Kabbage, a company with some 115,000 customers and $3.5 billion in loans that has built an automated platform for lending money to small businesses and individuals using a large set of data points to determine a customer's credit score, is announcing some big cabbage of its own today.
SoftBank Group is investing $250 million in Kabbage -- funding that Rob Frohwein, the co-founder and CEO, said the company plans to use to expand its business in the U.S.; launch yet more analytics tools to provide loans for specific verticals; expand into new markets like Asia; and to explore acquisitions to add new products to its business, like payments.
The investment, a Series F, brings the total raised by Kabbage in equity funding to $500 million (on top of some $3.5 billion in securities), and will give a bump to the company's billion-dollar-plus valuation.
For some context: In 2015, when it raised a Series E of $135 million, Kabbage entered the so-called echelon of "unicorn" startups with a valuation of $1 billion. In an interview with TechCrunch this week, CEO and co-founder Rob Frohwein declined to name a specific number but said that this latest investment was at a "meaningful upround" that was more than $1.25 billion but not quite $2 billion.
Founded in Atlanta in 2009, Kabbage was an early mover in the concept of using big data analytics to underwrite and monitor loans: the company draws on hundreds of sources of information, from a company's or individual's public social media profiles and a business's QuickBooks accounts, through to larger macro data sets, to decide whether or not to loan money (and how much to loan).
At a time when a number of other online small business lenders like OnDeck and Can Capital have stumbled under iffy business models, amid a wider shakedown in the online loan industry overall, Kabbage has grown. Frohwein attributes this squarely to its big data play, which collectively now crunches some 1.5 million data connections to help make decisions.
"When the proverbial shit hit the fan in the online lending space a little while back, people at Kabbage were nervous. All I said was, 'finally!'" Frohwein recalled. "What's happened is that now we have some separation between companies that were not focused on building differentiated solutions and those that are trying to do something different. We’ve gotten past the point of puffery. A small handful of companies have differentiated themselves and I think Kabbage is one of those."
He said that Kabbage is profitable in its loans business, but not yet in its platform operation -- the latter is a newer division launched in 2015 that essentially powers other lending businesses, alongside Kabbage's own retail operation. (Customers include Kabbage itself, which has a Karrot consumer loans business; as well as major banks like ING, Santander and Scotiabank.) "As a company, we will be profitable in Q4 from a GAAP perspective," he said.
While Kabbage's big data formula is today used by several other fintech companies -- they include Kreditech (which focuses on helping to create credit scores for people who are "unbanked" and is backed by Peter Thiel and Naspers), Fundbox (also with a long list of interesting investors including Jeff Bezos) and BlueVine (backed by Citi Group, among others) -- Kabbage plans to take its own data play to the next level.
One area will be loans for specific verticals or types of businesses: the idea here is that if you are a construction business or a restaurant, you are likely to have very different cash flows, so Kabbage would like to develop ways of making the loans more personalised and less full of default and friction that can easily be avoided if the lender understands more about the borrower.
Today, Kabbage already claims stronger customer loyalty than many other lenders: Frohwein said that on average its customers borrow 20 times from Kabbage over three to four years: he claimed that as a point of comparison the industry average is 2.2 times.
We should also keep an eye out for acquisitions and completely new product launches from the company. Some have suggested it might try to buy OnDeck in a consolidation play, but our sources say this was just speculation and that a more likely scenario would be acquiring companies to add new services to the platform, rather than as a consolidation play among similar competitors.
Asked about this, Frohwein would not specify what new product launches or acquisitions might come first, but he highlighted payments as an interesting area.
"Look at how PayPal and square have both gone from being payments companies to small business lenders," he noted. "There is a clear connection between how companies think about those two business areas, so it’s not a giant leap of faith for us to consider this."
While SoftBank has been making some major waves in the investment world lately with huge investments out of its new $100 billion Vision Fund, this latest effort with Kabbage comes from the SoftBank Group directly (and somehow $250 million sounds suddenly modest when you are thinking about $100 billion). From what I understand, it could potentially get rolled into the Vision Fund later down the line, but for now it represents some very interesting strategic opportunities for Kabbage.
Those could come in two general forms. First, there is expansion of Kabbage's retail and platform businesses further into Asia (where it's only so far worked as a white-label platform partner).
Second, there is the opportunity to work with a myriad of SoftBank's portfolio companies. Nothing announced so far on this front, but recall that SoftBank's diverse holdings include Sprint (which has a large number of small business customers); Lyft and a number of other ride-sharing startups (another business line that relies heavily on very small businesses: sole traders); SoFi; and many more.
In that regard, SoftBank's investment looks like a smart bet placed on a company that it believes it could leverage throughout its network in some interesting ways.
“SoftBank invests in market-leading companies that dramatically improve the customer experience and expand markets through breakthrough technology and data capabilities,” said SoftBank Managing Director David Thevenon, in a statement. “We invested in Kabbage because their unique automated lending platform leverages open data networks and best positions them to empower small businesses around the world.”