According to the US Small Business Administration veterans made up 9.1% of all small business owners in 2012. This represents 1.7 million small businesses, many of which have funding needs. This is the population that Mark L. Rockefeller and his team will be targeting with their new startup called StreetShares.
Rockefeller is a veteran himself, having served in Iraq, so he knows first hand the many challenges facing veterans upon their return to civilian life. After Iraq he did some volunteer work in Africa where he saw the difference that access to small business financing can make. He is also an attorney, a good background for anyone in this industry, having worked at a prominent international law firm.
Joining Rockefeller as co-founders in StreetShares are former Capital One executive Mickey Konson as Chief Risk Officer and experienced software engineer Ben Shiflet as Chief Technology Officer. Konson was the head of credit for Capital One’s national small business unit, where he spent a number of years, before becoming the Senior Credit Officer for their retail bank.
After closing $1.2 million in seed funding led by global Microfinance giant, Accion, that included veteran-focused and Harvard Business School angel investors, they launched StreetShares earlier this month.
Focused on Small Business Loans Less than $100,000
Like many others in the space StreetShares is focusing on a segment of the market ignored by banks – loans for less than $100,000. But in their initial launch phase they are targeting loans even less than that. The three loans available today for investors are all $25,000 or less.
Loan terms will be 1, 3, or 5-year and interest rates will be up to 29% with an expected average in the 15-16% range. Details of each borrower, including company name and location, will be provided to investors, as well as limited financials. Following a new release last week, future borrowers profiles will include more detailed financial information and pre-calculated key ratios. Each borrower gets to share their story and provide a pitch to investors on why they need the money.
A Unique Auction Model for Accredited Investors
This is what I find most interesting about StreetShares. They have adopted a unique auction model for investors where, similar to the old Prosper days, investors can name their interest rate. But this is not a dutch auction where every investor ends up earning the same rate – if the loan is fully funded then every investor will receive the interest rate they bid.
The minimum bid is just $25 and there is no whole loan program available, although Rockefeller indicates that one is coming. While they are open only to accredited investors today they are clearly targeting individual investors with such a low minimum investment per loan. Also interesting is that investors can choose to remain anonymous or not. And StreetShares co-invests in a portion of every loan and discloses their amount and interest rate of each investment.
At the time of this writing there are three loans available to investors on their platform and the investor bids have quite a large range. One three-year loan with a StreetShares co-investment rate of 20.5% has a range of actual bids from 19% to 26%. StreetShares also publishes an expected loss rate (ELR) with each loan and in the case of this particular loan the ELR is 7.4%.
Lower Borrower Acquisition Costs
StreetShares is not exclusively for veteran-owned businesses; they will take on any company that passes their underwriting criteria. But StreetShares believes in what Rockefeller called “affinity-based lending.” Veterans are their first affinity group and clearly their focus. They have negotiated multi-year exclusive affinity relationships with major veterans groups for a steady flow of veteran-owned business looking for funding. One of the benefits of this approach is that they will not be paying expensive loan broker fees.
They have been in business less than a month but already StreetShares has issued several loans and currently has nearly 300 small businesses that have started an application. Although, Rockefeller states, only a portion of them will pass StreetShares underwriting standards.
While they are entering a competitive space – there are certainly many online options for both borrowers and investors today – they have an advantage having such a strong affinity with veterans groups.
It will be interesting to see if their business takes off. Personally, I think they may find the auction model will turn off some investors used to fixed price investing. And with such low minimums it would be natural for them to tackle the non-accredited investor market at some point. There is certainly a willing investor population that would welcome an alternative to Lending Club and Prosper. And I am sure many veterans, both accredited and non-accredited would love to show their support for their fellow veterans looking for business financing.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.