Vested in the Success of Others
Investing in Dealstruck and the American Small Business
Small businesses, those sole- or family-owned enterprises that make up nearly half of our economy, are the lifeblood of this country and a key ingredient to the American Dream. Living in the heart of Silicon Valley I always get upset when I see institutions spring up which create barriers to entrepreneurship. The Dodd-Frank Act, created in response to the 2008 financial crisis, overreached in some regards and has made it increasingly difficult for banks to fill their traditional role as financiers and partners to this vital segment of the economy. But for every institutional problem there is an entrepreneurial solution.
I’ve been thinking about small-scale entrepreneurship and access to capital ever since I entered this industry. Venture capital has done a good job of supporting new models for consumer lending, but the lessons learned there do not universally apply to B2B. As I began to explore the lending market, I found myself looking for a company that recreated the partnering mentality of a community bank — a company that was vested both culturally and financially in their customers’ success, and that stood to profit from supporting a robust network of small businesses
When I first met Ethan Senturia, CEO of Dealstruck, at his office in the San Diego suburbs he sat me down and explained the challenges that small businesses face today. Community banks have been forced out of all but the lowest-risk financing opportunities. Merchant cash advance (MCA) lenders hide their APRs, which are often in the triple digits, behind tricky language. Invoice factoring companies only solve immediate cash needs and do not offer long-term solutions to help the business grow. Simply put, without the same protections that consumers get against predatory lending, small business have to fight against exploitation every day or opt out of debt financing all together.
Startups looking to enter this market are faced with additional challenges as they try to serve SMBs. The so-called “Speedboat Problem” suggests that as long as you have enough capital you can grow a speciality finance business as quickly as you want… just lower your lending standards. Small businesses generally lag behind the consumer market in their adoption of technology, creating friction to building a scalable underwriting function. To top it all off, lending businesses are under tremendous pressure to lower their own cost of capital. But signing up with the lowest-rate warehouse lender can mean accepting limits on the types of products you offer, a dangerous precedent for an immature business.
All these and more represent an enormous suite of challenges to the ultimate goal of a lending business: the right product at the right price for every borrower.
When all you have is a hammer, everything starts to look like a nail.
This is where I saw Ethan diverge from his competitors, and why we fought for the opportunity to invest in Dealstruck. Namely, the biggest challenge that Dealstruck’s competitors face is the risk of mis-financing their customers. The wrong product, over the wrong time horizon or offered at the wrong rate can create a “treadmill effect” for small businesses, dooming them to bankruptcy as they race to keep up with compounding debt payments. The biggest opportunity for Dealstruck is to continue to innovate on product, avoid the temptation to take shortcuts in sales or underwriting, and make sure that their incentives are fully aligned with their customers.
Not all money is created equal. This is something we in the VC world know deep down, as we compete with other firms to win deals. It’s also something that Ethan and his team know, as they trade off higher margins and wider acceptance in order to partner with their customers for long-term success. We are honored the Dealstruck team chose us at Trinity to help them scale this vision, and we’re inspired by their commitment to doing right by their customers. Check out more details on TechCrunch here.