Kabbage’s Journey to Scaling their Business

The National Fintech Organization kicked off its first presentation in the series: NFO’s Growth Garage, with Kathryn Petralia, co-founder of Kabbage Inc., for a fireside chat with Kara Parkey, vice president of MX.

Founded in 2008, Kabbage, now owned by American Express, is an online financial technology company based in Atlanta that provides funding directly to small businesses and consumers through a fully automated lending platform. Kathryn was a co-founder along with Marc Gorlin and Rob Frohwein, and she has a wealth of knowledge accumulated over 20 years of work with both startups and established companies that focus on payments technology and e-commerce.

The fireside chat highlighted insights garnered from Kabbage’s journey from its early stages in the fintech industry through to its acquisition by American Express, to help emerging fintech companies learn from Kabbage’s experience and incorporate these insights into their own growth strategies.

Background

When eBay launched an API in 2007, Rob had the idea that the data generated by the API could be used in underwriting loans to small businesses selling on the eBay platform. All three co-founders were ready to start the lending business but were faced with one problem – none of them were technologists. Nevertheless, they persevered because they understood that technology can be used to improve lives and businesses. So, Kabbage was born and they quickly hired a technologist to code and build the platform.

Raising Capital

For all fintechs, raising capital in the beginning stages is very important but challenging. “It was really hard to raise money during the global financial crisis for a company based in Atlanta that was founded by people who weren’t technologists,” says Kathryn.

Early on, when all their customers were e-commerce, the founders were able to raise funds in Atlanta from people within their personal networks. However, by 2014, 90% of Kabbage’s customers were brick and mortar, institutional rounds were led by investors on the west coast, in New York, and by many international funds. Over time, the proliferation of APIs enabled Kabbage to expand their market and provide its products to more customers.?

“We persevered and over time it got easier but when you’re in a capital-intensive business, you are raising money for [growth] equity and for debt [to lend]. We were always in a state of looking for the next round.”

Partnerships

Partnerships also played a key role in the success of Kabbage’s first stages because they expanded its network of potential customers and provided it with new resources to improve its technology. Kabbage found that many partners were willing to do their part for equity, which was critical in the early stages.

For example, Mark proposed a partnership with the CoreCard platform, an Atlanta-based company that is the backbone of the Apple Golden Card. CoreCard brought many potential customers to the table, and it agreed to enter into the partnership in exchange for an equity stake in Kabbage. Next, Kabbage began working with GDS, a decisioning platform. GDS also worked for equity, which became an important partnership because it allowed Kabbage to conserve cash while enhancing its system. Another crucial partner for Kabbage was Yodley, which had similar growth plans and helped strengthen and broaden Kabbage’s network of people and businesses.

While these partnerships were pivotal in Kabbage’s growth, Kathryn cautioned fintechs to, “Always choose your partnerships carefully. A start-up working with a start-up is hard because you both are still navigating your business through many changes. The same goes for partnering with big companies, because it may feel like they are taking over control and asking for unnatural changes. Sometimes you need to turn down opportunities with partners because you’re both either a portfolio company with a certain investor or because you are industry competitors.”

Working With Investors

Kabbage wasn’t afraid to ask for help when it was needed. Management carefully examined investors’ portfolios and the other businesses they support. That way, they could feel confident about the type of people they might have on the board.

“Choose your investors and board members carefully because it’s important to feel comfortable with their philosophies, their vision for the business, and the path they want to follow to grow the business,” says Kathryn. “Most of the board was investor-heavy, and all were supportive of our vision.”

Acquisition by AMEX

In 2020 Kabbage was acquired by its biggest partner, American Express. During the pandemic, Kabbage noticed that many small businesses were in need of aid, and it needed backing to expand its distribution of PPP loans. Banks faced many challenges in providing these loans to new customers, which was an opportunity for Kabbage: it already had a stable technical system, knowledge of technology architecture, and access to APIs and a real-time customer data. As a result, Kabbage was able to partner with many banks and smaller banks to help provide PPPs. With the backing of AMEX, Kabbage was able to become the second-largest PPP loan processor by number of loans, because of its automated platform and the success of its partnerships.

?Lessons Learned

“Let mistakes refine you, not define you,” says Kathryn. “It’s hard to regret things that you think you’ve learned from. We’ve overcome many challenges in the early stages but we always adapt and continue to grow.”

In 2013, Kabbage’s portfolio, which was mostly comprised of loans to relatively unstable eBay businesses, wasn’t performing well so the company had to lay off a number of employees. Management had to rethink the strategy and approach, taking it as an opportunity to leverage all the data and experience generated from previous operations to improve the quality of the portfolio.

Also, like many other companies, Kabbage had to let go of half of its team when the pandemic shut down operations (until the start of the PPP program). Again, management viewed this as an opportunity to refocus everyone’s efforts and get back to basics.

There were also some lessons learned from partnerships. Kabbage tried to venture into partnerships with many global banks, as the banks were interested in attracting small business customers. ?However, from the start, it appeared that the incentives weren’t properly aligned, which forced Kabbage to rethink its partnership process.

“We learned that we shouldn’t give up a big part of what we do just for [the growth opportunity]. The user experience, the underwriting, how customers are brought to the platform and how they’re funded are very important but were sometimes forgotten when we got into these partnerships.”

Leadership

Kabbage valued building strong connections and communications with all people, to ensure they were building a strong community in the company. Management took great effort to make the company a place where people could feel comfortable and see people who look like them.

Furthermore, Kabbage believed that making your employees have a great experience and valuing time off helped combat burnout and stress.?Kathryn encouraged leaders to always listen to the people and invest their energy and get enough information before they act. Most importantly, Kathryn recommends having fun and surrounding yourself with people that enjoy the mission and want to solve The Problem.?

Outlook

Kathryn believes fintechs are changing the way consumers and businesses interact with financial services, and those brands are becoming recognizable and preferred by consumers, so the outlook for further fintech investment is bright. Finally, fintechs that have generated revenue and have a path to profitability in the near future are better positioned to raise even more money.