(This was originally posted Sept. 11, 2008)
It is September 11, 2008 and I have started preparing content for my soon-to-be released-blog, CMBS 2.0. The history of the company is deeply connected to September 11, 2001 and what better day than the 7-year anniversary of the attacks to chronicle that history.
The birth of Backshop
The company was incorporated in July 2000 with $500,000 of “Angel” money. We used that money to convert our starting technology (that we created at my first company, GateCapital) from Microsoft Access to Microsoft SQL and ASP (a desktop application to a Web based enterprise application).
By early 2001 we had a product that was functional (albeit grossly deficient in underwriting tools) and started the effort to sell the software. Right away we realized how hard it was going to be because we had two big strikes against us.
First, we were an undercapitalized “.com” from San Francisco (this was well after the internet bubble burst) competing against well capitalized competitors ($50MM each for CapitalThinking and MortgageRamp).
Second, we were trying to convince lenders that their Excel models were useless and they needed to dump those models and join Backshop.
In fact, I used to go into meetings with a button that had the word Excel on it with a line through it and was preaching my “No Excel” mantra. Needless to say, we could not find any banking executives who had vision and confidence in our ability to deliver on the promise of “Goodbye Excel”. So we started looking at other ways to survive.
In the summer of 2001 I had (I thought) found it. A local Bay Area company called LoopNet (a commercial real estate multiple listing service) was going through a tough time as a result of the .com crash. They were forced into a merger with a competitor, had investors screaming for better cash flow and did not have a proven revenue model.
In August 2001, I put up $75,000 and signed a contract to buy a division of LoopNet called LoopLender. The strategy was to link our newly created loan origination software with the equity listings on LoopNet to create deal flow which, in turn, would help us close software business because the banks would not only get a no-Excel, kick-ass system, they would also get deal volume.
So, on September 10, 2001, with the LoopLender business plan fresh off the printer, I took the “pink” eye to New York, Checked in to the Soho Grand (Canal and W. Broadway), and woke up bright and early on Tuesday the 11th to go and raise the money to fund LoopLender.
My 9 a.m. meeting was on Wall Street with Steve Schwartz at JPMorgan/Chase, and I had a 10:30 a.m. meeting ON THE 26th FLOOR OF TOWER 1 with Jim Kehoe, my old GateCapital partner. In fact, Kehoe and I had talked about a breakfast meeting at Windows On The World before the JPMorgan meeting but, thank God, we are both a bit too lazy for that so we settled on the 10:30.
On my way to my 9 o’clock on Wall Street, the first plane hit, and I witnessed firsthand the destruction of that day. The explosions, the realization it was a not an accident but a terror attack, the people jumping from the burning towers, and then, the collapse of the towers. I went back to my room, called my family to tell them I was OK, and then slept until 4 o’clock that afternoon. For the next few days (I did not leave New York until Friday), I lived 10 blocks from Ground Zero and spent time with all sorts of people who had similar stories of close calls. In the days immediately following the attack, the spirit of New Yorkers was amazing and I built on that vibe for my healing process.
So, when the realties of the event sunk in, I realized that the deal I had cut to buy LoopLender was not going to get funded. Of course I should have just taken my $75k hit and walk away. But, being the optimistic entrepreneur, I figured if I could get LoopNet to lower its price, maybe I could close it. I ended up chasing the deal for another 6 months, throwing another $125k in deposits to keep the deal alive while I was trying to close the equity. While I had negotiated hard and got the pricing way down, I could not get my equity to close (Wimps!), and ultimately lost $200,000 when I could not close without them. Ouch!
For those of you who don’t know, Loopnet had (is having) a happy ending. They dominate the commercial MLS space and had a successful IPO. Check them out on the NYSE under the ticker “LOOP.”
Time to rock
After a rough couple of months and a move out from an office in San Francisco to a desk in Sausalito, I finally got a break in November 2002. Through an introduction from Chris Tokarski of Coastal Capital (and later Countrywide), I met Perry Gershon at RBS Greenwich Capital (now of Loan Core Capital). He had just been brought in with Mark Finnerman to ramp up the real estate group.
I went in for my sales call, gave my “No Excel” pitch, and finally got the response I had been praying for: “You’re the first guy who knows what he is talking about.”
Perry had developed an Access database at Nomura under Ethan Penner, so he knew the value of getting out of spreadsheets and getting the business into a database. And he is one of the smartest folks in the business.
Over the next 12 months, we built out the deficient pieces of Backshop (we called it cUnderwriter back then) so you could do lease-by-lease underwriting and everything you needed to originate and securitize loans on stabilized properties.
We started marketing the product in January 2004. We signed up our second client (Chris Tokarski and his partners at Countrywide) in April and have been rolling ever since. We were lucky enough to get different types of clients who needed discounted cash flow modeling for properties other than stabilized real estate in the United States. So, we built out the multiyear cash flow models and construction lending models, and we could account for different currencies and date formats, etc.
We also made two significant acquisitions. First, we acquired Conquest bond modeling software and CMBS database from Standard and Poor’s in late 2005. This acquisition has positioned us to become a content as well as software provider. Second, we acquired DealCentral from MortgageRamp / CapMark in 2007 (one of our $50MM funded competitors). We consolidated DealCentral clients onto Backshop and eliminated a competitor.
Transparent standards — today!
And now, we embark on perhaps our biggest challenge: the adoption of a transparent standard for the real estate finance industry.
This mission is bold but necessary.
We are committed to making the software widely available to all who want to join the standard. We hope, with continued widespread adoption, we can balance the transparency requirements with privacy issues and create a more credible, open standard for the resumption of the CMBS business.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.