Credit Karma caught my eye because they are on the WSJ Billion Dollar StartUp List. This led me to ask “how many real Fintech Unicorns are in the Billion Dollar Startup Club”. It is a short list with Square, Stripe, Lending Club and Credit Karma. Lending Club has broken out into the realized Unicorn status via their IPO. Credit Karma is in the same general space as Lending Club (consumer lending), but there is as yet no IPO chatter about Credit Karma.

If you think that Credit Karma is onto something big, you could try to get in on their next round. Be prepared to pay top dollar. In their last round in September 2014, Credit Karma raised $75m at over $1 billion valuation.

Or you could short $FICO or $EXPN.L on the theory that Credit Karma will disrupt these companies. FICO and EXPN.L are publicly listed, they are Fintech Big Data plays and they are real Unicorns (over $1bn in value for common stock). $FICO is American and $EXPN.L (Experian) is a UK company with a global footprint. They are not directly competitive with Credit Karma, but they are in the same space (“comparables” in i-banker speak). The trouble is, neither $FICO or $EXPN.L looks massively over valued. They are not cheap, but nor are they in the stratospheric valuation territory that brings out the short sellers en masse. Nor is it obvious Credit Karma will be disruptive to these established credit data companies and if so in what time frame (to short stocks, you have to know the difference between inevitable and imminent and only short when the threat is imminent and it is far from clear that Credit Karma is an imminent threat to FICO’s revenue stream).

Credit Karma must be doing something right because they claim 30 million consumers use it. To understand the consumer value proposition I went to this review site (I don’t live in America, so cannot test it myself) and this jumps out at you:

“they never asked me to enter a credit card number!”

So, Credit Karma is free to consumers. While it is free, you do have to trust Credit Karma enough to give them your Social Security Number, so that 30 million is impressive. Credit Karma is only available in America, so that 30 million is well over 10% of the adult population of America. About 75% of adult American do not have FICO scores, so that 30 million looks like 15% of the 194 million Americans with a FICO score, which is clearly a significant share of market that is growing fast.

Credit Karma was founded in the dark days of the Great Credit Crisis and got their first $500k Angel round in October 2008 when the core was melting down. Anybody who worked through those days close to the financial markets has some intense stories to tell. A few resolved to do something about it. Kenneth Lim (Founder CEO of Credit Karma) was one of those who did something about it. What he did was level the information playing field. This is like going to a car dealer armed with the same data that the dealer has. If you know your credit score, you can be smarter about buying credit. There are other places where you can pay to get your credit score. The Credit Karma innovation was simply to offer that credit score for free and then monetize via selling leads to anybody offering credit.

This is where you start to see the whole financial ecosystem change at a fundamental level.

I may see an ad for 12% APR credit based on my credit score. You may come via a P2P lending market like Lending Club and offer me 11%. This is a free market doing what it should do.

I keep mentioning FICO scores. You probably won’t be invited into Credit Karma’s next round, but you could buy FICO stock, which is a publicly traded Fintech Unicorn. Fair Isaac Corporation (FICO) invented the FICO Credit Score.

Like Credit Karma, FICO is a Big Data Fintech, so lets “follow the data trail” through two steps:

• Step # 1: Banks report to Credit Bureaus. This is simply data sharing. It is in their common interest to assess credit risk before they lend.

• Step # 2: FICO aggregates data from the 3 credit bureaus to create a simple numerical score. That is it. It is as simple as that. A number makes it accessible. The algo is ridiculously trivial, but the concept was brilliant.

Credit Karma is getting the same data and offering a simple numerical score. They cannot call it a FICO score for obvious reasons (IANAL, but I assume FICO has protected that). However as this review shows, a consumer can track it enough to see that the score is comparable and therefore useful:

“in this case they were within 4 points of each other”

Credit Karma has competitors offering free credit scores, just like Facebook had plenty of social networking competitors. This is a classic network effects game where there is massive value given to the winner and the “also rans” get nothing. If Credit Karma wins this race, they will become the new credit score and that will be a very valuable business. I can see why investors value Credit Karma highly. It is a natural business to IPO, because the branding event of an IPO will help them become mainstream, but I assume they have not yet cranked up the monetization engine to a level where IPO investors will be happy.