Real-time data was Kabbage's secret sauce, its first investor says

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Kabbage closed a $700 million asset-backed securitization this week — the largest ever by a small-business online lending platform. It was a remarkable moment for the online lender that uses alternative data and machine learning to make small-business loans.

The firm started life as a small, scrappy fintech startup in Atlanta in 2008, but has grown rapidly. It made $2 billion worth of loans in 2018 and more than $600 million in the first quarter of 2019. It also recently agreed to provide financing at the point of sale on as part of a program called Pay Later.

Jonathan Ebinger, general partner at BlueRun Ventures, a Menlo Park VC, was one of the early investors who took a chance on Kabbage. In 2010, he was the lead investor in Kabbage’s Series A fund (since then, the company has raised $500 million). In addition to Kabbage, BlueRun has led early rounds for PayPal, Waze and Coupa.

Following is an interview with Ebinger about what he saw in Kabbage in those early days and its progress since.

Kabbage was one of the first online lenders to small businesses. What did you see in the company when you first looked at it that made you realize they were going to make it?

JONATHAN EBINGER: What I saw was an approach in sync with the rest of the technology industries I invest in. They were using data to make real-time decisions. It’s a natural extension to bring real-time decision-making to lending. There’s more than adequate data made available by businesses themselves on which to make accurate, real-time lending decisions. So when I saw Kabbage’s value prop and what Kabbage was doing, it was a straightforward decision for us. We had invested in a number of other companies using real-time data for decisions.

What were some of those?

The one that’s most notable on the consumer side is the navigation system called Waze. When the two founders [of Waze] pitched us, we knew immediately this was the way that mapping needs to be done. It coincided with smartphones getting mass adoption. We invested in Waze in 2008, the same year Apple came out with the iPhone. The timing was fortuitous for that.

Similarly, we invested in Kabbage shortly after the global financial crisis. The problem was acute for small businesses with regard to getting access to working capital. Lack of working capital was the primary upshot of the financial crisis for small businesses. Small businesses think more about, do I have money in my checking account. They don’t think about things at a macro level. They know if their customers aren’t paying them on time, they’re going to have a hard time buying more inventory and growing their business. By us effectively developing a heuristic around what we believed was a healthy business, we were able to find customers that were invisible to the traditional bank.

Furthermore, a lot of these companies [Kabbage has loaned to] were operating what are now traditional businesses, but 10 years ago they weren’t. They’re businesses that are operating with new inventory, outsourced workforces, distributed customer bases, it’s not easy for a community bank to make a snap decision on whether or not they’re creditworthy. All those things played into our decision that this was a trend and the right team. [Co-founders] Kathryn [Petralia] and Rob [Frohwein] had had successful businesses in the past.

They both have a force of personality.

They do. They’re great people. It permeates the whole company. One of the hardest things to do is to keep corporate culture as a company scales up. They’ve been remarkably consistent in their hiring and their corporate practices, to make sure they always remember who they’re serving, but they’re still very much an upstart. They have joy in what they’re doing. They have a great corporate culture, and Kabbage is consistently considered one of the best places to work in Atlanta.

Do you think culture stems naturally from leaders trying to run a company that they would want to work in? Is it the hiring choices that make the difference?

You’re right and you do have to be careful, the fire and the passion founders have can quickly be attenuated in the organizational ranks if the hiring decisions are not made well. One thing I focus on when reviewing founders’ hiring practices is you want to hire people that you want to work for you versus people who will work for you. In the early days, before you’ve raised money, anybody who raises their hand for a company that has less than a year of cash, you think, this person is willing to work for me, I’ll take him. So you need to shift gears and believe in yourself and hold out for that perfect hire. If a company is venture backed, I’m not a fan of what we call on-the-job training. You want people who come in knowing what they’re doing, certainly at the senior level. When you have people who know what they’re doing, you can move much more quickly and everyone can speak a tribal language. Everyone knows the shortcuts to success.

How significant do you think Kabbage's $700 million securitization is?

The securitization is significant in that Kabbage is clearly recognized as the leader in online SMB lending, and this is one of the benefits accruing to the leader.

Does it position Kabbage ahead of competitors like OnDeck?

OnDeck and Kabbage's businesses continue to diverge, as Kabbage is focuses more on cash flow management for SMBs, of which lending is a piece.

Does it prove or provide a vote of confidence in Kabbage's underwriting decisions and method?

The securitization is market validation of Kabbage's approach of accessing and monitoring customer data in real time.

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