Neighborly, a Company Strengthening American Communities at the Intersection of Government and Finance
By Joe Lonsdale
In the 1980s, Michael Milken and his firm Drexel unlocked new sources of funding for growing companies by opening up the high-yield bond market to retail investors. Neighborly, the newest addition to our portfolios, similarly promises to bring an entire asset class to ordinary Americans by providing them with direct access to municipal debt. Neighborly represents the next step in finance’s long history of democratization.
Neighborly will benefit citizens and local governments alike. When they issue bond notes, many local governments, such as school districts, pay 5-9.75% of the cost of issuance upfront, and much of the money in the municipal debt market gets eaten in broker-dealer channels before reaching retail investors. Governments are eager to recapture the value of their bonds that gets lost in the abyss of the financial system. The City of Denver was so anxious to recapture the value of its bonds that, in 2014, it built its own disbursement platform to connect directly with retail investors. It was a huge success: it filled a $12 million tender with $500 “mini-bonds” in only 23 minutes.1
Municipal bonds are a $3.7 trillion market and $60 billion, at the very least, end up in the hands of brokers. Instead of paying the salaries of middlemen, this money could be used to add tremendous value to countless cities across America.2
When a municipality issues bonds, it first has an investment bank structure the security. The bank also typically underwrites the bond, taking responsibility for the first layer of distribution. The bank sells the securities to a network of institutional investors and brokers, clipping a portion of the transactions as a fee. The brokers then flip the bonds to retail investors, also taking a significant cut.
Neighborly’s platform will enable the structuring and placement of securities at a much lower cost. Governments will no longer be forced to use investment banks to package and sell bonds. As a result, Neighborly will influence financial professionals to create value instead of profiting from the inefficiency of an antiquated process. Governments will have the ability to fund more micro projects tailored for neighborhoods, and citizens will obtain higher yield rates on tax-free bonds.
Neighborly will play a role in simplifying other facets of the municipal bond process. Government officials will store and manage all documents related to their muni bonds on the Neighborly platform, eliminating redundant legal and advisor work. Additionally, Neighborly will use machine-learning algorithms to determine when analyst insight is needed, and assess the quality of bonds more accurately while using fewer resources than the rating agencies. Bringing software to this market will standardize processes and unlock network effects, which will improve the workflow of the entire industry from origination to maturity.
Technology innovations enable process innovations; they empower organizations to operate in ways that would have never been previously possible. By using Neighborly, cities around the country will be able to replicate Denver’s success without having to pour resources into building their own technology platforms. It will also allow them to do more creative and targeted fundraising for community projects that the old system could not support.
Formation 8 and Sound Ventures are proud to be partnering with a company that is leveraging technology to put billions of dollars back into communities and is creating economic value for investors, employees, and local governments alike.
2 Wirz, Matt. “Muni Bond Costs Hit Investors in Wallet.” The Wall Street Journal 10 Mar. 2014. Web. 30 Jun. 2015.