Dealstruck is one venture that I hope succeeds.
Finance for small business is a huge broken market. Lots of startups are rushing in to fill this need. So far I have reviewed two approaches:
- Merchant Cash Advance.I reviewed CAN Capital here. Merchant Cash Advance seems a bit like PayDay Loans but for Retailers. You pay a lot to get immediate cash in an emergency (about 60-70% on an APR basis). Used very occasionally, it makes sense for Retailers. The problem is thatMerchant Cash Advance Lending Firms do well when they get repeat business i.e. when it becomes a habit for the Retailer. That is win/lose. The really great businesses are win/win.
- Automated approvals for 3-18 month loans. These ventures use new data aggregation and risk analysis algorithms. This is what ventures like OnDeck and Kabbage are doing. This looks more like a win/win proposition.
Dealstruck is offering what small business owners really want which is:
- 2-5 years (medium-term)
- $100,000 to $250,000
- APR% range 5% to 15%
If you are an entrepreneur aiming to build a high trajectory startup, you can get equity capital that is reasonably patient (lets leave egregious preference terms out of this discussion for now). However what about normal “butcher, baker, candlestick maker” startups? That is where Dealstruck is offering patient debt capital.
I can see that Dealstruck offers what entrepreneurs want. The question is:
“can Dealstruck offer a good enough deal to Lenders”.
There is certainly a hunt for yield in our ZIRP (Zero Interest Rate Policy) world. Lenders want short and long duration assets and everything in between. Dealstruck caters to the long duration end of the market. Basically you do a risk/adjusted calculation compared to Investment Grade Corporate Bonds or Junk Bonds of the same duration.
Dealstruck launched about 18 months ago with angel financing. I was interested to understand the proposition to lenders. On their site they say:
“Unlike other “Peer to Business” platforms, we don’t ask investors to back a loan that we won’t back ourselves. We believe in having skin in the game.”
So Dealstruck has its own Fund and gets co-investors. That sounds almost like AngelList where you follow an expert investor. That sounds promising.
Dealstruck also asks entrepreneurs the kind of questions that your local bank manager used to ask such as:
Have you been in business for at least 12 month?
Is your current level of revenue at least $20,000 per month?
Is your business currently profitable or at least break even?
Is your business free and clear of all liens or can they be removed
Is your personal credit clear of major derogatory marks for the past 24 months?
So they weed out high risk this way. What is not clear is how they do the automated validation of data that they collect (which is what Ondeck and Kabbage do).
Dealstruck launched about 18 months ago. There is no sign of a big venture round. Maybe they are taking the “slow fuse” approach, get to profitability early and then grow slowly – just like their “butcher, baker, candlestick maker” customers. In our dash for growth venture world that would be innovative.