The Real Math on Cohort Financing

UA financing is just how you finance UA. You can finance it with your own cash or factoring or or bank credit or you know all these different instruments, but I think the market thinks of when people talk about UA financing, they think cohort financing. So that that's the first thing to get out there, I guess. To Phil's point, there are lots and lots of people have come into this market recently. When we were doing Pollen VC, we were using a product, just a very fast revolving credit line based on platform receivables. That's actually quite a different instrument to cohort financing, um but obviously as more and more people come in, there are slightly different variants of it, but the core proposition is largely the same where people look at your previous data and they lend you hoping that you can replicate what you've done in the past.
And scale it.
The whole point, I guess, is you can use someone else's money to do the heavy lifting in terms of scaling user acquisition rather than

you know, the pre-2022 game of just raising equity and using equity to put into Facebook ads, which is frankly, what most people did.
When equity was still a bit cheaper than it is now, as well.
That's definitely true.
So it sounds like maybe there's there's two key types of UA financing with one more dominant today. So receivables is the Pollen VC model, has been around for is it a decade? Martin?
Yeah, more but but actually there are very few people doing this or doing it properly now. Our requires closed down our business, so the Pollen VC business in early 2025. So yeah, I think it's fair to say there are very few people doing receivables and 90% of the focus in the market is around financing a future cohorts.
And that's interesting to me cuz you just told me you had a billion dollars lent with no credit defaults. That's a good stat. You're borrowing against money that's already owed. So if it's so foolproof, why did it scale down?
The thing is, it works incredibly well

in certain circumstances, right? And and the reason it's zero defaults is cuz you're effectively lending against credit risk on Apple, Google, Facebook, etc., right? So, the question is more around if you've got A, you do have platform receivables from ad networks, whatever. It works extremely well if you've got short break-even periods because you can just keep recycling this money in. So, most people and where I always advise folks when they're looking at co-op financing is if they've got longer break-even periods, that could be anything from, you know, four, five, six months right out to a year or more, then co-op financing is a much more applicable instrument because those break-even periods are are a lot longer. So, that that's my sort of duration access and how I think about it.
So, that's receivables the old way. V2, I guess, is cohort financing. So, Phil, what's the business case for having Mytika or different cohort financer like front my ad spend and take a cut instead

of borrowing money? And like how does that work and how is it different than receivables?
So, first of all, we are not doing this for new business or new games anymore. So, I can be quite transparent of what we've learned as well. Where it's obviously different is as Martin has said, the periods are much longer. So, instead of lending precisely against what's owed, you actually need to look at what is the ROAS, what are the ad campaigns currently doing, what is the future going to look like, right? So, you need either as the game or as the lender have very good prediction capabilities to truly understand where the business is heading. And I think we've all been there, right? You you will have an amazing campaign, you think it's doing really well, and you double down. But then, the ROAS dips. The ad network will always spend your money even though they might not acquire profitable players for you. But if you truly understand your ROAS, your campaigns, your payback periods, and you

know you can scale, it's a perfect mechanism. Because what normally happens is you can borrow up to 80% of a cohort. I know some of them do 100%, but I'm not sure if I would sign up to that, but let's say you borrow 80, put 20 in yourself, you can scale very quickly. And if that works, as Martin has said, the unit economics can be phenomenal even if the interest rates are a little bit higher potentially. But that's the key is you and the lender should really understand where your UA is at and how the performance is doing and how you can forecast it.
Martin's got me thinking now cuz like the the no defaults for it that long is just like ringing in my ears. Like how risky is cohort financing?
I'm an only old credit guy, right? So as I as an investment banker back in the day, turned up developer. And the reason I launched Pollen VC because I had this problem myself, right? I was trying to invoice finance my receivables, no one could understand. Cohort financing is is

a little bit different, right? Like receivables is, you know, you've got a verified contractual receivable from and some [clears throat] of the best credit risk in the world. You're advancing money and you recover that money directly. It's just super fast factoring. The thing that was really important there is to be able to recycle this money quickly. So if you have a bank credit facility where you can submit an invoice once a month, that's no use to you if you've got, you know, 14 to 30-day payback periods or a very sort of you know, aggressively convex LTV curve where you're making money quickly. So from a credit risk perspective, it it's different, right? So what you're essentially doing as a cohort lender is I'm looking at the time series data of your UA performance in the past and I'm betting with with some margin that you're going to be able to continue to do that. But, you what you just need is is more capital to do it. So, it is inherently more risky, which is why it's more expensive. And, you know, more expensive can be okay. Think about it like this. You've got You've got 200 grand to put into UA this month.

Someone else is prepared to come in and provide 800 alongside. So, you're getting what? Four or five times leverage on your existing investment. And, if it all returns okay, sure, they make a decent interest margin, then you're capped out, and your own IRR or your MOIC or however you choose to do it is massively increased. So, it can be if the circumstances are right, and both parties really understand what they're getting into, it can be phenomenally helpful and successful for both parties.
If both parties truly understand, because I think your question can be read in both ways. How risky is it for the lender, and how risky is it for the games? Because I think a lot of games, at least the ones we spoken with, I think we looked at about 40 to 50 games in detail over like the year, bit more than a year period. And, a lot of games think, "Oh, it's cohort financing. The risk" and that's how it's been pitched, to be honest, by a lot of providers is, "Oh, the risk is only in the cohorts."

But, that's often not the case. The lenders want their money back. So, as as Martin said, "Look, they judge risk with a certain margin." So, if it's 80/20, they often at least take the 20% as a margin, the 20% you've put in.
[clears throat]
So, that's the first steps. If you I've read a lot of contracts, and Martin has probably looked at more than me, is they then go to other cohorts if the original one doesn't pay back. If that's not the case, then there are other collaterals and and so on. So,
Sorry Sorry to cut you off, but I I thought that part of the cohort financing deal was that they took the risk with you.
That's what everyone thinks, but I it it's not really the case. Um I mean, to some of them, I won't name any names, but they'll tell you, "Oh, we never had a default." And, And then you ask them further and go like, "Okay, so does that mean every cohort has performed?" And they're like, "No, no, we just managed to recover our money." And that's the key here. Because you have so many providers out there and Margin Ruby keeps tap. I think I stopped counting at about 12 or 13. What banks

now do is they send a spreadsheet that's not extremely detailed and say, "Oh, these are past cohorts. Will you lend against it?" And some of the lenders actually have pressure to deploy money. So, they will lend against very little data, which means they can't really judge the risk to the level which I believe is required. But then put a lot of terms in that make sure they recover the money ultimately. So, that makes it you could argue a buyer's market, but it could also mean that there's a bit of buyer's remorse in here potentially if the performance isn't what what everyone was hoping for.
I feel even more suspicious now.
Cohort financing is a superb instrument, very innovative. When the circumstances are right, right? But when you hear stuff like, "Hey, we take the risk on the cohorts with you and we don't take a lien on your business, right?" So, these are the two things that I hear the most often, right? So, first of all, you know, I want to unpack first of those, right? We take the risk on the cohorts with you. Now, what typically happens is in an 80/20

situation, if you don't meet the reference cohort benchmark, you go into aggressive amortization. Right? Which means that instead of taking 80% of the cohort revenue, they're taking 100 because guess what? Like any lender would do, they're looking to recover, right? So, there's some kind of math built in there around effectively first loss cushion is how they look at it as a lender. The other thing is then around collateralization. So, you can see different flavors of this, right? You know, is every cohort individually collateralized and they really do take the risk on the cohort or as yeah, rightly so in my in my viewpoint personally, there's cross collateralization between the cohorts. So, one of them is underwater and another one's been ahead, then you know, isn't it totally reasonable to cross-collateralize? And then I actually saw another one recently, which was effectively merchant [clears throat] cash advance documentation dressed up as cohort, which basically gave full recourse to all the company's assets. Right? So, there's a real spectrum of what's actually a risk here. The second one,

just cuz it's a personal bugbear of mine, is like "Oh, we don't take a lien on your business, right? We only care about the cohorts." Well, guess what? In those contracts, it prevents you from allowing anyone else to take a lien on the business, and they've got primary first dibs on all the cash flows. Ergo, you've got a lien on the business, right? So,
Just not in name. Okay. Let's talk about some of these risks and I kind of simplify them down. So, so one risk is like let's say they're funding a cohort 80%. And you have a bad quarter. And your total return for that cohort is only 88%, and they were charging you a fixed fee 10%. They will just take that whole 88% and the developer or publisher gets nothing. That's the one risk. The term you use is I think cross-collateralization, but what the way I'm reading that, I want to make sure I understand it, is sometimes if you're not looking at the contract, it might not even effectively be cohort financing,

where they will instead of taking the risk on that cohort, they will pull from other more profitable cohorts to make back a bad cohort. Is that true? Is that what I Is that Am I understanding correctly?
Yeah, I like there's lots of different flavors of it. One flavor is you can have the ability to claw back from cohorts other cohorts that you have funded and cross-collateralize between those. If you have the ability to cross-collateralize against all cohorts, whether you funded them or not, then that's basically like a call on the receivables, right?
That's a secured loan essentially.
Yeah.
It depends how long the cohorts right? I mean if if you have a hyper casual game then probably not, but if if you have something that that is a bit more sticky then yes.
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