Starting a $4 Billion Business With Little Capital and A Lot of Creativity and Teamwork

Years ago two people came to my office to pitch an idea. That was to start a student loan business. They would contribute targeting expertise for a percentage of the revenue. I didn’t see the upside-only the downside. Our company would have funded everything and still have to share revenue whether we made a profit or not. I guess the bright spot, had we pursued the venture, at that time was our company would have retained all of the enterprise value. We were known by these aspiring entrepreneurs through the advertising agency in our Group – Creative Solutions ( which provided direct marketing and related services to a wide range of student lenders throughout the United States.

As this practice area grew, so did the ambitions of our clients. They wanted more and more customer acquisition. The challenge for them was the inability to amortize the costs. The more they spent on marketing the greater their impairment to short-term earnings. We always promoted our Group of Companies’ creativity. In this instance, a number of prospective clients asked us for solutions to this predicament. I suddenly remembered the two people whose idea I shot down a few years before. This time my partners and I searched them out and we went to their office.

I proposed creating a company that we formed together with each investment group retaining half of the ownership. Next, we set a ridiculous target of investing very little capital with very high growth ambitions. First, we identified buyers of loan agreements and then after careful consideration and taking stock of the competitive landscape chose direct mail and telemarketing as the primary channels of distribution. Telemarketing was selected because very few competitors had any skills in this channel. We were able to obtain a very high share of voice (pardon the pun) with relatively low spending and high response. This was achieved by offshoring the outbound calling to India for what turned out to be a great supplier and partnership. This required significant knowledge transfer but paid high dividends by way of labor arbitrage.

In addition, it raised barriers to entry. Most U.S. firms were put off by the distance and the need to invest the time and energy necessary to achieve similar or better results with domestic call centers. Our advertising agency Creative Solutions was vital to knitting the brand, messaging, and customer-centric strategy together.

Given the Loan Asset Class was a Federally Guaranteed Student Loan we were able to structure a capital-efficient funding mechanism that benefited students with a very low-interest rate and our bondholders with high investment security that came with the collateral. Our ability to advance north of par provided operating income to originate and service the loans. Most asset classes advanced at less than 100% of your borrowing needs requiring the deployment of capital as a credit enhancement. Given the quality of these loans, this hurdle was eliminated.

De Novo Corporation’s ( infrastructure was leveraged as well as those of our partners to create a company that originated $4 billion in loans of which nearly $1 billion was securitized in just 4 years. Our clients who obtained loans from us through forwarding purchase agreements were happy and our adverting agency grew by manufacturing a new client.

The moral of this story, is don’t be so quick to turn away ideas and look at the opportunity costs associated with saying NO.

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