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January 13, 2011, 9:29 AM EST
By Mary Jane Credeur
(Updates with customer’s comments in 18th paragraph.)
Jan. 13 (Bloomberg) -- Merchant-lending startup Kabbage Inc., which advances as much as $12,000 to EBay Inc. sellers to buy inventory, raised $6.7 million in venture funding from investors including TPG Capital’s David Bonderman and Warren Stephens of Stephens Inc.
The round of capital, led by BlueRun Ventures with money from United Parcel Service Inc., will be used to expand Atlanta- based Kabbage into marketplaces such as Amazon.com Inc. and Overstock.com Inc., develop software and hire more people, founder and Chief Executive Officer Rob Frohwein said.
Kabbage, which takes its name from a slang expression for money, targets sellers with annual sales of $15,000 to $3 million who are overlooked or rejected by traditional lenders because of their credit scores or lack of collateral.
Stephens, the CEO and owner of Little Rock, Arkansas-based Stephens Inc., said he invested because retailers and merchants need more access to capital.
Kabbage “doesn’t have to dominate a big segment of the market to make the company really successful,” Stephens said in a telephone interview. “It’s very targeted and there’s tons of people in it and if they get just a meaningful share of the market, the company will do very well.”
Stephens was connected to Kabbage through co-founder and Chairman Marc Gorlin, whom he’s known for several years. Stephens also was an investor in a previous company Gorlin co- founded called VerticalOne, which was bought by S1 Corp.
‘Beyond Credit Score’
****Bonderman, the billionaire who runs Fort Worth, Texas-based TPG Capital, has known Gorlin for years through family connections and past business deals, Gorlin said. Kabbage approached him about a possible investment and he agreed, Gorlin said.
Bonderman declined to comment, said Owen Blicksilver, a spokesman.
BlueRun Ventures, the Menlo Park, California-based venture fund that was an early investor in PayPal Inc., contributed about half of what Kabbage raised in this round, said Jonathan Ebinger, a general partner. ****“What we’re looking for with Kabbage is something additional beyond your credit score to give confidence that this person can be in business for a long time,” Ebinger said. “There is a real hole for a power seller who might not have perfect credit.”
Access to capital is one of the biggest needs of small businesses after banks tightened lending standards during the recession, according to the National Federation of Independent Business, a Washington-based trade group.
‘Banks Don’t Understand’
Twenty-three percent of small business borrowers had none of their credit needs met in 2009, and 5 percent didn’t bother to apply for loans because they didn’t think they would be approved, according to federation survey report in 2010.
Kabbage uses data on a merchant’s selling history, buyer feedback ratings and business-owner credit scores to approve unsecured advances online in 10 minutes. The money is put in the merchant’s PayPal account, and repayments are automatically deducted monthly. Traditional lenders such as banks can’t approve a loan as quickly, and typically require collateral.
****“Banks don’t understand the online merchant market and they can’t economically underwrite a $10,000 loan and automate that process” to get approval in minutes, said Frohwein, 42, a Villanova Law School alumnus and former CEO of LAVA Group Inc., an intellectual property investment bank.
As repayments are made, customers may request more cash and treat Kabbage funding as a revolving line of credit. Most customers use the money to purchase inventory, Frohwein said.
School Backpacks
Services such as eBay’s Bill Me Later, which allow customers to spread payments over a longer period of time, don’t provide cash up front.
Peer-to-peer investing firm LendingClub, which funded $13.4 million in loans last month, provides a one-time loan and doesn’t function as a line of credit that borrowers can pay down and then increase again.
Cindy Shebley, who sells photography equipment on EBay, took a $1,000 advance from Kabbage in June to buy several hundred backpacks.
“It was a little extra money for me to experiment with, and I ended up selling almost all of them at a really good profit, right at the perfect time before back-to-school,” said Shebley, 53, who’s based in Everett, Washington.
She paid back the money over five months and plans to use Kabbage again, she said.
“I wish they’d been there five years ago when I was first starting up and banks wouldn’t give me the time of day,” Shebley said.
Credit Scores
The average Fair Isaac Corp., or FICO, credit score of Kabbage borrowers is 680, and the firm will approve advances for some with scores below 650 if other metrics are favorable, said Chief Operating Officer Kathryn Petralia, a former executive at credit card and payment companies including CompuCredit Holdings Corp.
Online merchants tend to have lower credit capacity, more inventory and quick turnover that hurts their credit score, Petralia said.
Some lenders consider 680 the bottom range of a “good” score while others prefer 720 or higher, according to MyFICO.com.
Over time, Kabbage plans to create its own score for online merchants that takes into account sales cycles, inventory needs, turnover rates, shipping behaviors and repayment history, Frohwein said.
“We see this much broader range of data that tells us so much more about creditworthiness, that most traditional lenders would never look at,” Frohwein said. “We think there’s an entirely new market for that data.”
--With assistance from Joseph Galante in San Francisco and Jason Kelly in New York. Editors: Anita Sharpe, James Langford
To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.
To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net.
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(Updates with customer’s comments in 18th paragraph.)
Jan. 13 (Bloomberg) -- Merchant-lending startup Kabbage Inc., which advances as much as $12,000 to EBay Inc. sellers to buy inventory, raised $6.7 million in venture funding from investors including TPG Capital’s David Bonderman and Warren Stephens of Stephens Inc.
The round of capital, led by BlueRun Ventures with money from United Parcel Service Inc., will be used to expand Atlanta- based Kabbage into marketplaces such as Amazon.com Inc. and Overstock.com Inc., develop software and hire more people, founder and Chief Executive Officer Rob Frohwein said.
Kabbage, which takes its name from a slang expression for money, targets sellers with annual sales of $15,000 to $3 million who are overlooked or rejected by traditional lenders because of their credit scores or lack of collateral.
Stephens, the CEO and owner of Little Rock, Arkansas-based Stephens Inc., said he invested because retailers and merchants need more access to capital.
Kabbage “doesn’t have to dominate a big segment of the market to make the company really successful,” Stephens said in a telephone interview. “It’s very targeted and there’s tons of people in it and if they get just a meaningful share of the market, the company will do very well.”
Stephens was connected to Kabbage through co-founder and Chairman Marc Gorlin, whom he’s known for several years. Stephens also was an investor in a previous company Gorlin co- founded called VerticalOne, which was bought by S1 Corp.
‘Beyond Credit Score’
****Bonderman, the billionaire who runs Fort Worth, Texas-based TPG Capital, has known Gorlin for years through family connections and past business deals, Gorlin said. Kabbage approached him about a possible investment and he agreed, Gorlin said.
Bonderman declined to comment, said Owen Blicksilver, a spokesman.
BlueRun Ventures, the Menlo Park, California-based venture fund that was an early investor in PayPal Inc., contributed about half of what Kabbage raised in this round, said Jonathan Ebinger, a general partner. ****“What we’re looking for with Kabbage is something additional beyond your credit score to give confidence that this person can be in business for a long time,” Ebinger said. “There is a real hole for a power seller who might not have perfect credit.”
Access to capital is one of the biggest needs of small businesses after banks tightened lending standards during the recession, according to the National Federation of Independent Business, a Washington-based trade group.
‘Banks Don’t Understand’
Twenty-three percent of small business borrowers had none of their credit needs met in 2009, and 5 percent didn’t bother to apply for loans because they didn’t think they would be approved, according to federation survey report in 2010.
Kabbage uses data on a merchant’s selling history, buyer feedback ratings and business-owner credit scores to approve unsecured advances online in 10 minutes. The money is put in the merchant’s PayPal account, and repayments are automatically deducted monthly. Traditional lenders such as banks can’t approve a loan as quickly, and typically require collateral.
****“Banks don’t understand the online merchant market and they can’t economically underwrite a $10,000 loan and automate that process” to get approval in minutes, said Frohwein, 42, a Villanova Law School alumnus and former CEO of LAVA Group Inc., an intellectual property investment bank.
As repayments are made, customers may request more cash and treat Kabbage funding as a revolving line of credit. Most customers use the money to purchase inventory, Frohwein said.
School Backpacks
Services such as eBay’s Bill Me Later, which allow customers to spread payments over a longer period of time, don’t provide cash up front.
Peer-to-peer investing firm LendingClub, which funded $13.4 million in loans last month, provides a one-time loan and doesn’t function as a line of credit that borrowers can pay down and then increase again.
Cindy Shebley, who sells photography equipment on EBay, took a $1,000 advance from Kabbage in June to buy several hundred backpacks.
“It was a little extra money for me to experiment with, and I ended up selling almost all of them at a really good profit, right at the perfect time before back-to-school,” said Shebley, 53, who’s based in Everett, Washington.
She paid back the money over five months and plans to use Kabbage again, she said.
“I wish they’d been there five years ago when I was first starting up and banks wouldn’t give me the time of day,” Shebley said.
Credit Scores
The average Fair Isaac Corp., or FICO, credit score of Kabbage borrowers is 680, and the firm will approve advances for some with scores below 650 if other metrics are favorable, said Chief Operating Officer Kathryn Petralia, a former executive at credit card and payment companies including CompuCredit Holdings Corp.
Online merchants tend to have lower credit capacity, more inventory and quick turnover that hurts their credit score, Petralia said.
Some lenders consider 680 the bottom range of a “good” score while others prefer 720 or higher, according to MyFICO.com.
Over time, Kabbage plans to create its own score for online merchants that takes into account sales cycles, inventory needs, turnover rates, shipping behaviors and repayment history, Frohwein said.
“We see this much broader range of data that tells us so much more about creditworthiness, that most traditional lenders would never look at,” Frohwein said. “We think there’s an entirely new market for that data.”
--With assistance from Joseph Galante in San Francisco and Jason Kelly in New York. Editors: Anita Sharpe, James Langford
To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.
To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net.
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