More data equals less risk: Algorithmic SMB lending giant CAN Capital raises $33M growth and liquidity round

By Michael Carney , written on January 8, 2014

From The News Desk

For business owners, finding the capital to grow can be a full-time job. If you’re a startup entrepreneur, that typically means turning to friends and family, angel investors, or venture capitalists. But if you’re a small business owner – think restaurants, retailers, salons, etc. – there are less viable options available to you. Bank loans are notoriously difficult to get, a fact which may be more true than ever in today’s fiscally conservative Great Recession aftermath.

Fortunately, CAN Capital (CAN), which describes itself as the market share leader in the alternative small business (SMB) finance category, is about to expand its operation. Today the 15-year-old company announced a $33 million Series C round of venture capital funding led by Meritech Capital Partners, with participation from existing investor Accel Partners*, Ribbit Capital, and QED Investors. Meritech will receive board observation rights as part of the deal.

The new capital won’t be lent directly to small businesses, according to CAN Capital CEO Daniel DeMeo. For that, the company has a $460 million syndicated line of credit provided by banks including Goldman Sachs and Wells Fargo. Rather, the double digit millions worth of fresh equity will go to expand CAN’s operation, including bolstering the proprietary, big-data driven underwriting platform that powers its lending

“Our biggest value proposition is our speed of funding and our ability to qualify merchants with difficult credit history or who can’t get bank financing based on the size of funding [meaning those requesting loans of less than $1 million, which are not profitable enough for traditional banks to underwrite],” DeMeo says. The company has used the real-time risk scoring system to issue approximately 123,000 distinct small business loans in the US and Latin America totaling $3.6 billion. The company lends through a number of subsidiaries and is affiliated with FDIC member and Utah-chartered industrial bank, WebBank.

“CAN Capital’s unique risk model and its highly-effective underwriting engine have allowed the company to serve small business owners that have difficulty working with traditional capital sources,” Meritech Managing Director Mike Gordon said in a statement today. Accel partner and CAN board member Kevin Efrusy added, "CAN Capital was probably the best-kept secret in the emerging financial innovation boom. The company created the alternative SMB finance space and is growing rapidly. One should be wary of those with loud megaphones, but weak balance sheet results. CAN Capital is not only profitable, but the company is the revenue, market share and innovation leader in the space."

The company revealed today that it has doubled its revenue over the last four years – a four-year average annual growth rate of 18.9 percent – and projects doubling again over the next two years – which would represent an average two-year growth rate of 41 percent per year. Over that same time period, CAN has grown its employee headcount 30 percent to 500 today.

While this new round of venture capital may not end up in the pockets of small business owners, a portion of it may be distributed to existing CAN shareholders, including VC backers, management, and employees in the form of a tender offer and share buyback campaign. The company has not made a final decision to proceed with the buyback, but DeMeo notes that it conducted a similar program after raising $30 million from Accel in December 2010.

Big-data driven underwriting is growing in popularity as companies like CAN, FastPay, ZestFinance, and many others have demonstrated the power of data to lower default risk – CAN’s default rate has been less than 5 percent since 2009 – and improve capital performance. Given the demand from borrowers, many of these finance businesses find themselves limited only by the size of the credit lines they can secure and by the size of the sales staffs they can build to bring in new business.

Another way these companies can grow is by licensing out their underwriting technology to third parties, a strategy that makes them more akin to traditional software companies than financial services companies. CAN is already experimenting down this path, according to DeMeo, who says that the company currently has several international white label, technology licensing pilots underway.

The big question is, where does CAN go from here. Unlike so many venture-backed startups, it’s been able to provide a measure of liquidity to its investors and founders without the need for an IPO or to sell to a strategic acquirer. Both options remain on the table going forward, DeMeo says, although there is no rush to pursue either strategy in the near term.

In the meantime, CAN seems content to continue turning data into cash. Just don’t ask it to decide between being a technology company and or a financial services firm. The hybrid approach appears to be working just fine.

(* Disclosure: Accel Partners is an investor in PandoDaily.)

[Image via aresauburnphotos, Flickr]