"We just call it 'AI-blockchain-crypto tech,' and then people get very excited about it," cracks Kathryn Petralia, co-founder and president of small-business online lender Kabbage.
Petralia was discussing her Atlanta-based company's ambitious expansion plans this year, which include buying other startups and rolling out new payments products. But she was also joking about what's shiny and new in the world of financial technology startups: everything and anything involving cryptocurrency, relating to the blockchain, or connected to artificial intelligence. Such startups were heavy on the ground in mid-June, when I interviewed Petralia and her co-founder, Rob Frohwein, at the annual MoneyConf event in Dublin, a 5,000-person gathering of entrepreneurs and established companies in every corner of the fintech ecosystem.
Lending remains a large draw for fintech-focused venture capitalists, who put $900 million into the sector in the first quarter of 2018, according to an April CB Insights report. However, venture capitalists are "on pace for a new low" of money spent on lending startups, even while overall global fintech investment is "on pace for a new high," the report found. Instead, investors are increasingly willing to bet on startups working in wealth management or robo-advising, insurance and blockchain or cryptocurrency.
Yet lending startups are gradually gaining more business from other entrepreneurs. According to a recent Federal Reserve survey, 24 percent of small business owners sought financing from an online lender in 2017, up from 20 percent in 2015.
That's created opportunities for some online lenders--including Kabbage, which specializes in funding small businesses. The company last week announced that it's lent a total of $5 billion to its customers, including $1 billion that entrepreneurs have applied for on nights and weekends--when traditional banks are closed.
Kabbage, which Petralia and Rob Frohwein co-founded with Marc Gorlin in 2009, has spent the last three years on the Inc. 500 list of America's fastest-growing private companies. It reported $172 million in 2016 revenue, some of which it's reinvesting into buying other startups, and some of which it's using to develop other financial products.
The company is developing payments processing that could potentially rival products offered by PayPal and Square. It's also contemplating deposit accounts that could resemble checking accounts at traditional banks. Frohwein, the CEO, says Kabbage wants to use these new products to create a full "cashflow as a service" product suite within the next 12 months, or sooner. ("Granted," he acknowledges, "it might not be the sexiest line in history.")
Kabbage also recently purchased New York startup Orchard, which analyzes loan data and provides other behind-the-scenes technology for lenders. Petralia said she wanted to buy Orchard for its technology, which Kabbage already uses, and for founders Matt Burton and David Snitkof, who are joining Kabbage. The deal will also help Kabbage expand its New York office: "From a culture perspective, it allowed us to get to critical mass in our New York office really fast," Petralia says. "It almost was like when you get to move into a home that's fully furnished, as opposed to having to go pick it all out yourself."
All of this growth, however, isn't immediately leading to an IPO. Which may be prudent: The public markets haven't been kind to online lenders OnDeck and Lending Club, both of which have seen their share prices suffer since their IPOs. (Lending Club's founding CEO, Renaud Laplanche, also abruptly left in 2016 amidst revelations of loan malpractices.)
Kabbage has raised almost $500 million in equity financing, including $250 million last yearfrom Japanese tech super-funder SoftBank. But "we are not under extensive pressure from our existing investors to get out of the business," Petralia says. "They're excited about what we have to do ... and they see this amazing opportunity."
Moreover, "an IPO is a huge distraction. It's not just any fundraising event, it's a really, really complicated transparent fundraising event that brings with it a lot of extra work--forever," Petralia adds. "There's going to be a time for that, I suspect. But right now ... it just doesn't make sense."
It is clear that traditional financing/lending players need to have more touch points with consumers to build valuable businesses.