Fundkite Revenue & Valuation (2024)

fun kite was launched back in 2015 on a dream in an idea they've scaled nicely today in a capital efficient way they put out or they generated uh they get 5,000 applications per month they send out offers about 1,300 of those some portion of those are accepted and approved the business in 2023 did quote about 70 million bucks of Revenue Alex is constantly thinking about how do they keep their both default rate low which is uh 16% if I'm remembering properly and then the actual charge off loss rate 6.8% of that those are good economics they optimize for about a 16% uh take rate Nim sort of Allin which is very healthy 91 folks full-time on the team they're funding these deals with prom notes on their own balance sheet and then also sourcing some of them out to Capital Partners as well hey folks if we haven't met yet my name is Nathan ladka I launched and sold my first software company back in 2015 and went on to write a book about it which you guys made a Wall Street Journal bestseller purchasing over 30,000 copies thank you so much for that after the book I launched this show and went went on to create founder path.com I raised a large fund to do non-dilutive deals with B2B software Founders so far we've invested in over 400 software Founders totaling $150 million here in 2024 we're doing three to four New Deals per week so if you're looking for Capital and don't want to give up Equity go sign up at founder path.com for free to get your offer all right let's jump into the interview hey folks my guest is Alex Schwarz he's a CEO of fun kite one of the fastest growing fintech companies in New York that provides funding to small businesses across the US the company was founded in 2015 and his company utilizes a boutique funding style offering business owners a flexible variety of products and services that can be tailored to fit their individual needs before fun kite he engineered and sold proprietary technology to the greater fintech industry Alex you ready to take us to the top let's do it all right give me your just to get us all on the right frame right off the bat give us your sweet spot deal is it 100,000 bucks into a small business doing a million a year in Revenue so our our average deal size is about $110,000 um and these are companies that are doing between one and five million a year in annual growth sales okay and any specific sector uh Ecom restaurants no very broad everything from restaurants to Ecom to Medical there's some industries that we don't um cater to at the moment like what like transportation and trucking they're really in trouble those guys are really having a big hard time right now getting by um we don't do bail bondsmen uh so truckers transportation and we've um we've we've pulled back a little bit on the construction industry and why is that I mean there's a lot of fintech firms that are doing on balance sheet lending to truck drivers or truck companies that buy the truck and then you can sort of discount cash flow the trucking revenues and they lend against that why are you staying away from so let's understand our product first I think that will that will break it down so what we do is called Revenue based Finance where're we're we're buying future receivables based on historical sales and we're buying them at a discount so as the merchant is generating sales we collect our receivables and we collect those receivables a portion of those receivables to recover or um I'm sorry to to accumulate what we've purchased right so let's say we bought $100,000 worth of receivables for a lump sum payment of $90,000 today and we'll collect 10% or whatever that fixed ratio is of your receivable so if you did 5,000 in sales this month we'll collect $500 if you did 3,000 will collect 300 so it varies so we take what's the what's the typical term though is that you're gonna get back no term there is no term until we our receivables there is no term but Alex for you what's typical though right so if you're taking 10% a monthly receivables do you typically get paid back on the receivables you purchased within 5 months or do you model for 12 months or I mean we we we we model anywhere from eight to 16 months but it's very unpredictable right so there is no term there is no fixed term with our product we're taking a ride with the with the um uh with the merchant at you know look we look at historical data and we hope that business is going to increase and sales are going to go up but it it's it's really hard to uh to predict that so um having said that White Trucking is it so we've seen a lot of Transportation companies fail um they're having they're the biggest problem they have is accounting for the cost of goods which in their case might be fuel right so fuel is jumping up and down they're booking the the jobs at One Rate they're not getting paid fast enough so they're having a hard time and this has been going on for years we see a lot of major transportation companies follow bankruptcy in the last two years but construction so we're seeing a delaying payments they're having a hard time collecting money a lot of projects went into to S standstill so when interest rates went up a lot of the commercial properties are in trouble we see a lot of big developers in trouble right now they can't refinance so that's slow down the residential Market still seems to be doing good but not as good as it was you know post immediately postco right and Alex in fact during a key a key component you have to model is obviously the discount rate the 100K example you just gave us where you wire 90k up front would represent a 10% discount of future receivables is that your target typically um typically it can range from anywhere from 10 to about 28% discount so depending on the risk factors that we're facing and the quickest way at least on an Ann on a year-long facility now years again go from 8 to 16 months depending on the percentto monthly receivables but a 28% discount rate paid back over 12 months represents about a 50 52% effective interest rate uh how do you get consumers or how do you get these businesses comfortable with that kind of interest you can't really consider an effective interest rate on this because this is not a loan and it's it's impossible well no but Alex sorry just to take a step back it's not a loan it's not but they it's a true sale they're selling you future receivables which is why you don't have to deal with Rec characterization Lisk and Usery and lending laws right that's the way you get around that as a factoring business you can still calculate I mean we don't get around it this is what the product is right yeah but the reason factoring the reason factoring is a thing is because it's a true sale you don't have to worry about Usery laws in certain States and lending licenses and things of that nature but the differ between a factoring product and this product and you me 30 seconds factoring works like this I've got a purchase order from Home Depot I've got a real buyer that's ready to buy a million dollars worth of worth of widgets I'm a manufacturer I need $500,000 to produce those widgets I go to a factor I say here's a purchase order from Home Depot for a million give me a half a million when I deliver those goods Home Depot is writing the check to the factor and I get the difference and so in factoring you're underwriting the buyer right who's buying the product how credit worthy are they so that's a little and there's usually they're very short-term type of deals right with us we're buying receivables we don't know what if they're going to have so we're looking at let's say a restaurant we look at 12 months of of receivables they're averaging $100,000 a month in sales and that's how we're going to calculate our offer but what happens if their sales go down it's a hurricane it's co it's there there there is no guarantee that they're going to have receivables so because we reconcile their sales constantly right so we do reconciliation so if we're supposed to take 10% we're looking at their sales or we're adjusting payments it it most of the time it never works out as planned it's it's always a slower Pace okay so there is no uh fixed term here and and it's very hard look we have disclosures in States like California and States like New York where at the time of um origination we have to provide a APR right and it it we do calculate this APR based on the standards that they have provided but it's not always accurate and it's it it will change it will change because what if it takes them two years or three years right so the better way to look at this is is the cost of capital so you know I'm getting $90,000 I got to pay back $100,000 my cost of capital is $10,000 that's the true way to look at this and um because there is no term and and and that's really really important right so my audience will understand this they're they're sort of Savvy find they'll understand this completely but I just want to underscore paying back that 10K cost of capital in three months if the company grows really fast and receivables grows really fast be a lot more very different than paying back 10K over someone that delays their payments and it takes three years absolutely absolutely yeah and we're not catering to your bankable client right we're not banking yeah yeah I get that it's a restaurant I guess my question to you though is the example we just gave is if you do a deal with a restaurant for 110k your average deal size and then they explode right they do really well that's good for you that's great you're going to get your money back quicker but it drives the effective like if they're backing into an effective rate it drives it through the roof why do you do you ever restructure those to keep your good customers coming back for more um no we don't restructure them and never seen it explode in a way where they just pay back like that however you know if a merchant comes back in 30 days and says look I I I just want to repay the receivables now we just give them a discount on the balance so instead of like the 10K you might see you're paying early you can pay yeah we we discount it and that's great right it explod but it never explodes in the way we we want it to explode yeah it's always the worst case it's the implosion not the explosion right so yeah help me understand on a month let's just use last month February Ary how many New Deals did you do across how many uh uh companies um okay so we processed last month probably approximately 5,000 applications for different businesses right okay um we don't disclose the numbers of deals we actually fund or the volume we can give you just average numbers right um but so yeah 5,000 businesses about 5,000 applications we processed a variety of Industries like there's we we get sometime I me agriculture supermarkets restaurants um manufacturers it's just to you name it we see it can you give me I don't want I don't want to I don't want to push you on something you don't want to disclose but can you at least sort of put us in the right range right so if you have 5,000 applicants are you doing sort of on the range of a thousand new wires per month into these companies or or can you no nobody does that type of um conversion no that that's it's much lower yeah it's much lower it could be anywhere from so I I'll I'll give you this number out of 5,000 applicants we made offers to Merchants about 27% of those applicants we made uh funding offers okay okay uh got it so so about about uh 1300 you made offers to and then some portion of the uh why would someone not accept your offer um they might get a better deal from a competitor better terms who like who um there's on de there's Shopify there's um PayPal there's there's a lot of big competitors in the space right you with Lending Club so Lending Club is really not a funer it's uh a lot of them are like kind of Le gens so you're they're they're Gathering they're telling you they're doing it and then they send it out but Lending Club is not really a business funding they do it more personal stuff consumer based right I see just you're not Leen right you have your own source of capit absolutely absolutely a full fintech in the space our own underwriting legal collections sales we do marketing so you have you've raised balance sheet Capital to do these deals and hold them yes we have yes okay so what's your fund size how much do you have available to lend out um on any given time our capacity is about 30 million a month okay this is um so this is an interesting question like who's who's backing these fintech providers say I mean you're seeing you're reading the news about folks backing up from the bass providers like you're seeing uh treasury Prime lose their banking partnership and the government going onass I mean are you seeing a lot of sources of capital for you to raise to then lend out or not lend out but and more more and more fund the word the word is fund fund yeah um more and more every single day so we've got there's a biger influx of capital from hedge funds um High net worth individuals um there's a lot of syndication that goes on in this in this space so the capital and and we've had some a lot of conversations with banks that want to jump into the space there's going to be some regulation coming out next year where banks are going to be forced to go back and start to lend out to the small businesses but banks are not equipped to underwrite a small bit they can't underwrite a pizzeria they don't understand how to look at bank statements like we do so we're we're in our final stages of automation that so let's go back a step how does this really work right so no two businesses are alike you take a Burger King in in New York City and you take a Burger King in Toledo it looks like it's a Burger King two different operators different cost labor rent everything right so and and you've got two different people that run businesses and cash flow to different ways so you really have to go through those bank statements to really understand true sales revenue and how they operate their business right you have to look at line by line to see what's going on right so what we've done is we've created automation that's able to really understand read those base statements and with scoring models shoot out offers so primary for us is looking at the cash flow history of the business second is is is credit and background and Industry um and we've been able to do that and Banks they they can't do that I mean we we talk to Banks all the time they don't understand that they're credit driven products they pull a credit it's 750 great we can fund this guy we can provide credit um we don't look at credit credit is not the most important uh factor to us it's how they got there so you can have somebody with 550 credit they're just utilizing a lot of their credit and their credit score is down you can have somebody with 7805 score and they have no credit they've got one credit card and so credit isn't always a true reliable uh factor for us when it when it comes to providing funding when your your source of capital on the 30 million fund that you've raised um more than that I'm just saying I have capacity to fund 30 million a month so what what how much capital have you raised total in in in debt funds that you can then again go go you both in in debt and so both in debt and um participation almost 200 million okay and how much do you have to participate on on the so the advance rate is what 90% 95% 80% um the average what do you mean Advance rate yes you mentioned you people fintex raise Equity to cover their haircut capital in their warehouse facilities typically and those Warehouse facilities don't have any warehouse facilities or or senior lines we we don't take we don't take on Capital like that right we have uh Investment Partners that participate in these transactions or these um um contracts and that's how we structure it so we have Bal you're creating an you're creating an individual SPV for every deal we have spvs but uh it's structured as participations yes some of them some of it is participation and some of it is balance sheet that we raised on on a debt basis but but not senior lines or mezan okay let me use a real example from our research right you raised 16.8 million and according to Crunch base on October of 2023 it's debt quote debt financing fund kite $16.8 million what is that um that's structured notes oh I see so you're okay got it so you're raising these sort of structured notes at your opco level and then and then that's the money you're using to these deals for sure oh I see I see why did you choose to go did another filing recently that number went up to like 22.8 or something okay so where do we get the 200 million from like I can't find that 200 million number in my research anywhere I see something we have a lot of participants that take down um participation in deals oh I see okay so that's the total that's like what you've also sourced out to your partners that's not necessarily the paper you're holding okay you're holding something like 20 million no we're holding way more than 20 million okay because we you know well we we we we fund we collect we put more money out right so it's kind of compounding out okay okay and then the prom notes that you just mentioned the prom notes you raised at your operating Co you raise those at a fixed or floating rate um we rais them with a stated interest and a contingent interest so we give the upside on how well the portfolio does oh interesting so it's like a hurdle rate almost and then a 8020 split above the hurdle uh no 8020 spent we we charge our fees regardless of of the performance right right um but we we do provide stated interest fixed interest let's say and then the upside on how the portfolio or that node closes out over a period of time we've recently seen others in the space like pipe for example just give money out willy-nilly uh those Founders are now no longer there uh the book effectively according to press Outlets blew up and the company has pivot pivoted to selling embedded Finance tools to to sort of a devops play Charge offs are very very important in this space and managing them what would you consider a good loss rate and and are you comfortable sharing sort of what you're under today yeah so traditionally we've written off about 6.8% that was through 123123 in Bat Ros what we see is um that's on a monthly vintage or your total life to date total life total life average right off about 6.8% of the receivables we purchase so just to be clear if that if that that point in time total life today you'd put out 100 million bucks of capital your losses would have been 6. okay got it do you recover any of those or are they just gone forever no that's what we've written off right so we recover at least 50% of what goes into uh defaults or Collections and and here's an interesting and that's a 6.8 number right the 6.8 is 100% right of uncollectible okay so you've already tried to put it and and and you can't get it out okay can't get it out right um here here's some interesting stats nine out of 10 of those deals that go into defaults are not because the Merchant is running into issues they're going in because they get the debt settlement companies call them and say basically stop paying we're going to negotiate for Less right that's that's the problem because the merchants that really have a problem call us we just lower the payments based on their sales we work with them so the defaults that we and of course from time to time we're wrong and the merchant goes out of business and there's not that you know that's the risk we take right yeah but most of the defaults we see are again just people wake up in the morning and they they don't want to pay you because they either don't or someone convinced them they shouldn't and what's that percent it's obviously bigger than 6.8 what percent going to default um so total um total we I think trailing it's about 12 to maybe 15% of the portfolio going into some type of a collection issue yeah um and then you know we work it out or we have to Sue and we get them back on track but the right off is actually trailing about 6.8% how do you Sue and make it worth it I mean if these deals are are only 30 grand don't you lose more money on the suit um depending if yeah if you if you have expensive lawyers but you know if you if we we've kind of worked out a policy and procedure on how we do this to make it cost effective and so as you think about building the business with a good margin of safety moving forward and you're thinking okay if every dollar we put out 15% to end up defaulted 6.8 will be actually charged off in other words we sued we can't get the money collections couldn't get it the company went out out of business you know if it goes out of business we don't even Sue yeah okay obviously yeah yeah my point being though is let's say in the next year you put out 100 million bucks in your head you're thinking you got to charge or make at least something like 30% subtract the 15% defaults to 6.8% and then that's your margin that's what you take home as a business um you you could calculate it that way but you're not going to have um yeah there I mean I would do it a little bit differently well how would you do it this is all about you how would you I'm justess I know I mean so your your let's say your your average Factor let's say is 1.30 right because we still kind of calculate an effect let's say your average factor is 1.3 so you put you take a $100 million you put out a you're gonna you're buying 130 worth of receivables right um you're going to turn that money probably one and a half to two times a year so with a 100 million you're not going to buy 130 you're going to buy 200 maybe 260 million of receivables because you're collecting money putting it back out right and then you'll deduct your fees your expenses and your cost of capital and that leaves your net interest margin right your Nim is there a Nim that you're optimizing for um approximately in a good year maybe about 16 to 18% return and and I just don't know anything else about like on Deek and others is that more or less than what you know sort of these other companies in your space are doing uh you know there's it's hard to say I look and andak has long you know lower rates that they're trying to do these deals at and I mean they're great we work with them in in in in Partnership sometimes but hard to say I I don't know I I spoke to I spoke to someone there and they said look our our defaults are about 12% you know defaults is one thing actual write off is another so it's hard to read yeah how do you define a default is it like once a payment is 100 days past do or how do you define yeah once they've reached the agreement basically they're not remitting any of the receivables that we purchased and but is there a cure period so after 30 days if they yeah we work with look we try to you know we reach out to them we try to get back on you know get them back on track find out what's going on we're very Merchant friendly to try to resolve a problem but they'll block your payments so you can't debit your payments anymore from their account right they're not picking up the phone and they return oh so you're not sending the flow of funds they've got to hit the a or the wire button every month to pay you no no we we will debit their account we have the permission to do that but they could still block your access to do that exactly you do you use like modern you use modern treasury or something to automatically a the account automatically yes yes and you know when we reconcile we send a notice this is your reconciliation we're going to debit $92 from your account tomorrow right and then all of a sudden they block it right of course you know you you reach out you email you call and you try to hey what's going on so obviously if they go dark and you know you're returning certain number of those are blocked that's a breach you know we we pursue legal but a lot of how collect I mean do you have a UCC filing I mean how do you collect we have a UCC filing and the receivables and we we file we'll file in in courts or arbitration takes time you know takes time but look a lot of times the communication just works it out right this is the underside of lending of this sort of world that nobody talks about so I appreciate you being so open about talking yeah I mean look at the end of the day if somebody has a problem you know we try to work it out get on the phone hey what's we try at least I mean if they're talking to us we're going to work it out if they're not talking they went dark um and certainly if people who go out of business they tell you hey I'm closing down my business right yeah exactly and you just want some verification that they're closing down and you write it off that that's the risk you take yeah is that your target this year by the way you Ed the 100 uh the 100 million uh number earlier I mean would you consider 2024 a great year for you guys if you put out million I think it'd be below my expectation what's your goal what's your expectation a 300 300 okay and and what do you have to do between sort of now and December to get there any major changes or updates no no I mean we we we've created I hate using the word AI right now because we're I don't know if there really is such a thing in in our industry it's really I guess teaching the computers to do what we do manually for many many years right um there was a good line I heard yesterday you know in fintech you're either Finance or you're technology we're primary Finance right technology set right you know we have to you know create returns and protect money right so um what I think is going to make a difference is our automation that we've built out and our processes so we can go from processing 5,000 or 7,000 applications a month to 50 or 100,000 because it's going to be very automated and shoot these offers so that the cost of Labor goes down the cost of processing goes down what's your full-time team today how many people um i' say about 90 and how many are Engineers uh we have five Engineers okay I mean some people might go well there's not a lot of engineering is it really automated oh this it just and I'm deep involved I'm I'm like a CEO who's first ATT Tech you who's sitting there and writing code and working you WR code still oh my God it never ends you know it never ends because you know because programmers they they work on like um they're I love my guys but they're very there's no urgency with that right with you got to create the urgency yeah I have to create and because I I I know what I'm doing and you know I've built our platform architected everything I know what needs to be done quickly but I also understand what you know the investors look for as far as their data my employees what they need to see so I'm able to bridge all that together very very quickly as opposed to explaining to a developer who's going to sit there and write this out for 30 days I mean we launch stuff in days that I know you know other people take months yeah so considering macroeconomics and all that this year I mean are you are you trying to Target like 100% year over your growth rate or 300% or more conservative where we we we're going we're trying to Target um yeah way over 100% growth the year and we we just got into um um the credit card processing world because we see there's a lot of opportunities there's so we like um funding Merchants that have credit card sales the biggest one in the space as you as you know is square and Shopify right they're putting out billions of dollars and they're collecting it via the credit card sales right so there's a great Market there but there's a lot of underserved Merchants there so for example with Shopify unless they invite you to take money you can get a Shopify loan if you're sitting on their on their platform right Y and and they cap you out so we've had a lot of Shopify Merchants turn to us and say hey Shopify only gave me this but I need this and these are good business say they've got really really good track records or data that you could look at where you can project the future better right um so we got into that space and we're we're actively um marketing and who do you use as your who do you use as your middleware and who's the sponsor Bank um so we partnered with the one I'm going to mention is cero they're a fantastic outfit out of Nashville we partnered with them and then we have a couple of other partners that um we've gotten incredible deals with and usually it either goes through you know First Data fiser or tsus which is the process yeah and as we wrap up again you mentioned trying to do 300 million this year and then you said you want to be way over 100% year-over-year growth which would mean we could sort of back into volume this past year of you know caught 150 million bucks at a 16% Nim which you articulated earlier that would mean you did about 24 million bucks this past year with your team of 91 uh am I in the right range I'm not going to confirm or deny I I I can't do that we don't publish and there's a reason why we do it we try to uh this there's a lot going on with competitors in this world where I was going to give you credit because 24 million bucks of Revenue with 90 people is very high Revenue per employee for the space well we we did I think um we did about 70 million worth of Revenue last year give or take yep yep but that uh just to be clear though that's before you're paying your cost capital on the prom and all that yes yeah so that's still pretty so that would mean I mean if you're taking 16 I mean you can back into something like 30 32 33 million of Revenue that you're keeping your take rate on that yeah pre- losses I mean that's still very good in terms of Revenue per employee with 90 people yes and that's because I sit here seven days a week and I write this this stuff and make sure it's working fast and quick and and seamless and and that's a lot of and and again I got to tell you A lot of people so you have your Shopify you have your stripes squares the players and and they're very technology driven and the rest of the industry is just not they're really lagging behind so that's that's I think where we stand out you know technology wise I think we're really ahead of all of our midsize competitors in in the space yeah how does a company like you get valued in the equity markets is it 1X 70 million or 10x or how do you think about that um good question I think it's going to be valued by who who the who the buyer is and I see two I you know people ask me that what's the exit there there's really going to be only two buyers right there's either going to be a bank who's going to need you know this full setup that can underwrite and fund deals or it's going to be a hedge fund that's just got an enormous amount of money to put out and and wants a vehicle to be able to do it through...