by Benjamin J Spencer – January 27, 2011
By 2006, Mitch Jacobs had already created two companies and spent 15 years building financial software for small businesses.
During those years, he had watched numerous credit-worthy Main Street businesses get rebuffed by banks because of what he calls an “effort gap”—the banks’ unwillingness to spend 80 hours of time on smaller loans worth $50,000 or less. The process hampered the small businesses too, which wasted months compiling information, only to be shut out.
Then Mr. Jacobs had a light bulb moment.
“I remember thinking, ‘This is not a capital-and-credit problem. This is an automation problem,’” he said recently. He was sure that online banking and accounting, paired with inventory software and online tax records, could be used to simplify the loan evaluation process. “It just had to be created,” he said.
Four years later, Mr. Jacobs’ initiative appears to have paid off. His small-business assistance website, On Decl Capital, announced Thursday that it received a $15 million vote of confidence from one of the nation’s leading corporate information technology investors.
SAP Ventures, a unit of business software giant SAP that invests in fledgling businesses, led On Decl’s latest round of financing. Leading the startup’s software platform is a free online tool that helps small business owners evaluate the strength of their credit, organize their business records and payments and apply for various loans from On Decl.
The average On Decl loan is for $30,000 and has a six- to nine-month duration.
Traditionally, Mr. Jacobs said, banks have used small business owners’ personal credit and real estate collateral to determine loan worthiness. “It’s ridiculous to take that kind of approach today, given the amount of information Main Street [businesses] are generating,” Mr. Jacobs said. Small business owners often carry a lot of debt.
The tools at On DeclCapital.com help banks evaluate a firm’s financial soundness more accurately, he said. On Decl measures a range of data points pulled from a customer’s online bank accounts, tax records and inventory figures.
The strategy seems to be working. On Decl reached a milestone last year, when it hit the $100 million mark for total loans it’s given to small business. The company declined to disclose its revenue.
“It’s a huge market, and they’re growing unbelievably,” said SAP Ventures Managing Director David Hartwig, of On Decl’s success at reaching small businesses. “These people are reachable. And when you peel back the covers, it’s just a robust software platform.”
As part of the investment, Mr. Hartwig was named to On Decl’s board of directors and will advise the firm on strategy. He’s already one of the company’s biggest cheerleaders, mentioning On Decl in the same breath as Internet success stories like Groupon and Yelp. Groupon, a hyperlocal coupon site, recently raised the largest amount of venture capital ever for a startup: $950 million.
Part of that confidence may exude from the perceived reliability of returns. On Decl’s other venture partners include First Round Capital and Village Ventures. “The company has figured out how to loan to small business in a scalable fashion,” Mr. Hartwig said.
Small business is critical to helping the U.S. economy climb out of recession, said federal regulators at a Jan. 13 Federal Deposit Insurance Corp. forum in Arlington, Va. FDIC Chairwoman Sheila Bair said the devaluation of real estate due to the housing-sector drop threatened even stable small businesses, which often use housing equity as collateral to obtain startup loans. With new regulations, Ms. Bair said, “we’ve asked for examiners to focus on the borrower’s ability to repay, not on collateral declines.”
Hudson Yards Cafe Owner Jim Reardon appreciated On Decl when he applied for a small loan to keep his Manhattan bar and restaurant going during the slow season at the Javits Center, the West Side convention center which generates most of his business’ visitors.
“The loan was all based on volume,” he said, noting that On Decl spent about two weeks working with his credit-card processors to determine his business’ worth.
On Decl didn’t immediately disclose specific details about its vetting process. Mr. Reardon described the financing as “the best loan on the block.”
Emily Mendell of the National Venture Capital Association said an investment like the one SAP made in On Decl is “very typical.”
“Corporations are looking to invest in companies that touch their business somehow,” said Ms. Mendell. Rather than go to the expense of building and maintaining a research-and-development lab, she said, software corporations like SAP will invest in a smaller company that has created an innovative product.
PricewaterhouseCoopers and the National Venture Capital Association point to Thomson Reuters data indicating that the software industry in 2010 “recaptured its status as the single largest investment sector” for private venture capital, securing some $4 billion in funding.
In New York, the majority of software-related investments pour into Internet media and infrastructure, said David Silverman, a managing partner at PricewaterhouseCoopers’ New York metro emerging-company practice.
Companies like On Decl, which cross traditional sectors and span the software, Internet and IT sectors, are increasingly thriving, Mr. Silverman added. Consequently, corporate venture capital is jumping on board to share the wealth—and their experience—with startups.
While corporate investing arms like SAP Ventures represented only 8.7% of national venture capital spending in 2010, according to a PricewaterhouseCoopers report, Ms. Mendell said that is an improvement over recent years. The report found that last year’s corporate venture investment was the highest since 2007.