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Kabbage: The Care And Feeding Of A Fintech Unicorn

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Target A Large Market With A Big Pain Point

Want to start and grow a tech unicorn — a privately held startup company valued at over $1 billion? You have to target a large market. The Atlanta-based fintech company, Kabbage, has a valuation of $1.2 billion and is on the Forbes Fintech 50 2019

While less than what small businesses borrowed from banks before the recession, small business loans are still a huge market — more than $600 billion lent each year, according to Small Business Lending in the United States, 2016. Small business loans are defined as business loans of $1 million or less. 

Even before the financial crisis, banks were starting to focus on providing loans to larger businesses. These loans are more profitable. This trend only accelerated with the great recession.

Back in 2008, Kabbage founders saw an opportunity to use AI to make small business lending more efficient and profitable. Banks require that you meet high standards for cash flow, credit score, and collateral. By looking at more types of data, Kabbage is better able to evaluate the health of small businesses and lend to a higher percentage of applicants. For the risk Kabbage takes, it does charge more than a bank.

Kabbage can make loan decisions in 10 minutes or less — versus weeks for banks. Let’s face it, when small businesses need financing, they frequently can’t wait the weeks a bank may take to approve a loan. Even when small businesses know that waiting a few weeks means likely approval for a cheaper loan, some end up going with the online lenders.

No surprise, that during the global economic downturn, even a good idea took a long time to raise money — most of 2009, commented Kathryn Petralia, co-founder and president at Kabbage. 

The use of online lenders among employer firms has grown markedly over the past couple of years — from 19% in 2016 to 32% in 2018, according to the Small Business Credit Survey 2019 Report on Employer Firms. The speed of funding and the chance of being funded were the two most cited reasons for using online lenders.

More than nine in 10 (91%) of small business owners spend as much as 20 hours per week on cash flow management from handling payroll to invoicing and purchasing inventory, according to a Kabbage survey summarized by Forbes contributor Moira Vetter. Imagine how much more revenue a small business could generate if it had more time to focus on growth.

“Women and minorities are attracted to our process because it avoids bias,” said Petralia. “The Kabbage process is anonymous. Data makes the decision.”

Evolve As Opportunities Present Itself

In the early days, Kabbage focused on eBay businesses and other e-commerce companies. The financing needs of these businesses and many others were being ignored by banks. “By 2014, we realized that we could serve brick and mortar businesses,” said Petralia. “Any of the 90% of small businesses that are looking for less than $250,000 could come to us because banks couldn’t economically serve them.” Even companies with less than the three years of history that banks require could qualify for loans. In addition, much less paperwork is required by Kabbage. Companies don’t have to provide financial statements, lease agreements, and tax history.  They do need to have been operational for a year and have a minimum of $50,000 in annual revenue or $4,200 per month during the past three months. 

Kabbage acquired Orchard Platform Markets, a provider of small business lending data. Petralia said Orchard had a lot of pre-recession small business data it’s using to augment the models it developed internally to spot any signals of a recession, according to an article written by Forbes contributor Donna Fuscaldo.

“It may sound counter-intuitive but we want to help small businesses borrow less,” said Petralia. “Kabbage just launched tools that predict cash flow needs. Small businesses often borrow too much, hold the loan too long, and spend too much in fees. Kabbage Small Business Revenue Index, a free tool that analyzes live data of more than 200,000 companies in an effort to give small business owners a way to assess how their businesses are performing in real-time,” writes Forbes staffer, Brianne Garrett. Expect more tools from Kabbage, including payment processing, expense management, invoicing, and checking accounts. 

Staying Connected

In the early days, attending conferences such as Money 20/20 taking place from October 27th to October 30th, 2019 in Las Vegas was about meeting potential investors. Later, it was about meeting potential partners. “[Now] it’s about helping us connect to businesses that are starting up or changing direction in our industry,” said Petralia. “You want to stay front-of-mind with the media, with investors, and potential partners.” 

Given that alternative financing options are gaining traction with women small business owners, it is critical that the management of these companies be a reflection of these companies. To that end, Petralia is on the advisory board of Rise Up, Money 20/20’s initiative to help women become higher level executives in the financial services industry.

Since its launch, Kabbage has lent more than $8 billion. For the first three quarters of 2019, Kabbage added 42,000 unique customers, far exceeding the 37,000 customers added in all of 2018. Impressively, more than three-quarters of all Kabbage funding activity continues to be accessed by repeat customers. 

How will you grow your company into a unicorn?

Source: Forbes – Entrepreneurs