2017 Small Business Financing Leaderboard
March 14, 2018Thanks to several companies filing their annual earnings statements and Funding Circle disclosing their USA origination figures for 2017, we’ve been able to put together a leaderboard in the small business financing space. This list is not comprehensive and omits key players like PayPal Working Capital and Amazon Lending.
| Company Name | 2017 Originations | 2016 | 2015 | 2014 |
| OnDeck | $2,114,663,000 | $2,400,000,000 | $1,900,000,000 | $1,200,000,000 |
| Kabbage | $1,500,000,000 | $1,220,000,000 | $900,000,000 | $350,000,000 |
| Square Capital | $1,177,000,000 | $798,000,000 | $400,000,000 | $100,000,000 |
| Yellowstone Capital | $553,000,000 | $460,000,000 | $422,000,000 | $290,000,000 |
| Funding Circle (USA only) | $500,000,000 | |||
| BlueVine | $500,000,000* | $200,000,000* | ||
| National Funding | $427,000,000 | $350,000,000 | $293,000,000 | |
| Strategic Funding | $393,000,000 | $375,000,000 | $375,000,000 | $280,000,000 |
| BFS Capital | $300,000,000 | $300,000,000 | ||
| RapidAdvance | $260,000,000 | $280,000,000 | $195,000,000 | |
| Credibly | $180,000,000 | $150,000,000 | $95,000,000 | $55,000,000 |
| Shopify | $140,000,000 | |||
| Forward Financing | $125,000,000 | |||
| IOU Financial | $91,300,000 | $107,600,000 | $146,400,000 | $100,000,000 |
*Asterisks signify that the figure is the editor’s estimate
Ron Suber: ‘This Industry Will Look Very Different One Year From Now’
February 25, 2018
Ron Suber wears many hats. His official LinkedIn profile lists him as President Emeritus and Senior Advisor at Prosper Marketplace. Now you can add a new title to his repertoire – the Magic Johnson on fintech. That’s because when it comes to Suber’s legacy, he’s all about the passing game.
“I really enjoy the assist in basketball more than the score or the dunk and so I’m trying to be that leader of assists in our industry, Magic Johnson, if you’ll let me use that analogy … I want to be him for our industry and help everybody win and help the whole thing be bigger, but you have to give the ball to the people in the position where they can score and that’s what I’m trying to do,” said Suber in a podcast discussion with Lend Academy’s Peter Renton, who is also a co-founder of LendIt.
Since Suber stepped down as president of Prosper, his presence in marketplace lending and fintech only seems to have blossomed, which in hindsight may have been the plan all along. The godfather of fintech, as he’s also known, is in the midst of what he’s dubbed a professional rewiring, one that didn’t prevent him from participating in a podcast with Renton.
During the discussion, Suber didn’t shy away from any topic, fielding questions on everything from his investment portfolio, to Prosper, to travel and his views on marketplace lending and fintech. His travels have taken Suber to Patagonia and the straits of Magellan to his favorite Aussie city of Melbourne. Next up Suber plans to explore Africa, including Rwanda and Tanzania.
Suber on Aussie IPO Credible
San Francisco-based Credible, a consumer finance marketplace for millennials, just raised $50 million in an Australian IPO. Suber, who serves as chairman of the fintech, got to know Credible CEO Stephen Dash a few years ago. When Dash needed to raise money, Suber was the first to work with other fintech influencers including a group in Asia to invest $10 million in the company at a $40 million valuation.
Credible followed up with another equity round before deciding to IPO in Australia, where the market is different versus the United States or Hong Kong.
“We were able to meet with the asset managers, the family offices, and the superannuation funds and some of the pension funds in Asia, Hong Kong in particular, and throughout Australia who were very supportive of Stephen Dash, who is from Australia,” said Suber, adding that Credible was the biggest tech/fintech IPO in Australia last year.
Incidentally, Suber has also met with Australia Treasurer Scott Morrison, who sparked a meeting with Suber, Dash, US cryptocurrency exchange Coinbase and other members of the payments market to discuss how Australia can engage with young US entrepreneurs.
We asked Suber what to expect with crypto and lending, in response to which he told AltFinanceDaily: “Like the very early days of the internet, there were lots of dot-com companies with high valuations in the hype cycle, little revenue and unclear long-game solutions…think Amazon. Big winners emerged, and the majority lost money on the early bets. The same is true for cryptocurrencies. Enormous winners will emerge. In my opinion, the winners include CoinBase, Ripple and Ethereum.”
Suber on Prosper
While Suber has moved on from an executive role at Prosper, he remains engaged with the company and is close with the leadership team, including CEO David Kimball and CFO Usama Ashraf. Suber’s involved across the board, from customer acquisition, to business development and on the capital markets side of things as well.
“It’s again doing close to $300 million a month in originations, it has $100 million in cash it generates cash each quarter, it has its own securitization channel at this time in addition to the consortium … There’s a lot going on there including some product expansion, so there’s no shortage of things to do with Prosper, which I care a lot about,” said Suber.
Suber on Hindsight Being 20/20
Marketplace lending has had peaks and valleys along the way as it has matured from a nascent segment to essentially a transformational influence on the lending space, with its technology touching everything from the business model, to the borrower to the banks.
But if hindsight were 20/20, there are some things he’d do differently the second time around.
He pointed to Prosper’s acquisition of American HealthCare Lending, which he characterized as a “great decision,” giving the marketplace lender an opportunity to tap the healthcare borrower market. But as in any relationship, you can’t change each other.
“We changed American Healthcare Lending too much and tried to make it into something that it just couldn’t be with the point of sale financing. I think the lesson there is it’s great to do an acquisition, but you have to make sure you execute and keep it fresh and focused and successful once you get it,” said Suber, pointing to the acquisition of Tel Aviv’s BillGuard as yet another example of this.
Prosper also took on too much office space around the country.
“Perhaps we could have outsourced a little more instead of all the hiring. Clearly diversifying committed capital and maybe back then even using some of the capital we raised to do these own CLUB deal securitizations, which Prosper does now very successfully with its balance sheet,” he noted.
Suber also urged the marketplace lending market to showcase its technology and unique abilities as “tech-enabled finance companies” more. As the innovator that he is, Suber suggested there should be greater collaboration among marketplace lenders, comparing it to the airline industry. He explained:
“So, the airline industry is competitive, they’re competing for dollars and seats and people and talented pilots and the best planes, but the reality is they have to work together, they have to make sure that planes don’t crash and that the industry is on time and does lots of good things together… And that’s really what I think we can do better, a better job of as an industry is really working together, competing, but communicating and making sure everybody lands safely.”
Suber on Marketplace Lending
As the godfather of fintech, Suber is often looked to as a guiding voice on the status of the market. That’s why when he says the industry has advanced in innings, it’s revelatory.
“I think we’re in the home stretch, I think we’ve done the seventh inning stretch,” he said. Suber pointed to Asia, where the market has gone from 3,000 platforms to 50 and in the United States where it’s consolidated from 300 to fewer than 100.
“The mature are maturing,” he said,” pointing to a race in which some platforms are pulling away from others in terms of valuation, volume and the ability to engage the industry.
“The separation will continue,” he said. “The industry will look very different one year from now.”
Suber on His Investment Portfolio
If you’ve ever wondered which investment areas Suber believes represent the next opportunity, look no further. He’s “struck” by financial inclusion, in particularly a telecom play Juvo for which he’s an advisor and in which invested a few rounds. Juvo is looking to serve the unbanked in the developing world where they lack financial identities, internet access and smartphones. The company has partnered with the likes of Samsung.
“We talk a lot in the online lending industry about top down, super-prime and prime and near prime; this is my way of coming from the bottom up with technology and data and finance to be involved in financial inclusion. I’m really quite excited about that one,” said Suber.
He also likes startup Unison and the emerging fractionalization of the home equity market, which he characterizes as “the next big thing.” In addition to Suber, this market has attracted the likes of Marc Andreessen.
Suber has nearly 20 investments in private companies, including payment companies, financial inclusion and lending. He’s also become a debt investor to some online lenders, invoice finance plays among others. “I’ve really enjoyed the debt side of investing as much as the equity side,” he proclaimed.
Suber on Broader Fintech
In addition to marketplace lending, Suber is also a believer in the point-of-sale (PoS) solution and invoice finance companies, which he says are “fixing the way invoicing is financed and making it better, cheaper and quicker.” And in taking an overarching view of the market, he also likes the cleantech, pointing to solar fintech play Mosaic and a company called CleanCapital.
Suber on Rewiring
Suber is a big believer in rewirement, both in his personal life and in business. He defines it as “redesigning one’s life personally and professionally.” Before he applied it to his career, Suber and his wife Caryn pursued a rewirement in their personal lives, one that included selling their home and material possessions, buying a new home and traveling.
In 2017, he decided to do the same thing professionally to strike a better balance in his life. Since then, he’s developed a color-coded regiment by which to live, separating the hours of the week across categories including exercise = blue, personal = green, work = purple and teaching and managing his family office = red.
“There’s a lot of green on my calendar,” he said.
For those interested in rewirement, Suber has launched a blog on the topic, with the maiden couple of entries documenting the first 360 days and counting.
Many of Suber’s quotes here originated from his interview with Peter Renton. Renton is the co-founder of the LendIt Conference.
Holiday Bubble Helped Cause (Routine) Crypto Stumble
January 18, 2018
Those cherished-yet awkward-family moments you navigated this holiday may be responsible for Bitcoin’s recent rollercoaster ride.
While that may be painting with a bit of a broad brush, it does appear that that the post New Year’s dip that befell the cryptocurrency world was tied to a festive hype-bubble.
Between Thanksgiving and the December holidays cryptocurrency was a hot topic around the dinner table while people spent extended time with their families, John Omar, head of the Chain Operator blog and cryptocurrency trading course, told AltFinanceDaily.
Omar explained that not only were those that were already schooled in the ways of crypto-trading discussing their financial gains over apple cider and stuffing, but family and friends who were previously unaware or unfamiliar with the likes of Bitcoin were having their interests piqued.
This spurred a rapid uptick in pricing on the way to to unprecedented gains in Bitcoin and other crypto counterparts.
“No, this is not the end of crypto,” Omar told AltFinanceDaily. “This is far from the end. What we’re seeing is a price correction after 2 months of unprecedented growth. It’s not even a historic price correction. There have been more dramatic movements. There are a few reasons why the price is correcting at this time: potential regulation from Korea, China and France, and people who bought into cryptocurrencies after the holidays selling off to realize profits.”
Emerson Taymor, founding partner of the strategies firm Philosophie, agrees with Omar’s stance.
“Bitcoin and the market has seen much more significant drops in its past and always rebounded with a vengeance. It is a healthy correction, but far from the end,” he said.
Like Omar, Taymor also attributes the recent drop to “regulatory headwind” overseas.
While he believes that cryptocurrencies best days are not necessarily behind them, there will be losers on the path to determining a clear winner.
“Remember, cryptocurrency is much more than the “stock price,” Taymor said. “We are seeing a fundamental shift in how technology is going to be created. I believe we will have another big run up for the next 6-12 months and then we will have the real bubble bursting. Much like the Dot Com bubble, we will see people lose a lot of money and companies implode like Pets.com and Webvan, but we’ll also discover the next Amazon!”
Lights, Camera, Crypto-Transaction – How a Lending Journalist Raised Millions to Build Magic Lamps Through the Murky World of Initial Coin Offerings
November 15, 2017
This past July, the winner of the Best Journalist Coverage category at the 2017 LendIt Conference Awards, announced that he would be stepping outside of his journalistic endeavors to raise money for a futuristic lamp company. The product, dubbed Lampix, is described as a lamp with a projector, a camera, specifically placed light-emitting diodes (LEDs), and a cloud-enabled computer. On the company’s “Medium” blog, Lampix promises that the product is “designed to transform any flat horizontal surface into an interactive computer.”
The man behind Lampix, George Popescu (whose Lending Times news site competed against and beat out fellow finalist AltFinanceDaily at the LendIt Awards), makes for an interesting case study in alternative finance. That’s because Lampix shunned traditional capital-raising methods by relying on an Initial Coin Offering (or ICO), an unregulated blockchain-based corporate event which is similar to an initial public offering. Rather than purchasing shares, as is the case in an IPO, investors in an ICO receive digital tokens instead of shares. In August, Lampix raised $14.2 million through its ICO*.
Popescu’s name popped up again a few months after the LendIt award on a regulatory blotter in the UK.
In case details published by the UK’s Insolvency Service on August 1st, the agency announced that Popescu was disqualified from serving as a company director.
Mr Popescu breached his fiduciary duties to act in the best interest of Boston Prime Limited (“Boston Prime”) and/or failed to ensure that both Boston Prime, as the regulated firm, and him individually, as the approved person, complied with the Financial Conduct Authority (“the FCA”) rules and guidance.
$6.2 million was transferred out of the company to a company named FXDD. Boston Prime’s receiver is presently suing FXDD seeking the return of the funds to the company. Proceedings are ongoing. Mr. Popescu is not under investigation and there are no legal proceedings at this time against Mr. Popescu.
It’s an inauspicious beginning for someone financing the “lamp of the future” using an unregulated and controversial strategy. Even so, when its ICO concluded on August 19, Lampix declared its gambit a success after raising $14.2 million through the sale of its digital tokens, which are known as PIX.**
By mid-November, the market value of those digital tokens, which exist on the Ethereum blockchain, had dropped by 50%, causing Lampix investors to suffer losses of $7 million. Unlike shareholders in publicly traded companies, token buyers have few investor protections. It’s not clear they are even considered to be actual investors at all. Buried in the fine print of Lampix’s 85-page “white paper” – a convenient way to avoid the label of prospectus – is a disclaimer. “Buyer should not participate in the [PIX] Token Distribution or purchase [PIX] Tokens for investment purposes. [PIX] Tokens are not designed for investment purposes and should not be considered as a type of investment.”
Additional disclaimers, moreover, declare that the white paper is not a prospectus, that the tokens “are not securities, commodities, swaps on either securities or commodities, or a financial instrument of any kind.”
But the distinction has not deterred people from joining in the frenzy of buying digital tokens like PIX. So much so, TechCrunch reports companies employing this strategy had raised nearly $800 million by means of ICOs in the first half of 2017.
And the SEC is not exactly excited about ICOs. “Fraudsters often use innovations and new technologies to perpetrate fraudulent investment schemes,” a July 29 directive by the SEC states. “Fraudsters may entice investors by touting an ICO investment ‘opportunity’ as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors should always be suspicious of jargon-laden pitches, hard sells, and promises of outsized returns. Also, it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.”
On September 29, moreover, the SEC brought an enforcement action against REcoin Group, charging Los Angeles businessman Maksim Zaslavskiy and two companies he controls with defrauding investors “in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds,” an SEC press release said.
The SEC alleges that Zaslavskiy and his companies –REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) — have been selling unregistered securities, and that “the digital tokens or coins being peddled don’t really exist.”
Meanwhile, telephone calls and an e-mail to the SEC seeking the federal regulator’s view on Lampix’s ICO drew a terse response from Ryan T. White, a public affairs specialist, who replied that the agency would “decline comment.”
Deborah Meshulam, a partner in the Washington office of law firm DLA Piper and a former SEC enforcement official, told AltFinanceDaily: “Regarding the lack of equity ownership, Lampix is seeking to establish that the tokens are not securities. Whether the SEC would agree should it decide to look into the offering depends on the facts and circumstances. The SEC staff would look past form to substance to assess whether the sale of the tokens constitutes an investment contract under legal standards. If so, then the SEC would view the Lampix offering as a securities offering. It may be that Lampix (or its lawyers) already vetted the offering with the SEC but I don’t know the answer.”
Popescu tells AltFinanceDaily in an e-mail interview, “We had to respect all securities rules and regulations of course, respect the Howey test and so on. There were no hoops to jump through as we are not trying to avoid anything or prevent anything. We honestly built a token to build a community to help us crowdsource (mine) pictures for all applications among which, Lampix.”
“Each PIX token,” the Lampix website explains, “will be used as a form of payment to picture image miners, voters and app developers or to purchase a Lampix, cloud computing and apps.”
Meshulam also notes that the June, 2017, date of the Lampix white paper pre-dates the SEC’s enforcement activity in this area. She adds, “The statement that ‘token sales or ICOs are not currently regulated by the U.S. Securities and Exchange Commission may be very literal in the sense that there is not a specific regulation, but the SEC has stated that, in the right situation, ICOs are subject to the US federal securities laws.”
Erin Fonte, an attorney in the Austin, Texas, office of Dykema Cox, and the leader of the firm’s regulatory & compliance group, says, “The ICO stuff is so up-in-the-air. The SEC is looking at it closely. But it’s fairly new. And some of them (ICO’s) have been tied to fraud and Ponzi schemes. If a client came to us (seeking advice), we’d want to vet the people behind the offering.”
But what of Lampix, the company that won the Augmented and Virtual Reality category of the South by Southwest (SXSW) Accelerator Pitch Event earlier this year in March – and put a pretty feather in the cap of Popescu?
Popescu’s resume is no doubt impressive. He holds a trio of master’s degrees in various scientific and technological disciplines, including one from Massachusetts Institute of Technology. And he is a serial entrepreneur who lays claim to having founded 10 companies: they include, according to his LinkedIn profile, online lending, a craft beer brewery, an exotic sports car-rental space, a hedge fund, a peer-reviewed scientific journal, and a venture-debt fund.
He’s charmed journalists like Forbes contributor Roger Aitken, who declared: “The founders (of Lampix)…believe that Lampix will impact humans as much as computers or smart phones in the future…Think Tom Cruise in Minority Report. Imagine your room in five years: you will be able to use any surface around you as if it was a computer. The ability to transform any surface into an interactive computer (augmented reality) is going to unleash applications we have not even conceived of.”
The Lampix website hyped its ICO with the aid of an infographic listing “active product inquiries” the company has in its pipeline, the likes of which includes Amazon, Apple, Samsung, Microsoft, Sony, IBM, BMW, Bloomberg, PwC, and the Aspen Institute. With all of these names seemingly lining up, it begs the question: Why did Lampix choose the controversial route of an ICO to raise capital?
But it’s hard to determine the seriousness of these corporate relationships. Florin Mihoc, Lampix’s Strategic Partnerships & Development Advisor, said he could not assist us with confirming any of them, citing the slow and cumbersome bureaucracy of dealing with Fortune 500 companies. He did invite us to try reaching out to some of them on our own, which we did.
Bloomberg is one of the few acknowledging a relationship with Popescu’s company. Chaim Haas, head of innovative communication at Bloomberg, told AltFinanceDaily that the New York-based media and financial communications company “collaborated” with Lampix. Bloomberg, he says, “has used Lampix hardware in its fellowship program (Bloomberg AR Fellows) as a prototype for augmented reality applications.” But Haas declined to elaborate on whether Bloomberg’s relationship with Lampix was more than an experimental one.
Edward Caldwell, director of public relations for East Coast markets and sectors at Pricewaterhouse Coopers, the Big Four accounting firm, declined to comment about Lampix. “We can’t discuss individual companies, clients or engagements,” he reports.
Douglas Farrar, senior manager for communications and public affairs at the Aspen Institute, told AltFinanceDaily that he could find no business relationship between Aspen and Lampix. “I have gone down quite a few rabbit holes here,” he said in an e-mail, “But I’m coming up empty.”
When Popescu was directly confronted about this, he wrote, “The companies would only figure [in the infographic] if they actually themselves reached out to us and we exchanged emails with somebody from that entity. Most of these entities have many people and most of the companies’ people will have no idea [that] somebody else in the company is talking to us.”
Telephone calls and e-mail requests for comment to Microsoft were not returned.
A spokesperson using BMW of USA’s official twitter account, however, responded to an inquiry by saying they were a customer of Lampix, “but only for office usage.”
Meanwhile, George Popescu has been on the sales trail. A case in point was his October 5, Youtube interview conducted by Ian Balina, a self-described influential investor in blockchain technology and cryptocurrency – and someone with a reputation as an industry promoter and evangelist. (Balina caters to the get-rich quick crowd and publishes how-to guides trumpeting promises like “How ICOs can make you a millionaire in 3 years” and “make millions with bitcoin.”)
Balina asked Popescu the softball question, could he show viewers a demonstration of the product? Popescu admitted he wasn’t prepared to do that and when he attempted to set one up on the fly, it didn’t work. The incident is notable because Lampix has been promoting the video through its social media network.
Popescu corroborates a number of details about the ICO, however. He confirmed the ICO price of a PIX token to be 12 cents, the US dollar price people had to pay per token. Cryptocurrency exchanges, where token speculators can buy and sell tokens online, show the trading value of a PIX token currently hovering around 6 cents, which translates into roughly a 50% loss in value.
Investors feeling hurt by such a loss can’t contest the purchase of PIX tokens with their credit card issuers. That’s because of a requirement that token sales had to be purchased with ether (ETH), the currency of the Ethereum blockchain. While ether is arguably similar to Bitcoin, it operates on an entirely different blockchain.
To participate in the ICO, in a Youtube video, Lampix also explained to purchasers, for example, how they could first buy ether with dollars through an online exchange known as Coinbase** before forwarding the ether to a digital wallet. Next, investors were instructed to send the ether from the digital wallet to a specially designated PIX address. An automated “smart contract” would then release the appropriate amount of tokens to the buyers’ digital wallets 31 days after the ICO was consummated.
It’s a byzantine procedure. And for investors – especially for those who are not exactly tech-savvy – the rigmarole makes it nearly impossible for them to recover their money should they feel buyer’s remorse. Neither the video nor the Lampix white paper mentions any buyer restrictions. Indeed, Lampix’s white paper specifies that “anyone” in the global market can participate. That means that an investor could theoretically be underage or a citizen of Iran or North Korea. (When asked what steps Lampix took with regards to KYC/AML, Popescu said, we “implemented the standard ones with partners specialized in it.”) Investors could even be citizens of the UK where Popescu is banned from being a company director.
And global they are. AltFinanceDaily interviewed Rudy (whose last name we are withholding), a graduate student who lives in Singapore that says he bought approximately $2,200 worth of PIX tokens during the ICO. The drop in value has gotten him so frustrated that he’s contacted securities regulators in the United States to investigate Lampix. Despite the caveat in the white paper that tokens are not an investment and should not be used for investment purposes, Rudy said he considered himself to be an “investor” and that his reason for buying the tokens was to sell them in the future for a profit.
Popescu, who wasn’t asked about Rudy’s experience specifically, told AltFinanceDaily that Lampix is not selling PIX tokens as an investment but rather to primarily build a community. “What people do with the tokens is their choice and we cannot prevent them,” he asserted.
English is not his first language but Rudy said, “I think that [the] SEC should regulate ICOs in the USA. There are no rules currently, teams can promise anything before the ICO and forget everything after the ICO. Things have to change, there should be legal pressure on crypto teams.”
Rudy added that he was “so enchanted” by Lampix’s ideas that he had promised himself not to sell the tokens for at least two years even if they were losing value. He conceded that he was not a tech expert. But, he says, the award at the SXSW competition was an important milepost to him.
AltFinanceDaily found 700 more people interested in Lampix on the company’s official Telegram channel. The chat history since September 20, which we were able to obtain, has been dominated by talk of the PIX token’s trading value. Those bemoaning the low price regularly use the term “investors” to describe themselves – never mind that the white paper specifies that PIX tokens are not supposed to be an investment or to be used for investment purposes.
The chat’s administrator, who uses the nickname Chester, identifies himself as a “community manager” at Lampix. At one point he too refers to PIX holders as investors. “Hey guys,” he wrote in the channel on October 1, “Lampix is a company, not a single person, we don’t do things that quick, but pretty quick and we try not to confuse our investors by telling you unconfirmed news. Be patient, things will be just fine.”
Laura Toma, another community manager for Lampix, responded to complaints about the depressed price in the channel by saying, “The issue is that people want to get rich in a month.”
Indeed, investors hound not only the community managers, but also Popescu himself, who frequently joins in on the chat and fields questions about the trading price of PIX. “You should care more about the company revenue, clients, users.” Popescu replied to one user.
“Are you serious?” a user calling himself Dante fired back. “We are investors, and we care about the return on investment.” Another user with rough English tells Popescu, “As you know, most people come to ICOs for short-term profit. We cannot deny it.”
Others keep the faith. “PIX will be the real Aladdin’s magic lamp,” writes one user. Another hyperbolically predicts the price will “fly out of the earth, fly to the moon, and finally fly out of the galaxy.”
There is very little discussion about the use of the product itself while numerous inquiries are written in Mandarin. “Lampix has a lot of Chinese investors,” writes one. Other users self-identified as citizens of Russia, Romania, and France. Meanwhile, Toma writes, “Yes, there are investors from USA as well.”
Despite the losses that investors have so far experienced with Lampix, among other concerns, Popescu isn’t limiting himself to just one ICO. According to his online statements, Popescu is connected as an “advisor” to another company engaged in an ICO. AirFox, a Boston-based start-up launched by two Google alumni, provides free data to mobile phone users in return for eyeballing advertising. In early October, Airfox’s ICO raised $15 million. But a month later its AIR tokens, which sold for two cents apiece during the ICO, had lost 75% of their trading value. That means investors in AIR, the company’s ICO ticker symbol (which is becoming an increasingly ironic moniker) have seen more than $11 million go up in smoke almost overnight.
Popescu says in their defense, “The AIR tokens are meant to solve a real problem, of remunerating people who watch ads in exchange of getting more data and minutes on their mobile phone. The ecosystem is still being worked upon, the product is not live. Once the ecosystem is live we will see what really happens. Until then the token is mostly being handled by speculators. The price can therefore vary widely and it doesn’t reflect their true value.”
Even as Lampix and AirFox have been racking up massive losses for investors, Popescu announced on November 5 in a LinkedIn post that he would be involved in five more ICOs.
Among them is DropDeck Technologies, at which Popescu is listed as the chair of the advisor board; its ICO is scheduled for November 21. Another company, Factury, for which he is listed as an advisor, is initiating its ICO on December 15.
He’s an ambitious man.
And his ICO familiarity hasn’t escaped the scrutiny of PIX investors. “I find it strange that you are directing 5 other ICOs,” writes one user in the Telegram chat on November 4. “To make Lampix big, this will require a CEO [who is working] full time working on the project.”
Popescu responds personally. “I am working full time on the project but people have asked me to advise on their ICOs and this grows Lampix’s notoriety a lot in the crypto space,” he writes. He offered further assurances that he wouldn’t be advising those companies’ projects beyond their ICOs.
In an email to AltFinanceDaily, he writes, “I run right now Lending Times, Lampix and Block X Bank only. The ICOs are just customers of Block X Bank. I have built about a dozen companies in 9 years, sold a few, closed a few. Each company has a team to help me, I am not doing this alone. For the ICOs I am more or less involved as an advisor / helping them project-manage their ICOs. How to run 3 companies? It’s about being effective, organized, delegating, partnering and being productive. Oh and I don’t watch TV, so maybe I have a few more hours per day than the average person. I do work long hours.”
Block X Bank, through which Popescu extends his efforts toward other ICOs, is described on the company website as “a boutique investment consulting company specializing in connecting blockchain projects with funding.”
In all of these ICOs, money is seemingly being created out of thin air. A consultant who was hired by AltFinanceDaily to help analyze the technical aspects of both ICOs and smart contracts determined that Lampix raised much more than just the $14.2 million in token sales. In addition to the 114 million PIX tokens sold to investors, our consultant explained, the company also issued 220 million tokens to itself. At the ICO price of 12 cents apiece, those tokens would theoretically be worth $26.4 million – a huge piece of the total ICO pie that Lampix could sell on cryptocurrency exchanges if it wanted to rake in even more money.
There’s a kicker too. At scheduled intervals over the next four years, the smart contract that made PIX tokens possible in the first place is slated to automatically create – and allocate – 330 million new tokens to Lampix. Thus, when Lampix raised $14.2 million in August, the company reserved $66 million worth of PIX tokens for their corporate use.
Popescu said in his e-mail to AltFinanceDaily that these company tokens are for “corporate usage like employee incentives, M&A, other company investments…etc.”
It’s a mind-boggling sum of money for the development of a futuristic lamp whose followers mostly seem to reside on internet chats like Telegram, reddit, and bitcointalk.org.
And this has occurred despite the company’s withholding any information regarding Popescu’s status in the UK. Balina, who interviewed Popescu on Youtube, told AltFinanceDaily he wished he had known about his disqualification in the UK. “This is definitely a big issue and I wish I would have known about it so that either my audience or I could have asked him this directly on the live stream,” he said.
AltFinanceDaily asked Paul Savchuk, Co-founder, CEO, and Chief Product Officer at Cryptocurrency Capital LLC, a US-based hedge fund that only invests in utility tokens as commodities, if Popescu’s ban in the UK would have been relevant information in the Lampix ICO. “Yes, that might be a red flag for us in some cases and require us to perform additional research,” he wrote in an emailed response. “We look at management very seriously – especially since a lot of projects are treated like startups and management is a key component to whether or not many of these ICOs can make it. We try to find such events and spot red flags whenever we conduct our due diligence research on ICOs. The reason: each project has something that needs to be improved. ‘Red flag’ – sometimes conversely can lead to a great opportunity when other market participants ignored it or were too skeptical.”
Mr. Savchuk further said, “Lampix is a perfect example of a coin that on the surface looks very promising, but when you dig a little deeper, you do find red flags that can dampen the excitement for this investment.”
And yet Savchuk spoke rather positively of the Lampix product after reading their white paper. “We believe the project is looking to change the current AR/VR tech industry,” he said, referring to augmented reality/virtual reality. “The project is promising for two reasons. First, they have multiple companies in their pipeline. Second, they have a legitimate product which they will manufacture and sell. They are one of the few blockchain products to offer a tangible product with the ability to disrupt the market.”
“Third,” he went on, “most companies have gaps in building a strong structure at the outset of their existence. Some have bugs in initial code that cause breaches in cybersecurity. Others release product with a low level of usability – the ones who are aware of such problems have a greater chance of success. We would prefer to see publicly known strengths and weaknesses of such companies. Management has to be transparent about their team and product no matter what. Whenever possible, we want to be in touch with the management team.”
With regard to the price drop, Savchuk said, “This is a danger for all purchasers of ICOs. Sometimes it’s caused by token purchasers (swayed by) fear and greed and (hoping for) easy money and fast money. I doubt somebody sold Apple Inc.’s stock right after its IPO. It is also very difficult to restrict exchanges from allowing massive pump and dumps. That’s not even mentioning the difficulty of measuring the value of tokens,” Savchuk concluded. “Consequently, such projects are struggling with low credibility. However, it also creates a possibility for those who believe in the idea and product on a long-term run.”
Popescu downplays the significance of the UK issue. The root of the debacle, he says, is the result of Boston Prime – the company he previously ran – being forced into bankruptcy by the actions of a company he is now suing called FXDD. “FXDD bought the companies and then bankrupted them and that’s why Boston Prime [went bankrupt],” he writes. “Myself personally and each company separately are suing FXDD for this. UK has archaic laws where if you are a director of a bankrupted company you get disqualified from being a director again for a time. Attorneys charge about 40,000 GBP to defend this automatic case and I weighed the pros and cons and decided to ignore it as I have no plans to be a director in the UK for time being.”
Investors unhappy with underperforming ICOs may be willing to challenge their legality. On October 25, for example, a class action lawsuit was filed against Tezos, a computer networking project that raised $232 million in one of the largest ICOs ever. In a complaint, the lead plaintiff alleges that, among other things, Tezos unlawfully engaged in the unregistered offer and sale of securities and fraud in the offer or sale of securities. “In July 2017, Defendants conducted an ICO in which they sold 607,489,040.89 tokens (dubbed ‘Tezzies’ or ‘XTZ’) in exchange for digital currency worth approximately $232 million at the time,” the complaint reads. The plaintiff, who purchased 5,000 Tezzies, feels he was misled about the company and the offering.
Internal squabbling at Tezos which has delayed the release of its product and the sheer amount of money at stake have put the company on the map with the mainstream media and business press. The New York Times, Wall Street Journal, and Fortune as well as news services Reuters and Bloomberg have all covered the allegations of fraud.
The day before the class action lawsuit was filed, moreover, a AltFinanceDaily reporter attended an explosive session at Money2020 in Las Vegas that saw Tezos co-founders, Arthur and Kathleen Breitman, attempting to give a status report of the company. A crowd that had gathered outside prior to the doors opening had attendees speculating whether the Breitmans “would actually show their faces” in the midst of all the drama.
To date, no lawsuits have been filed against Lampix despite the drop in the token’s value.
At a cryptocurrency/ICO meetup in NYC in October, a AltFinanceDaily reporter met with executives at one company preparing an ICO who said they would not allow American investors to participate because of securities-enforcement fears. Pressure is mounting in the Far East as well. Citing their illegality, Chinese regulators in September issued a blanket cease-and-desist order on all ICOs in their country. What that means for Lampix’s Chinese investors bears watching.
Popescu says that Lampix supports regulation in China. “Of course, all Chinese people have to follow Chinese regulation,” he writes.
Meanwhile, on the product front, Popescu says that right now a Lampix lamp can be purchased for $10,000, a tidy sum because they must be hand-made. “We plan to improve the manufacturing costs and then we’re planning to do a kickstarter early next year for around $500 [per] Lampix,” Popescu told AltFinanceDaily in his e-mail interview.
But for investors, it always comes back to the trading value of PIX. On October 25, one investor asks Popescu if the company will buy back its own PIX tokens at the ICO price to pump up their market price. “If you want a pump and dump please go to other companies,” Popescu responds. “We are here for 5-10 years to build a $100 billion dollar company and compete with Apple.”
And it all began with an ICO.
“ICOs also help with bootstrapping the user base – breaking the chicken and egg problem,” Popescu also explains in his e-mail to AltFinanceDaily. “In addition, given that Lampix is looking to crowdsource images, we prefer many different people hold PIX tokens rather than 2-3 VC funds. And last but not least I think tokens are better rewards for the community (liquid, mark to market, etc.) than illiquid instruments.”
Not everyone agrees that PIX is the most liquid instrument to grow the community. US Dollars come to mind, for example. “Let’s say I’m a customer,” one investor poses to Chester, a Lampix community manager. “I want to use the cloud computing service but then I see I have to pay with PIX. I have no experience in crypto and have no idea how to do that. I just want to use your service fast and don’t want to buy PIX coins first before I can make use of it. Will there be a fiat option?”
Chester is awed by the idea. “Well, you are so professional,” he writes. “Man, you are good. You are good, the question you threw just hit the spot seriously. I guess there is always something Lampix needs to figure out and choose the best solution. Technically speaking they are jolly good at this point, but it doesn’t mean it’s perfect.”
Chester, who assures him that he isn’t being sarcastic, goes on to refer to the investor who asked that fairly elementary question as a “big shark” that is “born to bite.”
It remains to be seen if the PIX “user base” shares the same philosophy as Lampix. Ian Balina, who interviewed Popescu on Youtube, separately asked his social media followers: “What’s the first thing you’re going to do once you hit your goals in cryptos?”
The responses fly in:
“Buying my Lambo”
“Travel to Paris”
“Buy an island”
“Buy my mum her dream home”
“Quit my job and start up something for me”
“Pay off mortgage and be financially free”
“Buy house in Miami, buy Lambo, enjoy life”
“Retire”
“Easy. Buy more crypto”
Meanwhile on Telegram, where investors continue to engage Lampix management on a daily basis, Dante offers a sobering reminder of what they’ve bought into, “We don’t have equity, we only have tokens,” he writes. “And we are taking a big risk.”
* The amount of tokens sold multiplied by the 12 cent ICO price doesn’t exactly match the dollar amount Lampix says they had raised. That’s because Lampix not only issued bonus tokens to buyers at each stage of their ICO but also because the market value of ether, which users had to convert to from dollars to buy PIX, had fluctuated when they reported how much they raised. Like Bitcoin, the value of ether is volatile.
** The smart contract Lampix wrote to launch Lampix’s tokens into existence specifically named them PIX tokens and dubbed their publicly identifiable symbol to be PIX.
*** Coinbase is a respected digital currency wallet platform based in San Francisco.
LendUp May Have a Leg-up
November 1, 2017
AltFinanceDaily recently sat down with LendUp CEO Sasha Orloff and COO Vijesh Iyer at an auspicious time. The company, an online lender that provides consumers with alternatives to payday loans and credit cards, is uniquely positioned in the wake of the CFPB’s 1600+ page Payday loan rule that was issued in early October.
And that’s not exactly an accident. Orloff says the company was founded (5 years ago) with the expectation that the CFPB would issue an eventual rule. “At the time, we had no idea what it was going to be but I could imagine that if they were going to write a federal rule that it would completely change the industry,” he said.
Orloff’s journey, as he tells it, began by reading Banker to the Poor, which inspired him to move to rural Honduras nearly 15 years ago to help the Grameen Foundation, a non-profit that focuses on providing loans and education to the poorest of communities. He was only 21 at the time. After a three-year tour, he moved on to roles at The World Bank, Citi, and finally starting in 2012, LendUp.
When LendUp was being envisioned, he explains, the smart phone was making it possible for consumers to access financial services outside of what was in their neighborhood and bank technology was the last thing that was going to become modernized.
“The CFPB rule was going to make it harder for banks to work with underserved consumers,” he says. “So we said let’s start a financial services company that focuses exclusively on the people that have the least amount of options and let’s start reinventing [these] products one at a time.”
And with that, they consulted academics, educators, government officials, and people from the industry. “How do you give somebody credit in an emergency fashion that can change it from a trap into an opportunity? And so we did that and it turned out the rule looked really similar to what we did,” he explains.
“I think there’s a lot of things they got right [about the CFPB rule],” he says in regards to how to eliminate debt traps. LendUp, for example, doesn’t allow customers to roll over their loans, they have to pay off their loans in full before they can consider borrowing again. Rollovers were a big sticking point for the CFPB when they published their rule last month. Their official announcement on the matter had stated that “many borrowers end up repeatedly rolling over or refinancing their [payday] loans, each time racking up expensive new charges. More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter. And nearly one-in-four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit.”
One piece of the payday alternative puzzle is in the underwriting. COO Vijesh Iyer, an alumni of both Capital One and PayPal, says “we basically use a variety of data sources, both the traditional bureaus and as what we call the non-traditional bureaus.” For the credit card product, LendUp will pull credit from a traditional bureau. “For the small dollar loan product we use non-traditional CRAs,” he says. Their team of data scientists tries to extract the most significant signals out of all of the data sources they have at their disposal. “That’s really valuable when you’re dealing with a subprime customer where the reason why someone could be underserved or subprime is very different. We all have different life stories and we’re really trying to figure out the differences which we get from multiple signals, multiple data sources.”
“The easiest person to convince that we’re a better product is an existing payday user,” Orloff says. “because it’s slightly cheaper at the beginning, it gets much cheaper over time. It has a lot more flexibility. It gives people for the first time the opportunity to report to the credit bureaus. It teaches you better financial behavior. You can do it on a mobile phone. You can get alerts and reminders…”
Meanwhile, payday borrowers always have to pay the same amount, Orloff contends. The loan terms don’t improve, he says. One notable advantage a LendUp borrower might experience is that when they first run into trouble with making a LendUp loan payment, they can get a few extra days leeway at no extra charge, which usually comes as a welcome surprise.
Granted, a LendUp loan’s APR can still look pretty steep. A calculator on their website offers an example of one that is 458.86% APR. Orloff says a part of understanding that is understanding what a consumer’s options are and what the costs to process the applications are. A 220% APR might only equate to something like $30 total in fees depending on what the loan terms are, he explains. Their borrowers don’t get paid in APR though he says, they get paid in dollars. “They care about what’s the total cost of credit in terms of dollars.”
“Our customers pay more than that on overdraft fees,” Iyer adds. “Every time they have a slight overdraft, even if it’s for a dollar, even if it’s 10 cents. Even if it’s two dollars. No one ever tries to evaluate what the APR for that is. But that is their fee and this is also a fee.”
But more than anything else, it’s about whether the borrower’s and lender’s interests are aligned, Iyers contends. Right now, LendUp believes they’re doing the right thing at the right time.
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This interview was conducted at Money2020 in Las Vegas
The Voice of Main Street – Small Businesses Share Their Experience With Non-bank Finance
October 18, 2017
If she hadn’t scored the $250,000 loan through Breakout Capital in 2015, Jackie Luo says, the commercial-software firm she heads in Baltimore could not have made the “strategic hires” and purchased the new server to support additional customers and maintain the company’s 30% growth rate.
“Without that infusion of capital” from the McLean (Va.)-based lender, says Luo, chief executive at E-ISG Asset Intelligence, the software solutions provider would have been hard-pressed to deploy the “bandwidth and capacity” necessary to meet burgeoning demand.
And demand there is. Luo says billing for her company’s services helping more than 100 businesses and government agencies improve operational efficiency by keeping tabs on multiple assets — human, financial and equipment — topped $1.5 million last year, up from $1 million in 2015. This year, moreover, E-ISG is on track to collect nearly $2 million.
Meantime, she says, the $250,000, 10-year note at 6% interest she obtained with the help of Breakout was both a good deal and convenient: she reports securing the financing in three weeks, compared with the six months that a commercial bank would likely have taken. In addition, she’s been able to forge a better relationship with Breakout than with a faceless financial institution.
“We are a small business,” she says, “and we’d be just one in a million at a big bank like Wells Fargo. They wouldn’t give us much attention.” With Breakout, Luo adds: “I have the freedom to make decisions about infrastructure investments without worrying about the short-term. And I don’t have to deal with people second-guessing me.”
Had she not gotten the financing, moreover, “I would not be able to pay myself,” she says. “I’d have to use my salary as working capital.”
Luo is not alone. Her company’s story of finding much-needed capital from a nonbank financial company is increasingly common. It has always been challenging for small businesses to obtain credit from a big bank — roughly a financial institution larger than $10 billion in assets. But the small and community banks that have been the lifeblood for small businesses have also been winding down their small-business lending as well, according to a March, 2016, working paper published by the Federal Reserve Bank of Philadelphia.
“As recently as 1997, small banks, with less than $10 billion in assets, accounted for 77% of the small business lending market share issued by commercial banks,” co-authors Julapa Jagtiani and Catharine Lemieux write in “Small Business Lending: Challenges and Opportunities for Community Banks.” However, the market share dropped to 43% in 2015 for small business loans with origination amounts less than $1 million held by depository institutions.
“The decline is even more severe for small business loans of less than $100,000,” they add, “where the market share for small banks under $10 billion declined from 82% in 1997 to only 29% in 2015.”
The Philadelphia Fed study notes that alternative nonbank lenders are filling a widening gap. “By using technology and unconventional underwriting techniques, many alternative lenders are competing for borrowers with offers of faster processing times, automatic applications, minimal demands for financial documents, and funding as soon as the same day.” And the Fed study finds that it’s likely that nonbank lenders, which are growing rapidly, are having a positive effect by “increasing the availability of credit, particularly to newer businesses that do not have the credit history required by traditional lenders.”
Meantime, the Small Business Administration reports that small businesses remain essential to the health of the U.S. economy. Businesses with fewer than 500 employees account for 55% of overall employment in the U.S., according to the agency, and are responsible for creating two out of every three net new jobs. Which means that alternative funding sources — which do not, it is worth noting, depend on depositors’ money, as banks do — are playing an increasingly important and largely unrecognized role in the country’s economic fortunes, notes Cornelius Hurley, a law professor at Boston University and executive director of the Online Lending Policy Institute. “They’re still a small percentage of the overall lending picture,” he says of nonbank financial companies, “but they’re an emerging force and a lot of small businesspeople certainly depend on them. If they disappeared tomorrow,” he adds, “a lot of businesses would be wiped out too.”
To find out what is happening in the real world, AltFinanceDaily interviewed small business owners around the country: among others, a Houston sports medicine provider, a Connecticut restaurateur, a Midwestern truck hauler, and a Maryland hardware-store owner. Some recounted being shunned by banks because of poor credit while others registered unhappiness with traditional financial institutions as inconvenient and impersonal. While some who turned to alternative lenders admitted they would have preferred not to be paying dearly for borrowing or for cash advances, most said the tradeoff was worth it.
The existence of alternative lenders has made it possible for these businesspeople to meet payrolls, pay contractors and suppliers even when business was slow or billings stalled. Customers with alternative funders – in addition to Breakout’s customers, AltFinanceDaily spoke to clients of Pearl Capital Business Funding and Merchants Advance Network– also reported that they were able to purchase or replace equipment and maintain inventory, hire additional employees and accept new customers, pay for upkeep and upgrades of their business’s physical plant, and make other expenditures necessary to keep operations up-and-running.
Jason, for example, who heads a family business in Louisiana manufacturing and selling pesticides (and who asked to be identified only by his first name), reports that his suppliers began demanding that he pay in advance for chemical feedstock after he took a “financial hit following a nasty divorce.”
The roughly $1 million (annual sales) business — which was started by his parents back in 1960 — furnishes chemicals mainly to cotton farmers and homeowners in Louisiana and Texas, most of whom purchase the company’s products through feed and hardware stores. Jason says he spends a substantial amount of time on the road handling sales and distribution.
His suppliers not only require him to pay for the chemicals upfront but, following his divorce, they now insist upon larger purchases as well. Following the departure of a previous lender, he says, Breakout stepped in with an $80,000, 12-month loan in March, 2016, which he was able to repay within six months. This was followed by a $60,000 borrowing in March, 2017, which he again paid down early – in 90 days, Jason says – and the account manager at Breakout “went to bat for me and gave me an additional discount for early payment.”
Had Breakout not provided external funding, Jason says, he would have been “wiped out.” He adds with feeling: “It would have meant the end of me.” And sinking the fortunes of the company would also have spelled job losses for five employees, including both his son, who works part-time, and his sister, the business’s co-manager. “Now I’m out of the hole,” he says.
In Houston, Anna, co-owner of a physical therapy and sports medicine concern, was interviewed in August just before Hurricane Harvey loomed on the horizon. “We’d been around for four years and growing rapidly,” she says, asking to be identified only by her first name, and “we couldn’t keep up with the growth.”
Anna recalls that a few years ago (she is vague about the exact dates) the company needed $50,000 to $60,000 to add equipment and staff to meet the growing demand. Because of some “ups and downs” in her business and credit history, however, a bank loan was out of the question. “My credit wasn’t the best,” Anna says, “and we had not been in business the five-to-seven years that most banks want.” She began casting about for financing and quickly saw that factoring would not be a suitable choice for a business like hers, which depends heavily on third-party payments from health insurance providers. “Companies using factoring are taking money based on credit card payments,” she says, “and we’re not a restaurant or a bar. So we can’t pay a percentage of every transaction.” Typically, she notes, getting paid by an insurance company involves a “90-day turnaround.”
Anna went online, did some research, and talked to three or four nonbank lenders searching for the “right kind of company.” That led her to Breakout. “What I really liked about them is that they did a lot of due diligence on our field,” she says. “They did their homework, asking us: ‘What are your collections and payroll? How much outstanding debt do you have?’ They also asked to see our actual bank statements.”
Despite the high level of due diligence that Breakout performed, Anna says, it only took “maybe three or four days” for the loan to be approved and for the money to land in her bank account. Before long, she was off to the races. With the added capital, she hired three more employees – bringing the employee headcount to 18 — purchased more gym equipment, made payroll, and paid off miscellaneous expenses.
The added capacity and fortified staff, meanwhile, enabled the company to “almost triple its volume,” the entrepreneur says. And not only did the financing “put me in a good financial place,” Anna adds, but after repayment, Breakout made it possible for her to effect a merger with a competitor by approving a second loan for about $30,000. “The best thing about Breakout,” she says, “has been the communication. One time I did need to make a payment two or three days late. But I just called (the account manager). I was very surprised because these kinds of companies are seen as a last resort. But it was like they were investing in us.”
John Speelman, who owns Poolesville Hardware in Poolesville, Md., can boast a raft of five-star Yelp reviews online. “Extremely helpful and friendly service, surprisingly good selection (and) the complete opposite of a big box hardware chain,” raves one customer. “It is so rare to find a well-stocked store that has helpful personnel—makes this store a real gem!” says another fan.
For his part, Speelman attributes much of his hardware store’s popularity to the financing arrangement that he’s been able to work out over the past eight years with Merchants Advance Network, a Fort Lauderdale (Fla.)-based alternative funder. “It takes money to make money,” is one of his pet aphorisms.
Located roughly 35 miles west of the White House, the hardware store boasts a clientele who tend to arrive in BMW’s rather than the pickup trucks that predominated a decade or so ago in this exurban community of some 5,000 denizens. Whatever their class background, though, they’re looking for items that are not a good match for an online purchase. “People don’t buy a toilet plunger, a can of paint or picture-hanging stuff online,” Speelman says. “Because they want to do that today,” he says, “they won’t order with Amazon.”
“One industry that has not been impacted” by online merchandisers, he adds, “is the garden center. They’ll buy a garden hose, weed killer and seeding,” he explains of his regular customers. “And light bulbs” while they’re there, he adds. “We’re like the 7-Eleven — a convenience store.”
To guarantee that convenience, Speelman pays cash-in-advance for most of his inventory, and banks have not been helpful. He contrasts the relationship he has with Michael Scalise, the chief executive at Merchants Advance, with loan officers at commercial banks. “It’s hard to get a loan for anything in retail,” he says. Never mind that he maintains “a high credit rating and I never bounce a check,” he went on. “There are no more local banks. At M&T Bank, all the managers I knew are gone and there’s always a new teller. The banking industry is a revolving door.” So he opts for capital from Merchants Advance “when I need 30-40-50 grand in a day, I use Mike’s money” even though the cost can be as steep as 25%, he says. If he doesn’t have something in stock – specialty items like ammo boxes, a Sugarplum tent, as many as 32 packs of size D batteries, metric measuring tapes – he can put in a special order with suppliers. But he prides himself on the full panoply of wares on his shelves. “You can’t sell from an empty cart,” is another of his favorite sayings.
Lori Hitchcock, who also draws capital from Merchants Advance, is manifestly displeased with the banking industry. She’s an owner with her husband of Hitchcock Trucking, the couple’s 60-year-old family business, which is located on a ten-acre tract in Webberville, Mich., situated between Detroit and Lansing, the state capital.
Of her experience with banks, Hitchcock says: “At the time we went with (Merchants Advance), banks weren’t lending. And they’re still not lending. We’re considered high-maintenance and high-risk. Banks don’t want a bunch of trucks” should they foreclose on a loan, she observes. “If you’re a farmer, they can take all your land. Great! In this crazy world you live in, it’s hard to get the banks interested.”
The Hitchcock family’s fleet of ten Peterbilt semis hitch up to more than 20 trailers and truck bodies – flatbeds, dump trucks, vans, and refrigerated trucks or “reefers” – and haul grain, sweet corn, onions, celery, fertilizer, and soft drinks across the Midwest. Most recently, she says, the family business took out $80,000 from Merchants Advance to expand its fleet and buy another reefer trailer and a backhoe. “Out here in the country, you always need a backhoe,” she says.
To satisfy her lender, the company makes daily ACH payments. “I’m not going to lie and say that things aren’t tight,” she says. “It is a burden. You just have to have constant cash-flow – which we do have. And it’s important to have good relationships…I can usually tell three weeks in advance if (making payments) is going to be challenging. So it all comes down to being loyal to people.”
Whatever the struggle to keep up with debt payments, it beats using her own money. “My husband and I are raising a family,” Hitchcock says, “and it’s nice having the cash so you’re not putting your personal earnings into the company.”
In Manchester, Conn., a stone’s throw east of Hartford, Corey Wry says that he wouldn’t be able to operate his two, highly rated restaurants just off Interstate 84 – Corey’s Catsup & Mustard and Pastrami on Wry – if he didn’t have funding from Pearl Capital, a New York (N.Y.)-based alternative funding company. A graduate of Johnson & Wales University in Providence, a restaurant-and hotel school, Wry describes himself as “a culinary guy” whose first love is serving food that’s both innovatively prepared and delicious. He candidly admits that his credit hit “rock bottom” after a confluence of untoward events.
Last year, a third restaurant in town, Chops & Catch, that he and some partners had “bootstrapped” had to shut down after six years of operation. Despite generally favorable reviews for such creative fare as the “lobsterburger,” the surf-and-turf themed restaurant was a money-loser. He was also struggling to pay off credit cards. And he’d been late more than once on car payments.
At the same time, Wry was in the process of moving Pastrami & Wry — a deli whose moniker is wordplay on his last name – to a new location. Both the general contractor and electrician were “over-budget” on that project, he says. Meanwhile, Catsup and Mustard, a hamburger spot, needed to be spruced up. Says he: “It was getting busier and the original seats were worn. I had a hole in a booth big enough to swallow someone.”
He approached a few banks for a loan and “it did not seem like it was going to happen,” he says. “Then I got a cold call from one of these financiers. Some of them had super-high rates. When you have bad credit but need to make capital improvements you do what you have to do.”
He’s accessed more than $100,000 from several alternative funding sources, including Pearl – from which he reports getting merchant cash advances for $30,000. But hard as it is to meet the obligations, which typically require a daily ACH payment, the financing has made renovating the burger place possible. Moreover, he’d still be on the hook with plumbers and other contractors – all of whom are local tradesmen and would likely be paying him personal visits until they were repaid — for the relocation of Pastrami & Wry.
“Business is good,” says Wry, who at 40 is single, often works 15-hour days, and says that he doesn’t have time for a girlfriend, much less a wife and family. “I’ve still got $3,200 on the books with the electrician,” he adds, “which means that I won’t be able to purchase a deli slicer. I have to plan these things out…”
James McGehee, a partner at the boutique accounting and tax-preparation firm McGehee, Davis & Associates, which is located in the Denver suburb of White Ridge, reports that the firm took a merchant cash advance from Pearl Capital, among other financiers, to bridge the gap between tax season and the rest of the year when billings invariably diminish. “Our overhead is pretty high,” he explains. “We’ve added two employees. We’ve been expanding on what we were doing, adding tax and accounting clients.”
A very conservative, sober-sounding man, McGehee explained that his credit was nonetheless “trashed” after he suffered from health problems five years ago. “Major stuff,” he says, “it was open-heart surgery.” The medical ordeal meant that he could not work for a time and had trouble paying his bills. “Some family members helped me through the mortgage and utilities payments and I ended up in arrears and in credit card debt,” he says.
All of which made an alternative source of financing his firm’s only option. “I’m not sure how we heard about Pearl,” he says. “I think they just happened to call. We took out [$11,000]. It was not a huge amount. We also borrowed $9,000 from another entity. We paid it all back during tax season. The terms were pretty steep,” McGehee adds.
“But when you need the money for cash-flow,” he explains, “you just absorb it. You grin and bear it. When you need the money, you need the money.”
Kabbage’s Petralia Talks Big Tech, Fintech and Lending
October 2, 2017
Kabbage co-founder and head of operations Kathryn Petralia was in New York last week for The Economist’s Finance Disrupted 2017 conference where she was a panelist on in an Oxford-style debate about whether tech giants Alibaba, Amazon, Apple, Facebook and Google pose a greater challenge to traditional banks than the fintech startup community. Her position is that no, they do not, and there appears to be room for both.
“Fintech can be anywhere. Alternative lenders, whatever you want to call them, I think they’re disrupting the space but not by trying to put people out of business. In our case we make loans to small businesses, but these are folks that are having a hard time borrowing from banks. So, we’re not taking business from banks. We’re drawing the circle a little bit bigger around access to capital.”
It’s only been a few weeks since the blockbuster announcement that SoftBank is investing $250 million into Kabbage, which thrust the small business lender into the spotlight for a few reasons, not the least of which was the more than $1 billion valuation that has been speculated for Kabbage.
This valuation, of course, is in stark contrast to that of OnDeck, which also lends to small businesses. As Petralia points out, however, OnDeck is a very different company than Kabbage and in fact not a very good comparable at all. For instance, Kabbage has never turned to brokers to find customers, and their application process has been fully automated since day one. She highlighted other differences too.
“All of our bank partnerships are technology integrations where our technology sits in their systems. They use our technology to deliver the customer experience. And I think what SoftBank saw in us was that potential. Whatever the valuation was I can assure you it was a result of a lot of due diligence on the part of SoftBank,” she said.
SoftBank may now be sitting on Kabbage’s technology but they’re also sitting on a vast treasure trove of customer data that Kabbage may gain access to in the future.
“Certainly, that’s something we’re interested in and that’s something they talked with us about. They have a lot of access to a lot of businesses in global markets certainly in Asia including Japan and India, so I think we’ll see more relationships forming from that alliance over time,” said Petralia.
And the SoftBank deal seems to support Kabbage’s ambitious expansion plans. “We always thought we would be in almost all of the global markets five years from now. SoftBank is a continuation of our strategy for growth.”
As Kabbage pursues its aggressive growth strategy, it’s hard to ignore some of the headwinds other industry players have experienced.
“I don’t think anyone’s immune to macroeconomic changes and changes to access to the debt markets. Our focus is on technology automation from the beginning, and I think that gives us an advantage in the way we manage our customer base. Debt investors can see it, the ratings agencies can see it. One problem with a lot of the lenders is that they’re not able to access the debt markets because there’s not enough history or their portfolios haven’t performed the way they need,” said Petralia, adding that Kabbage has had the benefit of time on its side.
Kabbage’s vision is to “dynamically deliver products that small businesses need to run their businesses and to stay connected to the data that drives the underwriting process for lines of credit,” Petralia says, adding: “This could be growth capital and it could be other products and services that work around small businesses, whether it’s data processing or insurance or payments, any of those things. We want to deliver big business tools to the little guys.”
In terms of customer interest rates, everybody would rather have a lower rate Petralia says, but customers in their ROI equation know they will be able to generate more revenue to offset that. And Kabbage doesn’t require small businesses put up any collateral, which is what a bank would require them to do.
Kabbage’s Culture
Meanwhile in addition to industry headwinds some funders have experienced company-specific issues that had more to do with internal culture than any macroeconomic influence.
“From our perspective, culture is incredibly important. We were No. 16 for Glassdoor reviews for mid-sized businesses and that’s because employees really enjoy working here. If I had to characterize our culture with one term I’d say connected – our employees are connected to one another and to our customers. There is transparency and trust and a culture of caring deeply about one another. That’s really important to us,” said Petralia.
As for future growth avenues for Kabbage, there’s a lot of stuff in the works none of which she was at liberty to discuss.
Tech Banks: Will Fintech Dethrone Traditional Banking?
August 20, 2017On Halloween, 2014, a largely unknown, Boston-based financial institution, First Trade Union Bank, embraced high-technology, went paperless, and officially adopted a new name: Radius Bank.
In reinventing itself, Radius did more than dump its dowdy moniker. It shuttered five of its six branches, re-staffed its operations with a tech-savvy team, instituted “anytime/anywhere” banking services, and offered customers free access to cash via a nationwide ATM network. And it teamed up with a fistful of financial technology companies to offer an impressive array of online lending and investment products.
Today, the bank’s management boasts that, using their personal mobile phones, some 2,700 people per week are opening up checking accounts, funneling $3 million in consumer deposits into the bank’s virtual vault. That’s a stark contrast from a decade ago when the financial institution was being rocked by the financial crisis and “we couldn’t get anybody to walk into our branches,” says Radius’s chief executive, Mike Butler.
“We tried to leave that old bank behind,” he says. “We’re a virtual retail bank now, an efficiently run organization that offers high levels of customer service and Amazon-like solutions.”
Radius Bank is not alone. At a moment when there is much discussion — and hand-wringing — over the future of seemingly outmoded, highly regulated community banks, a coterie of small but nimble banks is exploiting technology and punching above its weight. Almost overnight, this cohort is combining the skill and hard-won experience of veteran bankers with the lightning-fast, extraordinary power afforded by the Internet and technological advances. As a result, these small and modest-sized institutions are redefining how banking is done.
In addition to Radius Bank, independent banks winning recognition for their bold, innovative – and profitable — exploitation of technology, include: Live Oak Bank in Wilmington, N.C., which adroitly parlays technology to become the No. 2 lender to business and agricultural borrowers backed by the U.S. Small Business Administration; Darien Rowayton Bank in Darien, Conn., which is making a name for itself with coast-to-coast, online refinancing of student loans; and Cross River Bank in Fort Lee, N.J., which does back-end work for a passel of fintech marketplace lenders.
Interestingly, there’s not much overlap. Each of the banks goes its own way. But what all the banks have in common is that each has struck out on its own, each hitting upon a technological formula for success, each experiencing superior growth.
“These are companies that understand the value of a bank charter,” says Charles Wendel, president of Financial Institutions Consulting in Miami. “They have to work under the watchful eyes of state and federal regulators. But their cost of funds is low and they can offer more attractive rates. Because they’re less likely (than nonbank fintechs) to disappear, run out of money, or get sold,” the bank expert adds, “they also have the image of stability with customers.”
These modest-sized banks are emerging as not only pacesetters for the banking industry. Along with making common cause with the fintechs — which had promised to disrupt the banking industry – they’re even beating the fintechs at their own game.
“Classically, community banks have looked to technology partners to provide technological innovation,” says Cary Whaley, first vice-president for payment and technology policy at the Independent Community Bankers of America, a Washington, D.C.-based trade group representing a broad swath of the country’s 5,800 Main Street banks. “They still do. You’re seeing more partnerships. But now you also see community banks building innovative products and services outside of that relationship. You see forward-thinking banks developing their own technology to support big ideas like marketplace lending, distributed ledger technology, and emerging payments technology.”
With its extraordinary skill at exploiting technology, Live Oak Bank – which trades on the Nasdaq and is the only public company encountered in the cohort — has become a Wall Street darling. “While several banks have adopted an online-only model, and nearly all banks are shifting more and more delivery through online channels, Live Oak was built from the ground up as a technology-based bank,” Aaron Deer, a San Francisco-based research analyst at Sandler O’Neill Partners, wrote in a recent investment note.
Driving the success of Live Oak, which operates out of a single branch in the North Carolina seacoast town and has only been in business for a decade, is the explosive growth in its SBA lending, the bank’s “core strategy,” Deer notes. Last year, Live Oak lent out $709.5 million in SBA loans in increments of up to $5 million, the federal agency reports, making it the country’s No. 2 SBA lender. It trailed only megabank Wells Fargo Bank, the third largest bank in the U.S. with $1.5 trillion in assets, which made $838.93 million in SBA-backed loans last year.
As its SBA lending has taken off, Live Oak, which qualifies as a “preferred lender” with the federal agency, boasts assets that have nearly tripled to $1.4 billion in 2016, up from $567 million two years earlier. Those are flabbergastingly fantastic growth numbers. But just as incongruously — by nipping at the heels of Wells Fargo — Live Oak has been challenging a bank more than a thousand times its asset size for dominance in SBA lending.
And, interestingly, the bank is able to book those outsized amounts of SBA loans while lending to only 15 industries out of 1,100 approved by the government agency, slightly more than 1% of the universe. That’s up from 13 industries in 2015, and Live Oak is adding two to four additional industries yearly for its SBA loan portfolio, Deer reports. Included among the industries to which the bank made an average SBA loan of $1.29 million last year: Agriculture and poultry, family entertainment, funeral services, medical and dental, self-storage, veterinary, and wine and craft-beverage.
The bank has a team of financing specialists dedicated to each of the designated industries. Among Live Oak’s current SBA borrowers are Martin Self Storage in Summerville, S.C.; Utah Turkey Farms in Circleville, Utah; Pinballz Arcade, Austin, Tex.; and Council Brewery Company in San Diego. Steve Smits, chief credit officer at the bank, told NerdWallet: “When you specialize in something, you become efficient. Because we do it every day and we have professionals and specialists, we tend to be more responsive and quicker.”
The heady combination of technological sophistication and banking expertise has allowed the lender to slash its loan-origination time to 45 days, about half the three-month industry average for SBA loans. To speed up loan sourcing and generation, the bank developed its own in-house technology, which led to the formation of the Wilmington-based technology company nCino, which was spun off to shareholders in 2014.
Live Oak did not return calls to discuss its lending strategies, but in SEC filings bank management declared: “The technology-based platform that is pivotal to our success is dependent on the use of the nCino bank operating system” which relies on Force.com’s cloud-computing infrastructure platform, a product of Salesforce.com.
Natalia Moose, a public relations manager at nCino told AltFinanceDaily in an e-mail interview: “We work with Live Oak Bank, in addition to more than 150 other financial institutions in multiple countries with assets ranging from $200 million to $2 trillion, including nine of the top 30 U.S. banks. nCino was started by bankers at Live Oak Bank who found the logistics of shuffling paperwork among loan stakeholders to be unwieldy, inefficient and time-consuming.
“nCino’s bank operating system,” Moose adds, “leverages the power and security of the Salesforce platform to deliver an end-to-end banking solution. The bank operating system empowers bank employees and leaders with true insight into the bank, combining CRM (customer relationship management), deposit account opening, loan origination, workflow, enterprise content management, digital engagement portal, and instant, real-time reporting on a single secure, cloud-based platform.”
Live Oak, meanwhile, is not resting on its technological laurels. According to Deer’s report, the bank’s parent company, Live Oak Bancshares, has formed a subsidiary to inject venture capital into fintech companies. It’s already taken a small equity stake in Payrails and Finxact, “the latter of which is developing a completely new core processor to compete against the old legacy systems used by most banks,” the Sandler O’Neill analyst writes. “Quite simply,” he asserts elsewhere in his report, “the company is far beyond any other bank we cover in its technical capabilities and the growth outlook remains outstanding.”
Five hundred and thirty-three miles due north along the Atlantic coast in southeastern Connecticut, Darien Rowayton Bank is also experiencing tremendous success as a lender using a home-grown technology platform. State-chartered by the Connecticut Department of Banking and regulated as well by the Federal Deposit Insurance Corp., the $600 million-asset bank is winning attention in banking circles for its online student-loan refinancing.
A few years ago, DRB, as it is known, was looking to go beyond mortgage and commercial lending — “the bread and butter for most community banks,” bank president Robert Kettenmann explained to AltFinanceDaily in a telephone interview – and was somewhat at a loss. The bank considered but then rejected the credit card business. Finally, DRB struck paydirt refinancing student loans. “Our chairman really seized on the opportunity,” Kettenmann says, adding: “It’s a $35 billion market.”
Thanks to the National Bank Act, it’s able to operate in all 50 states. As a regulated commercial bank with a strong deposit base, DRB can also offer low rates well below any state’s usury prohibitions.
What is most striking about DRB’s program is its nationwide targeting of upwardly mobile, affluent young professionals. According to a PowerPoint presentation obtained by AltFinanceDaily, all of the bank’s super-prime borrowers, who are mainly in the 28-34 age bracket, have a college degree and a whopping 93% have graduate degrees. Average income is $194,000.
Forty-eight percent of those refinancing student loans with DRB are doctors or dentists and another 22 percent are pharmacists, nurses or medical employees; only about 20% are paying off their law degrees or MBAs. The heavy concentration of refinancing in the medical field reduces economic risk in an economic downturn. Forty-three percent of the borrowers are home-owners, the rest are renters – and prime candidates for an online, DRB-financed mortgage.
(Once known as “yuppies” today this cohort is “known by the acronym ‘HENRY,’” remarks Cornelius Hurley, a Boston University banking professor and executive director of the Online Lending Institute, explaining the initials stand for “High Earners Not Rich Yet.”)
The Connecticut bank partnered with a third-party on-line vendor, Campus Door, when it commenced making student loans in 2013. In the fall of 2016, however, DRB built out its own, proprietary loan-origination system, Kettenmann reports, emphasizing that CampusDoor had been an excellent partner but that the bank wanted to exercise end-to-end control over the process. DRB employs a seven-pronged, “omni-channel” marketing approach that includes interactive marketing, affinity partnerships, digital/online advertising, direct mail, mass-media advertising, and public relations/brand awareness campaigns.
DRB’s online enrollment provides “pre-approved rates” in less than two minutes with final approval on rates in 24-48 hours. Refinancers can complete the online application at their own speed. Through May, 2017, DRB had made $2.48 billion in refinancing to 20,000 student-loan borrowers, with only ten defaults, five of which were attributed to deaths or “terminal illness.”
On Yelp! the bank has received a batch of reviews ranging from very favorable, five-star (“I had a truly wonderful experience”) to one-star (“awful” and “truly a nightmare”). Many fault the application process as laborious, describing it as “time-consuming.” But for those who have succeeded, like the reviewer who counseled “patience,” the result can be “the lowest rate with DRB…my loan payments went down $100 a month.”
Just about an hour’s drive south and taking its name from its proximity to New York city just over the George Washington Bridge is New Jersey-based, state-chartered Cross River Bank, which has a reputation as a partner-in-arms to fintech companies. “We’re both users and producers of technology,” declares Gilles Gade, the bank’s chief executive.
The bank provides “back-end” and infrastructure support to 17 marketplace lenders that offer a suite of lending products including personal loans, mortgages and home-equity loans. Following loan origination by a fintech company – Marlette Funding, Affirm, Upstart, loanDepot, SoFi, and Quicken Loan, among other partners — Cross River does the actual underwriting. Last year, Gade reports, the bank underwrote 1.9 million loans valued at $4-4.5 billion, about 10% of which Cross River kept on its books. The bulk of the loans are sold “back to the marketplace lenders” or to a third party. “We’ve created a high-velocity automated system,” he says.
Gade is manifestly unapologetic about the bank’s role in assisting fintechs in their competition with the banking establishment. “We’re a banking infrastructure services provider for those who want to disrupt the banking system,” he says. “Consumers expect a lot better than they’ve been getting from traditional banking services.”
Back in Boston, Radius Bank’s chief executive reports that forging partnerships with fintechs to provide the full panoply of online banking services was no easy proposition. In its mating ritual, Radius not only had to determine that a fintech company’s offerings were sound and that it had the right characteristics – most especially “a long-term, sustainable business model” – but that its corporate culture meshed comfortably with Radius’s.
After meeting with as many as 500 fintechs and after a fair amount of trial and error, Radius formed partnerships with LevelUp, which enables customers to make mobile payments; with online lender Prosper, for refinancing consumer debt and “credit rehabilitation”; with SmarterBucks, for refinancing student loans; and with online investment firm Aspiration Partners – which allows investors to name their own fees and markets itself to a predominately middle-class audience as the firm “with a conscience.”
Radius employs advertising on social media websites and employs “psychographics” to appeal to “anyone who is zealous about using technology, not necessarily millennials,” Butler says. The data show that 65% of adults in the U.S. would prefer to use a traditional bank and have face-to-face interactions with a teller, he notes, leaving the remaining 35% as Radius’s target audience.
Christopher Tremont, executive vice-president for virtual banking, told AltFinanceDaily that a typical Radius customer is 42 years old, lives in Boston, New York, Chicago “or one of the bigger cities in the West,” is a “technophile,” earns $75,000 a year, and has $100,000 in personal assets.
Radius’s performance since it went paperless has been stellar. The bank has seen a rapid rise in deposits, spurting to $782 million through the first quarter of 2017, up from $565 million at year-end 2014. With little fee income but ample deposits and low-cost funds, Radius realizes the bulk of its revenues – and profits — on the interest-rate spread generated from its loan portfolio.
The bank booked $43.5 million in SBA loans last year, ranking it in the top 50 banks on the SBA’s league tables, while carrying another $105 million in its commercial leasing business at the end of the first quarter this year. Loan generation is driving asset growth, which are currently at $973 billion, up more a third from $726 million in 2014, and Butler expects the bank’s assets to top $1 billion sometime this year.
“Community banks love that part of the business—lending money,” Butler says.
