By Allan Maurer
Kabbage, (http://www.kabbage.com/) which just planted $6.65 million led by BlueRun Ventures in the bank, is a company with one of those innovative ideas that could not have happened at a better time. The company makes working capital advances via PayPal to qualified online sellers.
Marc Gorlin, chairman of Kabbage, at the 2010 Internet Summit in Raleigh, NC
“There is no faster way to raise working capital on the planet,” says Chairman Marc Gorlin. Out of Beta for a short time, Kabbage has doubled the number of clients it had previously.
It has been making advances of from $2,000 to $12,000 and is going to move up to advances of $25,000 to $40,000 over time, says Gorlin. “If they can get access to capital, they can truly grow their business.”
The alternative method of raising capital offers online sellers another option in one of the worst climates for obtaining small business credit from banks in history.
Kabbage co-founder and COO Kathryn Petralia on the motorized beer cooler the company won at a PayPal X developer conference
This Internet thing is just a fad
“Take a company like Zappos,” says Gorlin. “They were doing $50 million in revenue before they got their first credit line from a bank. Many local companies doing $5 million or $6 million can’t get credit. A company in Minnesota referred to us was selling hardware and had a run rate of $4 million a year from online sales. They went to a bank for money to expand. The bank told them this whole Internet thing is just a fad – and that was this year.”
While traditional bankers want to walk wooden floors and see actual customers, Gorlin points out that “There is actually a ton more data online.”
Using that data, Kabbage qualifies sellers in a matter of minutes from about 200 data points in PayPal and eBay – how long a store has been online, it’s seller rating (which indicates how well they treat their customers), PayPal charge backs, volume of sales and much more. Kabbage has made advances to companies selling everything from American Indian jewelry to model trains, plus size men’s clothing, odd sized men’s shoes, china, and collectibles. “It’s a diverse list,” says Gorlin.
The companies agree to paying back one-sixth of the advance each month via PayPal and can pre-pay with no penalty. Kabbage makes from 6 percent to 16 percent of the advanced amount in fees depending on the firm’s credit history and volume. Down the road, Gorlin sees the possibility of giving online sellers a “Kabbage score” based on its data and increasingly sophisticated analytics. It can, for instance, tell over time which data points may be most predictive of small business success online.
Robert Frohwein, CEO of Kabbage, has been CEO of LAVA Group Inc., an intellectual property investment bank, a founder and the managing partner of Sentry Law Group, and founder of MediaWheel
Hold it while we check your Kabbage score
Banks may eventually use the Kabbage score to open up their own loan coffers, Gorlin suggests. “We could be the means by which banks get more money to small businesses by automating the process for them,” Gorlin notes.
Data analysis Kabbage has done for its own customers shows that “Margins for online businesses are stout. A lot of them won’t sell things for less than a 100 percent margin, they are not paying rent on a store, they don’t have shelf space to fill or need people to talk to customers. They do have different fees on PayPal and eBay, but by and large, the customers we see are running high margin businesses.”
Founded in late 2008 by Gorlin, CEO Rob Frohwein, and Kathryn Petralia, COO, the company attracted high profile investors who include David Bonderman, founder of TPG Capital, Warren Stephens, CEO of Stephens Inc., and the UPS Strategic Enterprise Fund, in addition to BlueRun. The company says the funding will let it expand its financing service beyond eBay merchants to marketplaces such as Amazon, Etsy, Overstock and so on.
Talking to Gorlin, you can tell he gets a kick out of helping small businesses while building his own. Kabbage itself still has a classic startup culture, says Gorlin, a serial entrepreneur who was a co-founder of Pretty Good Privacy (NYSE:MFE), Vertical One Corp. and the Lanta Technology Group.
Startup culture, he says, “Is something you can’t recreate in a big company. You work the number of hours you do to create something out of nothing and you have to burn off some steam.”
So, there are nerf guns. Oh yes, and there is the motorized beer cooler. Kabbage won it as the audience choice prize at a PayPal X developer conference in San Francisco. “I guess you could put something besides beer in it,” says Gorlin, “but I wouldn’t know why.”
On the heels of its funding, Kabbage has already selected larger new offices in Atlanta and will be hiring. It currently employs eight people and expects to hit 15 or so in the next 60 to 90 days. But if you’re going by, watch out for the nerf guns.
Reprinted from our sister publication, TechViewAtlanta.com