Kabbage provides financing to allow merchants buy inventory by innovative techniques to analyze credit based on metrics determined by social media and gaming. Kabbage uses a variety of metrics as ranking sellers, on time delivery, and other metrics related to reputation from online sources realted. Kabbage, which was founded by Marc Gorlin, Rob Frohwein and Kathryn Petralia, is essentially a way for online merchants and sellers on marketplaces like eBay and Amazon to get capital they otherwise wouldn’t qualify for at a commercial bank.
Kabbage uses technology to analyze online merchants’ sales and credit history; customer traffic and reviews; and prices and inventory compared to competitors. And merchants can proactively add information to their Kabbage account to immediately increase their access to capital.
Kabbage provides financing to allow merchants buy inventory, just closed on $17 million in new venture funding from investors including Mohr Davidow Ventures. It plans to use some of that money to see whether social media and online gaming are indicators of creditworthiness. Mohr Davidow lead round and participation from earlier investors including Stephens Inc. Chief Executive Officer Warren Stephens, TPG Capital’s David Bonderman and others.
Instead of FICO credit scores or pledges of collateral, Kabbage uses the length of an online merchant’s selling history, monthly transaction volume, revenue patterns, feedback ratings and other metrics to develop its own score of creditworthiness in just minutes. Kabbage uses technology to analyze online merchants’ sales and credit history; customer traffic and reviews; and prices and inventory compared to competitors. And merchants can proactively add information to their Kabbage account to immediately increase their access to capital.
“The way credit scoring and analysis has been done forever in the banking industry is very backward,” said Bryan Stolle of Menlo Ventures.
Once merchants are approved, Kabbage puts increments of money up to $20,000 in their PayPal accounts, giving them instant cash to buy more goods to sell online or cover other expenses. Kabbage plans to test doubling the amount it advances to $40,000, Chief Executive Officer Rob Frohwein said in an interview.
“We want to be the de facto financier to all online merchants,” Frohwein said.
With more than 2,000 accounts now, Kabbage is adding about 300 more each week and projects 5,000 customers by year end. So far, there have been no charge-offs for failure to repay, Frohwein said, adding that all delinquencies have been paid within a week. Kabbage gets repaid in monthly increments over a period of as much as six months directly from the merchant’s PayPal account, and it has visibility on the merchant’s transactions so it can see money accumulate or dissipate. Last month, Kabbage was awarded a patent for its processes for determining creditworthiness.
“What better credit information do you want on a retailer than to see their daily transactions and whether they are meeting their projections? It was like ‘Holy cow, this is awesome,’” said Mohr Davidow’s Stolle, who will join Kabbage’s board. Kabbage recently lowered its fees and charges 3 to 7 percent for the first month, or 10 to 18 percent if the money is kept for the full six months, said Chief Operating Officer Kathryn Petralia, the firm’s co-founder and a former executive at credit card and financial services companies including CompuCredit Holdings Corp. (CCRT)
By comparison, EBay’s PayPal unit has a program called Bill Me Later, which allows merchants to defer payments although it doesn’t advance cash. Bill Me Later has some promotional financing rates of zero interest for six months, otherwise its typical interest rate is 19.99 percent.
FarmVille, Mafia Wars
Another metric that may help assess creditworthiness is participation in online games and social media sites.
In addition to looking at merchants’ Facebook and Twitter activity, Kabbage plans to study participation in games such as Zynga Inc.’s Mafia Wars and FarmVille to see whether there’s a correlation with on-time repayment, said Marc Gorlin, chairman and co-founder of Kabbage. Gorlin’s previous business dealings brought Bonderman and Stephens in as investors.
UPS is already using some things it has learned from Kabbage to help shape the way its UPS Capital unit views the credit risk of its customers, said Joe Guerrisi, a vice president of corporate marketing at Atlanta-based UPS, who has an observer seat on Kabbage’s board.
“We’re looking at how they use data, which is fundamentally different than what is taking place in financial services today,” he said. “This tells us more about the pain points” small merchants feel.
In conjunction with the funding, Kabbage is also announcing that it has been granted U.S. Patent No. 7,983,951 entitled “Apparatus to provide liquid funds in the online auction and marketplace environment.” It basically covers a system by which a provider of capital utilizes information regarding a merchant’s sales history on an e-commerce website to make a determination about providing funds. For a company which only launched a few years ago, snagging a patent is impressive.
Gorlin says the new funding will be used to add additional marketplaces, distribution relationships, new financial products and for international expansion. He explains that there is huge potential for growth in international markets, and the startup is being constantly being contacted by international sellers outside of the U.S. who are interested in Kabbage’s services.
Similar to the way that Square brought credit card mobile access to small businesses and that Greendot brought pre-paid credit cards the unbanked, Kabbage is bringing working capital and small loans to online merchants who may not qualify for a cash infusion from a traditional bank. Like the companies mentioned above, the startup has the definite potential to disrupt the marketplace industry.
Kabbage Series B Round raised $17 million in Series B funding led by Mohr Davidow Ventures with BlueRun Ventures, David Bonderman, founder of TPG Capital; Warren Stephens, CEO of Stephens; the UPS Strategic Enterprise Fund, Jim McKelvey, co-founder of Square; and others participating in the round. This brings Kabbage’s total funding to $24 million.Categories : Tech, World
Tags : Amazon, eBay, Greendot, Kabbage, Kathryn Petralia, Marc Gorlin, Mohr Davidow, Rob Frohwein, Square, TPG