Taking time out of her busy schedule, I was able to ask a few questions on the phone with Kathryn Petralia, the co-founder and President of Kabbage Inc. – a leading small business online lending platform.
If you don’t know Kathryn Petralia, you should. Here’s a crash course. She’s been hailed by Forbes as one of the most powerful women in the world, and TechCrunch recognized her for “crushing it” last year. Both sources refer to her success as a leader at Kabbage, Inc. which has financed over $4 billion to more than 130,000 businesses to date.
Needless to say, she’s a good example of a successful industry leader in financial technology, which is why I was excited to take a few minutes to hear what she had to say. We talked about her experience with Kabbage’s startup phase, small business lending in general, and her expectations for Kabbage in 2018.
On this page:
- Discussing Kabbage, Inc.
- Discussing the Startup Phase
- Discussing the Market
- Expectations Kabbage in 2018
Discussing Kabbage Inc.
Q: What sets Kabbage apart from other online small business lenders?
A: Our focus on real-time access to third-party data and our ability to stay connected to our customer’s data all the time. This technology allows us to provide an automated experience. Our customers have a fully automated experience, meaning 100% of their interaction is without other people involved. This allows us to offer different types of products to those customers, and it allows us to have a relationship with them that’s more than just transactional.
Q: How do you build small business trust in your brand today?
A: A lot of it is about the user experience. We’re proud of our brand and invested in our brand. A lot of businesses know who we are due to those investments. We want to be the go-to expert for small businesses, providing them easy access to tools—whether financial or educational—to grow their business. We’re focused on providing expert advice through SMB data, business resources and influencers across a variety of industries. That also helps build trust. Regarding our user experience, we make it easy for our customers to get through the process, they appreciate and respect that. That also has a lot to do with it.
Q: So, user experience seems to be a big advantage for non-traditional lending sources. While that’s an advantage, what disadvantages does a lender like Kabbage have against a traditional lender?
A: There are lots of things. First, traditional lenders like banks have well-known brands; they have access to really cheap capital. They have a lot of customers already. They already have access to a framework which they operate with the ability to move funds. They have tons and tons of advantages.
The only thing they don’t have is the ability to serve the market, because it’s too expensive for them to serve our customers with the type of product they need.
Q: Another one of the advantages for Kabbage was its technological platform. How is Kabbage investing in its tech in the future?
A: We’re always re-evaluating our tech. The platform we’re using right now is a few years old, and we spend a lot of money on that. A huge percentage of our employees are software engineers, and that’s important for our growth because we’re always investing.
We don’t raise our heads up and say “Oh we’re done with that. We’ve got all the tech we wanted for a long time.”
We’re always looking at new things; like how can we use blockchain for our products for example. How would that make sense for our customers? I think that awareness is really important for technology companies that want to stay competitive in this space.
Q: You mentioned blockchain. What sort of future do you see for blockchain?
A: Well, whether you’re talking about smart/dynamic contracts, to the concept of using it as a distributed ledger for the communication/transmission of funds and data, or increased security by the way transactions are created & stored, there is a lot of value there due to the real-time nature of it. I think there is a lot of opportunity for a financial institution with financial transactions.
Discussing the Startup Phase
Q: You started Kabbage during a tough economic period. How do you think your timing impacted Kabbage’s startup success?
A: I’m sure you’ve heard that many of the most successful tech companies were started during a downturn or at the negative part of a cycle, so this idea that a new countercyclical business has good opportunities actually helped us.
We were able to start growing our portfolio at a time when the market wasn’t great, so by the time a lot of folks entered it, we had more experience and data.
When you’re a startup, one of the biggest enemies that you have is time. It takes time to get your business off the ground, to prove what you’re doing, and to establish a model. The more time you have before your competitors get out there, the better off you are, and that’s exactly what happened to us.
Q: During the first couple of years when Kabbage was starting up, what was your greatest challenge?
A: In the early years, the biggest challenge was raising money. We were raising funds during the global economic crisis for a small business lender. Getting people to invest in that was pretty impossible. We did it, and it’s crazy that we did. They took a chance on us, but it was really, really hard.
Q: Was there a typical small business customer that you would lend to? Do you lend to certain business more often than others today?
A: Well, we got our start making loans to eBay sellers which you may or may not know. The reason we started there was because that’s where the first API was available, so we could get information on a business’ performance. Then as more APIs became available, we were able to expand our business. So for a long time, all of our customers were eCommerce businesses.
But about three years ago, we began expanding to service brick & mortar businesses, and today, about 85% of our customers are brick & mortar businesses. We see customers across industries – we see construction to retail to restaurants to medical practices, marketing agencies, ecommerce companies, and more. It really is incredible, and they all have different uses for capital. So our objective is to be able to serve them all with unique products that are dynamic to their specific needs.
Discussing the Market
Q: What kind of impact did post-recession regulations have on the market, competition, and your business.
A: It’s what made the banks dial back their efforts, and one might assume that created opportunities for companies like Kabbage. In reality, it created more opportunities for companies like Lending Club, Prosper, and SoFi because that was the type of lending that banks were already doing.
Banks were not making loans to small businesses, not the kind that we serve. They always have had a hard time providing less than a quarter million dollars in capital because they just don’t have the tools or technology to do it – not that they don’t want to. So, for small business lending, the regulation didn’t really impact Kabbage or even banks. It happened more on the consumer side.
Q: Over the last 5 years, fintech lending has grown to take up more of the small business lending market. Where do you see the market share in 5 years? Where’s Kabbage in this equation?
A: If you’re talking about businesses seeking less than half or a quarter million dollars, I think it’ll stay the way it is with largely non-traditional players, like Kabbage, filling that space. And I think banks could serve that market through partnerships, but overall, I think it’s going to look much the same as it is now.
Q: In the last year, we saw a few interest rate hikes; I think they’re projecting a few more this year. What’s your take on the interest rate environment, and how is it going to affect Kabbage’s business?
A: It’s fortunate that our rates themselves have continued to drop year-over-year. We would like for that to continue. The reason for that is as we continue to demonstrate success with our portfolio, our cost of capital goes down. But a lot of it is also because our loss rates are down as we get better at serving businesses effectively. So, I think there will be some pressure on rates with what we work with which is to provide capital, but I don’t think it will significantly impact our customers.
Expectations for Kabbage in 2018
Q: Can you share Kabbage’s growth expectations in 2018?
A: We’ve grown pretty rapidly, and I’ll say we’re going to continue to keep that pace. Our rate of growth is at a minimum the same as it was if not greater. Obviously, the larger you get the harder it is to maintain that rate, but we’re definitely going to continue to grow – not just in lending, but in offering other services that small businesses need.
About Kabbage, Inc.
Kabbage, Inc. was founded in 2008 by co-founders Rob Frohwein, Kathryn Petralia and Marc Gorlin as an online, financial technology company. It specialized in providing small businesses in need of financing lines of credit up to $250,000. Since its founding, Kabbage has expanded into a successful fintech platform, providing over $4 billion in loans to small businesses. Kabbage also licenses its automated underwriting platform to global banks, currently working with ING, Santander and Scotia Bank throughout Canada, Mexico, the U.K., Spain, Italy, and France.
About Kathryn Petralia
Kathryn Petralia got into tech at the early age of nine – her first computer being a TRS-80. Since then, she’s been heavily involved in several companies in the tech world. She was Vice President of Strategy at Revolution Money which is another online fintech startup; she worked with CompuCredit Corporation as a corporate development executive. This experience led her to the founding of Kabbage, Inc. in 2008.