banks.
Aaron Travis:So now something that would have been very difficult for HGreg to do, they were actually looking at the they would've looking at this, they would've had to do something similar to what AutoNation did in buying CIG, which sounds simple enough. Buy an existing finance company and use that to lend to your customers.
Andres Sandate:Right.
Aaron Travis:Bet it. Yeah. It's not that easy.
Andres Sandate:I can only imagine.
Aaron Travis:Yeah. It it it it's not that easy. So, you know, I think that to your point, yes, these markets are massive. The amount of money flowing into asset based lending and private credit, we see the headlines still every day. There's gonna be a ton of funds launching new products for asset based lending, some household name logos even this summer and at the end of 24.
Aaron Travis:So that's only going to be get get bigger. I'm not sure if banks ever are going to be able to sort of flow back into this the way that they normally have with pulling back during a credit cycle ending and then going out and being more aggressive. They certainly will have that tact, but it'll be interesting to see how it plays out.
Andres Sandate:Yeah. So the the narrative around AI in particular is I I you know, you you hear people ask if it's really AI driving a lot of the underwriting, or is it really AI being applied? Or are they just you know, they being you know, whether it's the the tech company or, the underwriter, are they using AI as a catchall? Like, it's the buzzy word that you have to use. Can you talk about, you know, this notion of finding good credit amongst the sea of credit and how your tools and your technology are in fact different, how in fact if I'm listening to the show, I can gain, you know, a level of understanding when somebody says AI and underwriting about an auto loan.
Andres Sandate:Like, what are the things I need to be paying attention to?
Aaron Travis:Sure. So let me start with Carus' own point of view, and what we've built is not we're saying that we're going to detect a great credit risk where everyone else thinks that it's bad. Is that gonna happen time to time from from what the modeling work we do with our customers? Sure. But but that's not really how we're approaching it, Andres.
Aaron Travis:It is more around optimizing what they're already doing. So when our our potential customers, the the conversation starts not with talking about tens of millions of data points and all these ML, AI algorithms that we're using and how many PhDs are on the team. It starts with how's your lending performing now? What are some of your pain points? There's a lot of metrics around lending outside of just the headline delinquencies and charge offs.
Aaron Travis:And then how can we use Caris' massive dataset, your own data, the models we've already built in our modeling capabilities to help you optimize around what's already working in your lending. And what you have pain points, how do we increase efficiencies around it?
Andres Sandate:Okay. So, Jamie, I wanna ask okay. Go ahead. No. I just wanna ask Jamie, in talking with customers, what are some of the what is some of the pushback?
Andres Sandate:Because it would seem that if if I'm originating and I'm trying to optimize lending and I wanna, you know, I wanna bring somebody in like you guys to help me, because you've got more sophisticated technology models, data, way to way to sense synthesize the data that I have, integrate what you guys see. I don't wanna oversimplify, but but what has been the reaction from from the marketplace?
Jamie Harrison:I mean, the reaction the reaction's been great today. I mean, Andres, you know, we we've got down as of next month, we'll have a a dozen different customers signed up and and and working with us here at Caris, and that's a number that we that that is growing in real time. But, I mean, the reaction's been terrific. When you think about some of the pushback that we've gotten again, I don't wanna make, you know, tired environment sound like it's it's roses by any means. But, I mean, look.
Jamie Harrison:Look. Let's start with 1. I mean, you nailed it on the head at the top of this conversation. There are, in fact, folks that have been pulling out of consumer lending, you know, after, you know, the SVB debacle that happened. In recent past, you know, there were folks that are saying, hey.
Jamie Harrison:Let's focus on deposits, and let's move out of kind of noncore business lines for some of these financial institutions that was in fact consumer lending. You know, when it is a little bit of a, you know, there is a there's a game that not a game that we have to play here at Caris. But, ultimately, when you start talking about credit risk with, you know, perspective or potential partners, they're you know, that's something that is that that should not be taken lightly, and it's not taken lightly. And so, you know, a lot of the a lot of the work that we're doing with with our prospective partners is a lot of hand I don't wanna say hand to hand combat, but it is, you know, very deep in the weeds. It is, you know, getting them to, you know, take a look at their own data and partnership and in parallel with us, and really inspiring them with the work that we can do ahead of a potential launch.
Jamie Harrison:And, you know, kudos to our data science team. None of them are on this call right now, but our our Paul our CTO, Paul, who I mentioned on the top of the call and the folks that are working with him on on that side of the house over here, just do an absolutely, you know, stellar job at at showing folks really kind of under the hood insights that they can take away from their own lending efforts, to to put them in a place that that can right side the ship. Or, again, as Aaron had talked about earlier, you know, double down on their existing expertise and strengths, through their own data and and through their own expertise. So, from pushback perspective, it's, you know you know, we touched on the macro environment. I'm sure we'll continue talking about that throughout the duration of this call.
Jamie Harrison:But, you know, the the the reality is there are folks that have been have been pulling out, so it's okay. Look. Auto auto loan originations are in fact still growing. I mean, so it's not like, you know, people still need cars. People still need to finance cars.
Jamie Harrison:You know, that's that's not that's never gonna go away, and that's not just gonna stop. So even if, you know, if you think about the market perspective, if there are less participants, you know, someone is picking up picking up the steam in in some capacity, and then so it's finding those folks. But I think there are also folks, even if they did pull back for a for a short time period, and and some will some will stop forever. That that is reality, and that's something that we're not not scared to say. But, you know, it's finding those folks who still have a balance sheet.
Jamie Harrison:I mean, a great example for you, Andres, would be we've actually had a few customers through instituting Carisys technology. These are folks that were struggling to get back in the game per se. Mhmm. So, you know, so
Andres Sandate:they took a pause and
Jamie Harrison:and That's right. And they had a they had a warehouse facility. They had a credit line, you know, 2 years ago. You know, covenants got super strict on those. You know, maybe they were they were floating rates.
Jamie Harrison:They weren't fixed. And so they were really trying to rethink and and, for the most part, recapitalize their own businesses and take a step back and say, hey. How do we go how do we move forward from here and kind of what this new environment is now gonna look like? And through actually instituting some of Caress' technology prior to them even getting back into the origination game, we were able to help some of those partners through doing analysis work and through doing data work and and partnership with them, approach the capital markets with a better narrative, with with more technology, with more expertise around their their own internal technology and and sitting side by side with ours. And it actually afforded some of those partners the ability to go out and secure financing.
Jamie Harrison:So the pushback of of of folks, you know, not being able to to play in the game because of this new environment we're in, while that is reality, we're actually helping folks reenter
Andres Sandate:Reenter the market. Yeah.
Jamie Harrison:With a different narrative.
Andres Sandate:Yeah. That's interesting. I'd I'd love to I mean, the auto finance market, as we know, consumers come with all different, profiles from a credit. Let's just say credit score perspective. Right?
Andres Sandate:You've got the prime, near prime, subprime, everything in between. You sound like you can offer multiple solutions to different types of, let's call it auto finance participants, banks, credit unions, and other other types of, let's say, lenders. Can you talk a little bit more about that? I would think a a gigantic company, you know, a big money center bank is a is a different has a different set of needs and is serving a different type of, let's say, dealership with its floor plan financing strategies than, you know, say, the specialty auto finance company, that's doing more subprime lending or near prime lending. Can you talk about how you guys tailor solutions or products to, you know, service different parts of the market?
Andres Sandate:And maybe, Aaron, I'll let you start.
Aaron Travis:Okay. Great. So, yeah, this kinda ties back to what I had mentioned earlier in that we're optimizing a lender or originator's strengths as they exist right now. So this usually starts with a a deep analysis on their lending and where are the pain points, and you'd be surprised at what comes to the surface. So, our conversion rates or our look to book or win rates in these states aren't great, or these types of dealers aren't great, or our performance delinquencies and charge offs aren't great for large loan amounts, things of that nature.
Aaron Travis:And so we start there and we start thinking about how do we build on top of the data and models, like I mentioned earlier, to course correct around what's working. And if and most people's goals are to grow. Right? That we're all in business. And so if you want to grow, and this is one thing that I think you know about consumer credit across the border credit across the board, as you try and expand scale and and increase your volume, a lot of times that can affect performance in and of itself because you're you're having to do a bit of a loosening of the credit box in in a general sense.
Aaron Travis:And so how do we increase volume? Like, one of our one of our very first customers that when you said, how is it selling AI? 1 of our very first customers, we really had to inspire them about the data and the approach that we take took and a lot of backtesting and analysis. And now that's starting to flip a bit because now we have 8 to 10 months of performance data for this customer where their conversion rate has gone up a 150% and the projected program yield on the notes that they're originating has doubled. So that's super exciting.
Aaron Travis:At some point, I don't think we're quite there yet, Andres. But at some point, we'll just be able to show results and then dig in rather than right now, we do have to dig in and inspire them and that that we're we're good at what we do and we can correct for some of the things that are happening. And so, it's gonna be different for every customer and the where it is on the credit spectrum, it it, of course, matters in a general sense, but our solutions can solve problems throughout the credit spectrum. And as you get up towards prime, where predicting defaults is a little or maybe a lot less important, it becomes around automation and speed and pricing. And if there's one thing, whether it's a portfolio or a brand new origination, that a mantra that we have that that we get from the capital markets, because as you mentioned earlier, we have a lot of connectivity then.
Aaron Travis:There's no such thing as bad credit, just a bad price. And consumer auto is interesting in the indirect channel. You're you're pricing this to the dealer, so it's a different construct.
Andres Sandate:Yeah. I mean, I think a lot of people, who think about auto finance, because of their personal experience, might think a lot of cars are sold new on lots, and you're getting financing offers from the sales professional. Let me walk you over here to our finance department. I mean, it it I haven't bought a car in a couple years, but it was painful. I mean, it took so long.
Andres Sandate:Now I feel like a lot more consumers are going to the dealerships armed with information. They've done research. They know some of them have financing. But but that all depends. Right?
Andres Sandate:And this is a gigantic market. So here's what I wanna ask you. If you look at the auto finance supply chain or value chain, you have, okay, you have, you know, you have credit unions, you have dealers, you have your lenders, you have specialty finance companies, we've talked about asset managers, you know, the Wall Street asset managers, private credit funds, and on and on and on. Okay? So you have all these different, participants in this massive market.
Andres Sandate:So maybe I'll start with you on this one, Jamie. How do like, when when you think about where your all tools and capabilities really can plug in, With that gigantic market as a start up, I'm curious. Like, where do you start? Like, you sound like you have a lot of relationships. You guys come from having done this before, but I'm just curious for my start up, listeners, investors.
Andres Sandate:Like, that's a big chain of potential customers, I would think, or maybe partners. You've used that term. How do you think about beginning to, you know, to to, I wanna say verticalize, but but penetrate into some of these markets?
Jamie Harrison:Yeah. And and, no, it's it's a great question, Andres. And so, you know, just taking, taking a step back, you know, you did just rattle off a bunch of names for, you know, what I'll call industry participants, and and it is a lot it is a large list. And, you know, you could be thinking, man, how do you how do you bite on this entire apple? This is a pretty big apple to chew on.
Jamie Harrison:So with that said, I mean, when you think about who who whose Care is partnered with to date, and how are they going about selling the technology, in its current form? And and for those folks that we're we're signed up with and we're working with currently, you know, those are folks that those are institutions, I should say, that are that are extending credit real in real time in either a direct or an indirect capacity. Through that, though and and those would be, again, the credit unions that you mentioned, the the banks, the specialty finance companies, and and the traditional indirect and indirect lenders. When you through the process of selling to those institutions, though, you really do have to have a pulse on what is going on within the broader environment. So, for example, you know, for for specialty finance companies and and many indirect lenders to to be in the origination game currently, you know, there are implications that have to be met on kind of the flip side of the coin.
Jamie Harrison:You know, many of them have a credit line. They have a warehouse facility. They're they're operating and they're extending credit and, you know, afford flow capacity using funds and investor dollars that come come from elsewhere. And many of those fund dollars come from Wall Street or they come from, you know, an institutional lender. So this trickle down effect of of of knowing who to sell to and how to sell to them, there there are nuances and and understandings of the broader ecosystem that that you do have to be aware of.
Jamie Harrison:So knowing that, you know, it kind of has I don't wanna say has morphed the the product set that that we're offering because, again, you know, think about where we are today. We're clearly focused on optimizing and enhancing current lending initiatives, and and our customers speak to that with the list that we've that we've built today and the traction that that we've got. Through that, though, it actually has opened up many, many more opportunities for us. And one thing I'll touch on, you know, really briefly is, if you think outside of just truly optimizing and enhancing lending efforts at point of sale and indirect capacity, Caris also has a a capital markets business. So, earlier this year in January, we launched as the exclusive forecasting partner on Intex Solutions.
Jamie Harrison:Intex is the premier fixed income structuring platform used by Wall Street in the capital markets for, fixed income securities. You know, they've got a lot of different what are called, add in forecasting partners that they offer for other asset classes. So, you know, they've got CoStar for CMBS and
Aaron Travis:MorningStar
Jamie Harrison:for RMBS, so on and so forth. And, through a lot of the work that we've done over the past couple of years from a data aggregation perspective, from a forecasting perspective, We've been building a rapport with them and went through about a year and a half long process of onboarding, then vetting the models and things that we built up here. I mean, keep in mind, you know, if you're gonna be an add in forecasting partner on on Intex, you're gonna be offered to, you know, the largest money managers in the world alongside rating agencies, the actual issuers of that debt, and and the underwriters in the forms of the bank who are taking these deals to the public markets. And, so when you think about, again, rolling this back and to make sure that I'm hitting on your question, how are we working with all these different players in the value chain? You know, what started as Caris really working with indirect lenders is now morphed into us having a capital markets business where we're focused on, you know, helping the capital markets and the buy side, you know, buy bonds in a in a smarter and a more efficient manner through through the forecasting and the pricing tools that we built.
Jamie Harrison:We've got credit funds that, you know, layering back to, kind of the regional bank pullback we touched on at the top of the call. We've got credit funds that are now using Caris' front end portal to, evaluate and and monitor and price, portfolios that they're seeing that are up for up for bid in the private market, so a pricing tool on that side. And so when you think about it, it's it's not we're not deviating from the core offering that we've built. It's just, hey. How do you wanna, in fact, use the technology that that Caris is offering?
Jamie Harrison:And while it lends itself, no pun intended, incredibly well to, indirect and direct lenders, A lot of those same tools that those that those counterparties can use, for their own efforts can in fact be applied to a whole range of solutions and problems. And, and so focusing in and narrowing in on on how this can be applicable and how we can sell them in a way that's not, you know, putting a constraint on the business from a being spread too thin perspective is important, and, and and it's growing quite nicely.
Andres Sandate:Yeah. The you know, as you are discussing the optimization and enhancement, I'm thinking, Aaron, I have a listener also who is looking at where to put capital to work. Right? And and how to deploy capital, and there's been such a proliferation over the last 10 years, really, and I think it's only gaining steam given the macro environment and the rate environment and just the Wall Street engine of creating product and building solutions and competing and growing. It it really is about being able to I don't wanna call it manufacture yield, but deliver yield to a retiree, right, who is got a pension fund or has a 4 zero one k account.
Andres Sandate:And if they're invested in an in an asset management and that asset manager is creating private ABS, public ABS, or participating in those markets, what I think Jamie just described is how you guys enhance and optimize back in the value chain, but also somewhat towards the front. Can you talk about the, I guess the question comes back to just data. At the end of the day, it it's it's like data has become such a huge and big part of making informed credit decisions. What were we doing, or what does this what did this space look like 24, 36 months ago? Is this something that when you say enhance, that we've gotten dramatically better because of data scientists, because of guys like you guys, at taking the data that was always there and reinterpreting it.
Andres Sandate:I'm just really curious because that it to me, it really gets to the the edge. You know, we saw quant take over Wall Street. Right? We saw algorithmic trading decimate, you know, just the the the the good old fashioned stock picker. There's still opportunities, but they're harder.
Andres Sandate:So I'm just curious. Are we seeing the advent of this happening on the credit markets and the underwriting?
Aaron Travis:So, great question and sends me down a couple of different paths. But let me let me stay focused on the heart of that question, Andres. Yeah. So coming off of the topic we were talking about earlier where some of these models a lot of these models have simply broken down. Yeah.
Aaron Travis:They had data that was skewed. So when we think about our peers, what we think what we think we're seeing is a lot of how do I take out the skewed data that has my models off and course correct to make them correct again. And, I don't know how we it it remains to be seen how successful those efforts will be. Yeah. Going back to sort of that optimization type mentality
Jamie Harrison:Yep.
Aaron Travis:Now you have a huge influx of yield buyers, which you're referring to. Yeah. So let me it might be really helpful to talk about what's not a yield type of buyer. So our dealer customers, they would like to move more metal. They make money on service.
Aaron Travis:They make money on each car sold. So unique approvals and bookings are very important to them. That wouldn't be important to a yield buyer. Credit unions, it's very important for them to increase their membership and deposit base, which gets you away from sort of a yield type buyer. Some of the specialty finance companies have pretty big credit lines.
Aaron Travis:So getting the cost of those credit lines is down. So how do they work with Caris on those? Now going to answer your question more directly, going to those yield type buyers, which which, as I had said, is becoming a bigger and bigger part of the market. Sort of how do I buy notes? How do I get a 12% return with an on an asset backed loan Yep.
Aaron Travis:Or portfolio? So that gets a little bit more complex. I will say this. We've built something called the Caris portals front end where you get a ton of real time data, and this goes to your question about what has changed. In our mind, what we think has changed is that the days are they're far from gone.
Aaron Travis:Not that many folks are doing this yet, but, it's a real time data and dashboards, almost Looker like dashboards so that so that you're running your lending program in real time, Andres, rather. You're pretty sophisticated. Right? I'm I'm very, like, sophisticated, and I need a ton of data, and I have a ton of my own data. So every quarter, I have our analysts pull down spreadsheet.
Aaron Travis:They're still doing spreadsheets and putting it into Tableau, and it takes us 2 or 3 weeks to do the analysis. And then we implement changes on the analysis 2 or 3 weeks later. So by the time we make our changing to our lending program, we're doing it off of data and lending that we had done 6 months ago rather than yesterday.
Andres Sandate:Yeah. Yeah. So you're compressing, and and that that's the enhancement, the optimization. That that has to be extremely powerful. Let's talk a little bit about differentiation because the other thing that I know to well, I believe to be true.
Andres Sandate:I shouldn't say I
Aaron Travis:know to be true, but
Andres Sandate:the believe to be true is, you know, there are clearly a lot of folks going after this market. Right? There are a lot of, they're not just one credit union. There's not just one bank. We have 6,000 banks in this country.
Andres Sandate:Right? You know, you look at Europe, you look at Japan, that's not the case. So we, we have this massive, you know, appetite for debt in this country. We, you know, we're not talking about politics, but there just seems to be such a, a unique setup in an environment with all these participants. And, I'll let either of you answer this, but I'm I'm curious.
Andres Sandate:When you look in the marketplace and you think about peers and competition and what are other folks offering, you don't have to talk about specific names, of course, but I'm curious. What are, what are you seeing out there that is not quite real or not quite optimizing or not quite enhancing, but is being packaged as such?
Jamie Harrison:Yeah.
Andres Sandate:Either one of you, feel free to
Jamie Harrison:to jump on. I'll start and then, you know, obviously, feel free to layer in. But, yeah, no. I'll I'll steer away from, you know, specific names, Andres. Wanna wanna be respectful of of everyone out there.
Jamie Harrison:I'll I'll say I'll say for 1 to start, you know, one thing that that we actually take a lot of pride in is the fact that we are focused exclusively on one consumer asset class, and and that's Bing auto. The reason that's important is, you know, there are we we do there are peers out there of ours that, you know, are focused on multiple asset classes and are actually offering, AI solutions and, you know, decisioning solutions, you know, approval, you know, mechanisms that are are pulling on on data that that, again, is not uniquely pertinent to just auto. And, you know, going back to the top of the call, you know, Aaron had mentioned that auto is such a very unique asset class with respect to the others. You know, you've got the you've got a dealer present. You've got a piece of collateral, and and the incentives through through that financing chain are are they they operate very, very differently, than these other asset classes.
Jamie Harrison:So it is in fact important. So for example, if you're going and taking a decisioning model or an underwriting model or or a loan structuring model that, you know, was was built in, you know, many of the data tied to it or much of the data, I should say, tied to it, you know, spawns and stems from, you know, mortgage originations or, you know, personal loan originations, you know, you you're kinda setting yourself up to fail. And so, while we do think there's a huge apple to bite on and there's an opportunity with respect to broader consumer consumer lending in general and these other different asset classes, you know, focusing in and honing in on 1 is important to us because, again, we think it gives us the the best potential upside for our partners and their potential upside to succeed in a in a very specific way that that can be calculated and can be you know, you can put your finger on it. You know, we talked about, you know, finding good credit amongst the bad. You know, Aaron kinda dismissed our our view on that on that narrative and then how we're going about things, here at Caris.
Jamie Harrison:But, you know, other other high level kinda ancillary points that could be valuable for you and and the and the listeners here would be, you know, not trying to be, you know, a replacement of FICO scores. Do we do we think that FICO scores are all that valuable in today's current day and age? And, you know, the answer is, in fact, no. But, you know, what what we're doing here and what we're offering partners is not a, you know, a better way to to come up with a with a FICO score or a or a risk grade per se. Again, it is it is, you know, analyzing every individual borrower, that piece of collateral, and coming up with a a forecasted cash flow from from that potential note and that origination and rolling that up from bottoms bottoms up into into a price that can be that can be derived from that.
Jamie Harrison:You know, I I think there there's some other folks out there within within the industry, I should say, within consumer auto that, do in fact limit themselves from working with only one type of potential partner. You know, we talked about here on the top of the call some of the folks that we're working with, and and you rattled off, you know, credit unions, you know, traditional indirect lenders, specialty finance companies, banks, asset managers. You know, while while that list is in fact large, the tech that we built here does not limit ourselves to only being able to work with, one of those different types one of those specific types of institutions. It can, in fact, be applied to to to all of them. And then lastly too, I mean and I think it's so important to hone in on Andres, and it's you know, we're not here at Cara's, we're not offering, you know, premade, off the shelf, fixed underwriting solutions on partners.
Jamie Harrison:Again Yeah. Everything in today's day and age, people are leery of of these black box black box narrative.
Andres Sandate:It's dynamic. I would imagine. It has to be. Yeah. That that kinda leads me to my next question, which is we we, you know, we live in clearly highly uncertain times.
Andres Sandate:You can pick what aspect of uncertainty you wanna hone in on. I mean, macro, geopolitical, rates, car values, technology, the environment. I mean, the list just goes on and on and on. And and when you're a lender or you are in charge of, ensuring that your models are enhanced and optimized and keeping up with, you know, your competitors so you can make a smarter loan decision to the customer that walks through the door to buy a car with your partner. You you know, that's a lot of stuff to a lot of variables, a lot of factors to to be weighing in.
Andres Sandate:And, Erin, I wanna come back to you because you talked about this time dynamic. With all those things to to to weigh in, how is Carisys, set of solutions and and products, how is it accounting for all of that and helping your partners to if they're an indirect lender. Right? So they're providing financing to a dealership group, for example, just to pick one example. How is it accounting for all of that in real time?
Andres Sandate:So you could sort of help them, you know, sleep at night, but also grow and and not miss out on loan opportunities that are good ones?
Aaron Travis:Yeah. Great question. So, first off, I do wanna mention that we do have what we call a decision waterfall that a visualization on the Caris portal. So we try as best we can not to look like a black box. So you can see how and why some of the Caris' models are making decisions.
Aaron Travis:But a more direct answer to your question looks something like this, Andres. Not, okay. We think that we're really smart. We're gonna tell you who to lend to and how to lend to them, and then we're gonna circle back in 12 to 18 months and see how the performance was. Yeah.
Aaron Travis:Oh, gosh. Those 22 vintages, which have been awful, I think we all know that, those 22 vintages were horrible. So what's the problem? How are you course correcting the models? Instead, that that speed of iteration and forecasting the bookings as they're coming in is very important to tweak things like LTV.
Aaron Travis:I need to be higher on my LTV to compete, but I don't wanna, of course, risk performance. So we're tweaking that in real time. And as our customer or our partner is booking loans, we're forecasting what the cash flows are gonna be off those loans. And so we're not waiting till for all
Andres Sandate:So it's like interactive, you know, back back and forth. Okay.
Aaron Travis:Correct.
Andres Sandate:Got it. So and and and talk a little bit, if you could, like the service model. Like, when when you have a partner, the data is coming back and forth. Your data science team, or or, you know, somebody showing up and sitting at a desk, if you will, and, like, reviewing a relationship and saying, hey. We need to book a call and get on the phone and do a Zoom with these guys and talk.
Andres Sandate:I mean, what does that kinda look like?
Aaron Travis:I mean, the most simple way to describe that is, those iterations that I refer to are fast and furious in the beginning. And so, yes, it's emails, getting on the phone. Our data scientists almost look more like a chief lending officer for you.
Andres Sandate:I was gonna say. I mean, you have yeah. Yeah.
Aaron Travis:Yeah. You have to So they're they're really our our our team has been great, and they're battle hardened through the last 24 months, which is amazing. So it's it's some pretty deep domain expertise. But, yes, the the the 1st month, it might be constant app reviews. I mean, to get real specific here, it's sort of Yeah.
Aaron Travis:You're going through app by app by app and you're tweaking and so or iterating, I should say. And and over time, as it starts to as the performance starts to come in like the one that I had mentioned earlier in the call, I don't think that we've had one of those deep dives in a month going from almost daily in month 1. And so, we'll see. I think, you know, rates as we as we all know, the Fed funds rate, got put up to where it is at 5 and change now pretty pretty quickly. Yeah.
Aaron Travis:It caused a lot of disruption, but now it's kind of plateaued there. So there hasn't been any huge market changes. And even though everyone's watching used car values and saying, oh my gosh. Are they gonna come back in more or what's happening? If you kinda look at the Manheim, it shot up, came in, so it has been very volatile.
Aaron Travis:But now it's kinda staying elevated, but it's so so the, anyway, I think those iterations will happen again. The good news is we have lots of data. We have lots of real time data, and we'll be able to jump on those iterations if and when needed quickly.
Andres Sandate:And you'll be able to, I would imagine as a as a you know, just thinking if I'm looking at Caris, the more data you're ingesting, the more valuable this moat this business is becoming. I mean, it just kinda seems like that way on the surface if I'm if I'm looking at your organization. Let's let's let's conclude and and talk Outlook and and kinda the road map, I guess, if you will, for the future. You did make the point earlier that you don't wanna be all things to all lenders. You wanna be very focused in, consumer auto finance.
Andres Sandate:Huge market. I'd love to ask you just about, like, from the founder perspective, about milestones, and and what what have been, you know, to you all and your team, like, in on this journey, what have been some of your big milestones that you would point to, in the first, you know, couple of years? And, Jamie, maybe we'll start with you.
Jamie Harrison:Yeah. The sure thing, Andres. I mean, when you mile I mean, to start off the bat, I mean, getting upwards of a dozen customers currently has has been a huge milestone for us. I mean, I I think most people are aware that, you know, that the startup environment of these past 2 years and change has has not been something that, has been easy for for a lot of folks out there. I mean, getting your your your business to a really efficient place, which is something that we've done here at Caris, was was top of mind, and we think we've we've been much better off for it compared to some others out there.
Jamie Harrison:You know, so so the customer and the traction the customer traction that that we've gotten today has been has has been terrific and and and I would consider a huge milestone. I think some of the partnerships that we've nailed down that set up the road map ahead for us you know, I talked about the partnership with Intech Solutions and the capital markets opportunity, on the top of the call here. That's something that we're really looking forward to. And while that's still kind of a process and a and a sales motion that that is in process, getting that nailed down and and creating that avenue for potential revenue, is is another milestone. I think, you know, we just hired a a new VP of sales, which which I consider a big milestone here internally.
Jamie Harrison:Yeah. You know, we know that that's a that's a hire that shouldn't be taken lightly. And, you know, we we've got a great, Brian Neubauer is on here with us with the team now and and comes from another, a company that we've gotten to know quite well and, think incredibly highly of him. So looking to really supercharge some of our sales efforts here after everything to date has been has has in fact been founder led and, and continue to grow the team on that side.
Andres Sandate:That's exciting. Aaron, I'm gonna let you have the final word. You know, when you build a company, I don't know how the teams decide you're gonna be a cofounder and CEO. You're gonna be cofounder and COO. I would imagine if you're in this together, like, it sounds like the 2 of you are and your your 3rd cofounder, I mean, everybody sort of throws the title out the window, and you just you just get shit done as I like to say.
Andres Sandate:And, you know, you live to fight another day. But I'd I'd love to give you the last word, and ask you kinda high level, you know, 1, kinda what's next, and 2, you know, we've talked a lot about, licensing the software and selling the software to lenders, you know, portfolio buyers? What are some other applications? You know, those are kind of my 2 final questions. You know, what's next, and what are some of the applications, where where you see this potentially being very applicable?
Aaron Travis:Sure. So I I'd say, as far as what's next, we wanna continue down the path of having what looks like a sandbox where you're building on top of your own underwriting, building on top of your own expertise, your point of view on credit, what types of dealers you're working with or what types of borrowers. And we're not only indirect, so although that it dominates auto finance. So I want us to look like this flexible tool that instead of hiring your own data science team, instead of buying and and having your own data strategy, It becomes a very ease much easier build versus buy type decision. So am I gonna build my own CRM or pay $25 a month to Salesforce?
Aaron Travis:I want them to say, I'm gonna pay $25 a month to to Keras, and this is going to this is going to be my the output will and the data will be mine. So that that's one thing. And I'll mention one other is efficiency, which is something that technology companies, startups, certainly Fintech hasn't had to think about for a long time. And and Jamie mentioned it, efficiency. So how many dollars in capital are we spending to get this many dollars of ARR?
Aaron Travis:And then how much are we spending on a operationally on a monthly basis to maintain this much monthly recurring revenue MRR? Yeah. We've been forced to be focused on that, so that's kind of the good news. Can't say it's the most fun, but now we come out of it as a very efficient business, and we have to stay hyper focused on that. As far as moving forward where this can be applied, now you think about how we have that that hyper focus on cash flow forecasting whether loan level or portfolio.
Aaron Travis:The ABS markets, ratings agencies, pricing products for, bonds, all these in in the, auto lending or in, like, it should say in consumer auto credit, there's been very little innovation around what your cumulative net loss is from S and P or Morningstar or KBRA. There's been very little innovation or automation around, if you're a mutual fund complex and you have a 1,000 auto ABS bonds in your portfolios, what is your nightly pricing 3rd party nightly pricing look like, and how is that done? So I'm getting a little bit in the data weeds here, and, and we also think that there's some great things around valuations and historical valuations and how those can be used at the collateral level. But we do wanna stay focused on auto. We don't think that the broad kind of, alternative to FICO works well across different transactions in a different consumer auto classes.
Aaron Travis:So that's how I see the future of Caris.
Andres Sandate:Well, no question. No question. The, you know, the the innovation, the AI, the ML, you you you sort of put 2 words that I'll I'll wrap us up with, the enhancement and the optimization. You know? That's like, I'm gonna call it the not AI.
Andres Sandate:It's e o. Right? You're you're you're talking language that I think, a variety of participants listening to this show today could could could really get their arms around. You know, if I'm a lender, if I'm indirect, looking to participate or grow in the auto consumer credit auto space if I'm a potential partner. So I I just wanna tell you guys thanks.
Andres Sandate:It's really gonna be fun to see, you know, where Keras goes. You've already signed a dozen customers. I can only imagine, you know, what the what the pipeline looks like with bringing on a VP of sales. So that's exciting. Congrats on that milestone.
Andres Sandate:And, and this was a real goal of mine is to bring, an organization on the show at ATL Alts that could talk about what is actually involved in not just the manufacturing or the creating of the yield, but what goes into the underwriting decisions that are you know, whether it's bonds or it's loans that are packaged that ultimately are going out to consumers. And here's one other thing I'll I'll tease out. I have a brand new podcast that's launching, and this show is gonna be on. It's called asset backed. And it is a very focused show for participants, folks like yourself, builders, credit providers, capital markets, participants who are in the asset backed, asset based finance space.
Andres Sandate:So I intend to put our, our conversation there this week because I think there's gonna be a lot of people interested in in, in this conversation. With that, Aaron Travis, the cofounder and CEO of Karas, and Jamie Harrison, the cofounder and chief operating officer. I wanna thank you for taking an hour today and joining me on ATL Alts.
Aaron Travis:Thanks for having us, Andres. Thanks, Andres.
Jamie Harrison:Appreciate it.
Andres Sandate:Look forward to getting an update and talking to you guys soon. Wishing you the best.
Aaron Travis:Same to you. Thank you. Bye.
Andres Sandate:Take care.
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