New P2P Startup Funding Veteran Owned Small Businesses

Veteran Small Business Owners

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.

Streetshares logo

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.

Here is a link to their press release announcing their launch earlier this month.

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Fred93
Fred93
Jul. 31, 2014 3:26 am

Every P2P startup has an angle. This time its veterans. Vets are generally fine folks, but I don’t see any evidence that they repay loans any better than anybody else. Until such evidence arrives, the angle is a gimmick, and I must discount it.

I am reminded of the scene in Gypsy where the old strippers are giving advice to the young stripper starting her career. One after another they urge her to adopt a gimmick.
“If you’re gonna bump it, you gotta do it with a trumpet.” etc.

This startup gives us no insight into their underwriting methods, not only no numbers, but no explanation about their approach at all, nothing really, and yet they expect us to invest. Peter explained unique auction scheme above in much more detail than it is explained on the web site.

Not much I can do with what they’ve provided me.

I do appreciate Peter introducing us to these startups.

Peter Somerville
Jul. 31, 2014 8:22 am
Reply to  Fred93

Fred, thanks for your comment and interest in StreetShares. We are veteran-owned and half our staff are veterans, so we know from experience that veteran business owners are underserved, despite being more stable and better-educated than the general population (https://www.sba.gov/sites/default/files/Issue%20Brief%201,%20Veteran%20Business%20Owners.pdf).

As we are currently open to accredited investors, a lot of information about credit policy and borrowers is restricted to our members (you can become a member at http://www.StreetShares.com). Our members have access to a lot of information about our borrowers – the company name, company and principal guarantor financial info, an assessment of their credit and expected loss rate, and a pitch from the entrepreneur. We hope this will help investors make well-informed decisions.

Peter Somerville, StreetShares Associate and USMC Veteran

Brett Byers
Brett Byers
Jul. 31, 2014 10:16 am

Some of you might remember me as Reflective-rupee and as Prosper’s largest lender from late 2009 to mid 2011 (see https://www.lendacademy.com/one-of-prospers-largest-individual-investors/ ).

I have invested now in several StreetShares loans, achieve very good interest rates (relative to my perception of risk and StreetShares’ expected loss rates) as a result of StreetShares’ unique interest rate bidding mechanism described by Peter.

For my point of view, the veteran focus for StreetShares is not just a gimmick, but has a great deal of substance for several reasons. First, as mentioned by Peter, the focus on this vertical has the potential to hugely reduce borrower acquisition costs and increase borrower acquisition flow, which has become the number 1 challenge for most P2P platforms. Second, I belief that veterans may be more reliable borrowers, especially if they know that other veterans are lenders, as I expect to be the case for StreetShares. Third, the network effects of the veteran focus should help bring in lenders as well.

Prescott
Jul. 31, 2014 3:41 pm
Reply to  Brett Byers

“Second, I belief that veterans may be more reliable borrowers, especially if they know that other veterans are lenders, as I expect to be the case for StreetShares”

I intuitively agree veterans lending to veterans will create some social pressures to perform. I haven’t seen any data to show that veterans are any better at running businesses than the population at large, which will kind of determine if these loans perform or not.

I’m also curious what the population size is for accredited veteran investors, it seems like it would be a small-ish group (again no data), and this platform will probably turn heavily into prosper and lending club – al la 80-90% institutional money. So they might have branding of veterans lending to veterans, but it’ll be mostly jus that – branding.

There is a reason Prosper had to abandon that model – nearly every investor lost money – retail investors (even accredited) are terribly ill suited to judge appropriate risk. I see the difference in that the interest rate you get is what you bid, rather than some lowest interest rate – it’ll be interesting to watch – will they end up with group think and everyone just bids the same interest rates as someone else?

Brett Byers
Brett Byers
Jul. 31, 2014 5:47 pm
Reply to  Prescott

On the issue of bidding for interest rate, I generally agree that a model, in the long run, where the platform chooses an interest rate, based on rigorous underwriting standards and projected loss rates, is best. But the model of allowing interest rates to vary from what the P2P platform would otherwise suggest can be to the benefit of lenders. It is generally to the advantage of lenders when there is a lack of sufficient lenders versus borrowers. Such is currently the case with StreetShares, as it is a new platform, and it has allowed me to get interest rates so far in excess of 9% over the suggested StreetShares rates (weighted average) using this interest bidding mechanism. This was also true in the early days of Prosper 2.0 (i.e., July 2009 and on), when the bidding mechanism allowed rates of 25% and 30% on very solid C rated notes with credit scores over 700. I invested in a great many of such listings in late 2009 and early 2010, in amounts as much as $10,000 per listing. Many of these listings failed to fill on the first try, and the borrower re-listed at a higher rate to entice lenders. The result was that my IRR for that vintage on Prosper was about 20%.

I did not invest on Prosper 1.0 (i.e., before July 2009), but I know that the poor performance for lenders was in part from lenders bidding too low on the interest rates (average interest rates of under 20% for Prosper 1.0 HR notes is evidence of this). Thus, my view is that a platform should limit the bidding of interest rates to no lower than the suggested rate. But, in times of a relative scarcity of lenders on a platform, whether Prosper in late 2009 and early 2010, or StreetShares or any other new platform now, a mechanism that lets interest rates go above the platform-suggested interest rate can be very beneficial to lenders at that point in time and can entice more lenders to join in.

Prescott
Aug. 1, 2014 1:30 am
Reply to  Brett Byers

A floor is a great idea when you start, but as soon as it takes off and is proven model / platform, institutional dollars will flood and the floor will be all you get.

Like you mention, you might invest at a lower rate as a friend, I think you’d want some special disclaimer agreement to avoid the Prosper 1.0 issues.

Another thing to consider, as you grow to get lots of institutional capital and you are setting the floor rate. Institutions might be willing to bid a lower rate than the floor where the platform takes the spread – but you’ve got to be dealing QIB types of investors.

Peter Somerville
Jul. 31, 2014 5:53 pm
Reply to  Prescott

Thanks for your comment, Prescott. StreetShares co-invests in every loan, and we make our bid fully transparent in the platform including the price. We understand that some investors may not feel confident in their ability to price a bid, in which case they could simply bid at the “house rate”.

With that said, we’ve already seen many investors bid in auctions using their own knowledge, methodologies, and investment goals to price loans. Since the StreetShares platform is transparent in allowing investors to see who the borrower is, there is a lot information that may reside outside the usual credit metrics that platforms typically offer.

Peter Somerville, StreetShares Associate

Prescott
Aug. 1, 2014 1:25 am

I like a “house rate” – at least you are giving people a really good place to invest at if they don’t know.

Brett Byers
Brett Byers
Jul. 31, 2014 6:09 pm
Reply to  Prescott

Perhaps slightly in contrast to my prior comment, where I generally support limiting interest rates to no lower than the rate suggested by the P2P platform, there is perhaps a limited situation where it might make sense for a rate to go lower. Imagine a case, as suggested by the StreetShares post above, where a lender is a customer and/or long-time friend of the business owner (and perhaps even with much detailed direct knowledge of the business and business owner not available from the platform). Perhaps such a lender might be willing to bid lower because that lender reasonably believes that the loss rate will be lower than that expected by the platform, or perhaps that lender might be willing to put up with a lower rate of return given the relationship with the business owner. My personal view is, however, is that it is generally best to limit interest rates from going too low (i.e., below the interest rate suggested by the platform). But, for now, and I expect for perhaps some months to come, the varying interest rate mechanism on StreetShares will benefit certain lenders.

Anil Gupta
Jul. 31, 2014 7:38 pm

StreetShares sounds terrific and found interesting differentiation with borrower acquisition through affinity groups and lenders able to chose interest rate. Only challenge I see is “if the loan is fully funded then every investor will receive the interest rate they bid.” It will create administrative nightmare of servicing each loan having multiple interest rates for same loan an distribution of payments.

Overall, I feel these guys are taking exactly opposite approach of SoFi. I definitely has to check these guys out. Hopefully they will be more transparent like LC and Prosper and unlike all other tightly lipped competitors.