Daniel Hegarty, founder and CEO of our portfolio company Habito, came up with the idea for the business six years ago, after an eye-opening experience trying to buy his first home when his own mortgage broker made several frustrating mistakes. Dan realised that the mortgage market was rife with manual errors and confusing jargon.
He launched Habito in 2016 as a digital mortgage broker (and more recently a lender) to help first-time buyers and homeowners navigate this complex transaction and ultimately solve these problems.
Since launching, Habito has helped process £5bn worth of mortgages and was voted Best Mortgage Broker at the British Bank Awards 2020. This year, the company completed a £35 million Series C fundraising round. Below, we ask Dan about raising funds during a lockdown, his outlook on the mortgage market and fintech sector, and his advice for other entrepreneurs and founders.
Mosaic: Hi Daniel, thank you for speaking to us for our Future of Money month. How difficult was it to complete the Series C fundraiser during lockdown?
Daniel Hegarty: Lockdown certainly didn’t help, we were coming to the close of the round just as Covid hit. Like many fintechs, particularly in real estate, our market closed down effectively.
However we’re very fortunate. We had a number of great investors at the table who we've been on a long journey with and built up trust. We spent a lot of time communicating with them about the fundamentals of the business and the ultimate vision, so we were able to complete the transaction.
Through my peers and investors I know, we’re now seeing many investment rounds being completed a hundred percent remotely. I think everybody's very grateful for the time they're getting back through not having to fly around the world or sit in taxis. On balance, lockdown was less impactful than I would have imagined. And we were pleased to get it done.
On the product side of Habito, how has machine learning benefited customers and helped to make the mortgage process easier to navigate?
The problem with the mortgage industry is that it's an enormous mess. There are over 100 lenders and over 25,000 different mortgage products. There are a lot of people in the chain of a home purchase, all operating in silos with legacy products, all potentially creating problems for the next person in the chain.
The core of Habito’s mission, of trying to help people find a home, was to abstract that chain away from the consumer and make it simpler, so that they could focus on what they really care about: finding a home for their family.
Trying to create an automation layer on top of those problematic legacy systems are some of the most interesting technical problems to me. That's what we have spent much of the last few years building.
And that has evolved, particularly this year as we launched the Habito Plus service: instead of just arranging mortgage financing, we also deal with the conveyancing and legal work, and act as the primary point of orchestration for the transaction.
In parallel, we've also become a lender in our own right, which again allows us to take control of more of the journey. For the first time, we control the complete end-to-end transaction, thus creating a completely differentiated experience.
Let’s talk about trends in the mortgage market. How has consumer behaviour in the housing sector been affected by Covid-19?
It's been incredibly tough. Around 400,000 transactions were paused when lockdown hit, which is an awful lot. It was very, very difficult, and we saw our business shrink.
The good news is that the housing market was one of the first to get back to business in May. Chancellor Rishi Sunak’s stamp duty cut doubled activity. This has probably been the busiest summer of property sales ever, which was great.
We’re now looking at what the end of furlough might mean for the larger recession, and looking ahead to the return of stamp duty at the end of March. It's still a bumpy road to come.
How are banks and fintechs faring at the moment in this Covid-affected environment?
Obviously, the banks who rely on FX and exchange fees are struggling. They are facing a slowdown.
To my mind, Covid has cast a long shadow beyond its direct financial implications, and I think this idea of doing the right thing and being on the side of the customer is more important than ever. And I wonder if that's where the opportunity lies for fintech.
There’s always been a fundamental, intrinsic trust in lenders to not lose your money, but not much associative trust — the idea that HSBC has my back and cares about me. I think that is quite high on the scale for fintechs, where there is an implicit assumption that they care about the consumer.
That is actually the really huge opportunity for fintech CEOs: to capitalise on the belief that we care about our customers. In the middle of a pandemic, that sense of community, of affiliation, of mutual obligation becomes incredibly important. The best fintechs have leaned into that.
The pivot we made as soon as Covid hit was: “This is tough for us, but it’s much tougher for everyone in the middle of a transaction or who is worried about their financial future. So the best thing we can do is become a public information service and just give people as much information as possible.”
The pattern I’ve seen is that many fintechs have leaned into the crisis, rather than leaned back as the banks perhaps have.
What is your advice to other fintech CEOs trying to navigate this environment, and what did Habito do?
I wrote a memo — I do like writing memos, as anyone is happy to tell you — because I had this feeling during Covid, much like after a horrible breakup or a bereavement, where the floor had fallen out of the world and nothing made sense.
In those moments, I’ve often found that you get a moment of clarity. I told the Habito leadership team that: “If our strategy was precisely the same the week after Covid as it was before, that would be odd. The world is clearly different. This is an opportunity to take a step back and look at the entire piece, because everything is up for grabs — except for our values, mission, and culture.”
In the middle of Covid, we went through a really deep moment of introspection and re-examination of our strategy that I found incredibly positive and, as a group, brought us much closer together, with more clarity about where we were headed.
Taking that kind of global perspective on your business and on your own life is a rare gift. I would not miss the opportunity to re-examine the fundamental assumptions you have about the business you’re building.
What else changed for Habito this year?
We became a B Corp, which is this stamp you put on the business that says you're going to put people and the planet on the same level as your profits.
That may seem like virtue signaling, but actually it’s an incredibly difficult process. It causes you to look very carefully at all of your practices, from how you treat your staff to your impact on the environment.
The thing that came out of that for us, was that it wasn't going to be enough for us just to be faster, or have cooler adverts: we were going to need a really good story about how we positively impact both customers’ financial lives and the broader economy.
I'll be very interested to see how that develops in fintech in general, as we move away from being entirely obsessed with unit economics and hyper growth — which is very important and allows us to do amazing things — and start to think more about the net impact of the things we're creating. For instance, can we use machine learning to predict customer behaviour in advance and try to stop people falling into debt traps or making poor financial decisions? In other words, move to a kind of a preemptive state for financial advice, rather than a reactive or commercially-led state.
What were the challenges of becoming a B Corp?
It’s a really long form! It took six of us two years to fill in.
On a basic level, particularly if you are a startup, there’s an overhead cost and you're going to need to spend real time on it. There's a danger of seeing it as a meaningless kitemark that you think is going to support your brand, but actually isn't fundamental to your business. And when you're trying to be incredibly lean, justifying this process as a reasonable use of money and time can be challenging.
But more and more, as it becomes integrated into the very core of our commercial decision-making as a business, it just feels very natural and easy.
Do you see a trend at the moment of fintechs being pushed to prove the profitability case for their business?
You don't always see a vast amount of contrarianism in venture capital. Often, the market moves as one. A few years ago, the only conversation at the table was hyper growth. I think it was the failure of WeWork’s road to IPO that has triggered this current focus on unit economics and past profitability.
It's an interesting game that you have to play as a founder. Ultimately, you shouldn't be worrying about the individual moments of observation along the path to fundraising. You should be thinking about the 10 year vision of what you're trying to build, and enjoying being a private company, rather than having to live quarter to quarter in terms of observation.
But reality gets in the way. At some point, if you're trying to grow a large business, you're going to raise capital. And so you're going to be subject to the whims of the market. Right now, the investors I know are adopting a slightly more conservative stance. But in reality, there's still a surfeit of capital, particularly at the early stage, and especially if the founding team is of a high quality and the market size is big enough.
What other challenges do you see for fintech founders in the coming years?
Brexit remains a big worry for us, most pointedly in regard to talent. We've got an incredible history of bringing the best people in the world to the UK to build businesses. If the UK were to take a less welcoming view on immigration, that could be really problematic.
Also, I worry for founders trying to build early-stage businesses completely remotely. Large-scale businesses can invest in making sure that remote communication works well. But when you're four people, it is tough. It’s really tough if you can't just get in front of a whiteboard and get stuff done.
The hours we spend together in the early days, overhearing each other’s conversations, lead to serendipitous moments. I would be nervous for founders who grab at the opportunity of getting cheaper labour costs by having a completely remote workforce. I would be suspicious that they'll be able to achieve the same level of creativity and alignment as a physically-proximate startup.
Thank you for your time, Daniel. Any last words of advice to entrepreneurs and founders?
Become a B Corp, especially if you believe in it.
This is a really interesting moment for founders. I believe that we're building the next wave of businesses that will have a massive impact on society, so how are we going to operate? How are we going to be a net benefit to the world?
Secondly, this is the moment to hold your nerve and double-down on customer centricity and a commitment to building extraordinary products. The opportunity and the rewards are absolutely outsized right now — if you can execute well.