Kabbage Inc. wants to find out whether players who build underground business empires in the online game “Mafia Wars” are a better credit risk than those who idle away hours milking cows in “FarmVille.”
The Atlanta-based finance provider, which helps EBay Inc. and Amazon.com Inc. merchants buy inventory, just closed on $17 million in new venture funding from investors including Mohr Davidow Ventures. It plans to use some of that money to see whether social media and online gaming are indicators of creditworthiness.
Instead of FICO credit scores or pledges of collateral, Kabbage uses the length of an online merchant’s selling history, monthly transaction volume, revenue patterns, feedback ratings and other metrics to develop its own score of creditworthiness in just minutes.
“The way credit scoring and analysis has been done forever in the banking industry is very backward,” said Bryan Stolle, a general partner at Menlo Park, California-based Mohr Davidow Ventures, which contributed more than half of the new funding.
The rest came from earlier investors including Stephens Inc. Chief Executive Officer Warren Stephens, TPG Capital’s David Bonderman and United Parcel Service Inc.
“When I first saw it, I thought, ‘My God, somebody is going to pay a lot for that information,’” said Stephens, whose Little Rock, Arkansas-based firm does investment banking, private placements and asset management.
Once merchants are approved, Kabbage puts increments of money up to $20,000 in their PayPal accounts, giving them instant cash to buy more goods to sell online or cover other expenses. Kabbage plans to test doubling the amount it advances to $40,000, Chief Executive Officer Rob Frohwein said in an interview.
“We want to be the de facto financier to all online merchants,” Frohwein said.
With more than 2,000 accounts now, Kabbage is adding about 300 more each week and projects 5,000 customers by year end. So far, there have been no charge-offs for failure to repay, Frohwein said, adding that all delinquencies have been paid within a week.
Kabbage gets repaid in monthly increments over a period of as much as six months directly from the merchant’s PayPal account, and it has visibility on the merchant’s transactions so it can see money accumulate or dissipate. Last month, Kabbage was awarded a patent for its processes for determining creditworthiness.
“What better credit information do you want on a retailer than to see their daily transactions and whether they are meeting their projections? It was like ‘Holy cow, this is awesome,’” said Mohr Davidow’s Stolle, who will join Kabbage’s board.
Kabbage recently lowered its fees and charges 3 to 7 percent for the first month, or 10 to 18 percent if the money is kept for the full six months, said Chief Operating Officer Kathryn Petralia, the firm's co-founder and a former executive at credit card and financial services companies including CompuCredit Holdings Corp.
By comparison, EBay’s PayPal unit has a program called Bill Me Later, which allows merchants to defer payments although it doesn’t advance cash. Bill Me Later has some promotional financing rates of zero interest for six months, otherwise its typical interest rate is 19.99 percent.
FarmVille, Mafia Wars
Another metric that may help assess creditworthiness is participation in online games and social media sites.
In addition to looking at merchants’ Facebook and Twitter activity, Kabbage plans to study participation in games such as Zynga Inc.’s Mafia Wars and FarmVille to see whether there’s a correlation with on-time repayment, said Marc Gorlin, chairman and co-founder of Kabbage. Gorlin’s previous business dealings brought Bonderman and Stephens in as investors.
UPS is already using some things it has learned from Kabbage to help shape the way its UPS Capital unit views the credit risk of its customers, said Joe Guerrisi, a vice president of corporate marketing at Atlanta-based UPS, who has an observer seat on Kabbage’s board.
“We’re looking at how they use data, which is fundamentally different than what is taking place in financial services today,” he said. “This tells us more about the pain points” small merchants feel.
One repeat Kabbage customer is Val Prescott, founder of an online vintage boot retailer called The Old Rebel Boot Co., which refinishes and sells cowboy and fashion boots on eBay.
Prescott buys discarded boots in bulk for $1 to $3 per pound from businesses that scrounge items from estate sales and charities such as Goodwill. Then she and her business partners clean and polish them, and sell them for $50 to upwards of $500 per pair.
Prescott has taken four or five advances from Kabbage since starting her business a year ago, and now she’s selling 125 pairs per week and has 2,500 pairs in inventory. She recently took another $10,300 from Kabbage to replenish her stock and build her own website.
“Before I found Kabbage, if someone called and said, ‘I have 30,000 pounds of boots. Do you want them?’ -- I would put my head in my hands because I wanted them so much but had no way to buy them,” said Prescott, 78, who runs the company with her daughter Tracy and granddaughter Kate. “They’re almost like a silent partner.”