Data science by another name

Although Goldman doesn’t talk about what Capital Access does in terms of data science, that’s essentially what it does. The models traditional credit-rating agencies use are designed primarily for speed, meaning they don’t always paint an accurate picture of applicants and tend to exclude a large percentage of small businesses from access to capital. So Capital Access built its own models using its own variables.

It’s trying to solve a problem, and it’s getting creative with data in order to do it.

For example, one of the ideas behind the formation of Capital Access — an “A ha!” moment that came as one of the company’s founders was having a hard time securing a loan for her Gymboree franchise — was that credit card sales represented a predictable stream of income that a lender could use to ensure they get repaid. Now, the company has a product called AdvanceMe that simply takes a flat percentage of a customer’s credit card receipts every month as repayment. The repayment model ensures that Capital Access gets paid back while its customers aren’t facing default by having to write oversized repayment checks in months when revenue dips.

But that type of loan also a great to learn about the income patterns of various types of businesses. “It created an infrastructure for gathering a lot of rich information about that business …” Goldman explained. “We receive a small amount of payment each night an an enormous amount of information.”

In fact, he said, Capital Access recalculates its models every night based on the information it receives every day from credit card transactions and other data sources.

Poor financial planner, or savvy businessperson?

What it has discovered over the years is that there’s a lot to be gained from applying common-sense approach to what has traditionally been a contextless process. According to Goldman, there’s often a disconnect between what credit-rating companies such as Fair Isaac and Experian penalizes and what those things actually mean. If a small business owner calls four banks in a day trying to secure a loan for suddenly available property to help him expand, for example, or if he runs up credit card debt to buy up inventory on the cheap, those might actually be smart business decisions despite the negative effect on his credit score.

That’s why Capital Access looks well beyond the credit score, even for more-traditional loan offerings than AdvanceMe. Goldman said it will look at factors such as how long a business has been around, the type of business (e.g., ice cream shop), where it’s located (e.g., Miami versus Chicago) and the owner’s business experience. Recently, he noted, Capital Access funded a restaurant that a bank turned down because it was technically a “new business,” although the owner was a successful businessman who sold a successful restaurant franchise so he could open his own.

When Capital Access decided it wanted to offer an entirely digital option (that product, called CapTap, launched on Monday), it had to find a way around a part of its scoring model that relied on data derived from actually contacting an applicant’s landlord to ensure good standing. CapTap promises a 7-minute approval process, Goldman explained, but reaching a landlord might take days. So, it tested the risk associated with this variable by eliminating the landlord check for a subset of customers during a fixed period of time. Write-off rates turned out to be quite a bit higher among that pool of customers, so Capital Access adjusted the CapTap model and origination fees in order to account for the increased risk.

Getting started with CapTap

Success breeds attention from large banks

The proof that these alternative risk-management models actually work shows up not just in lower default rates, but also in the attention they’re increasingly getting from large banks. Capital Access, Goldman said, actually has partnerships in place with banks such as Wells Fargo in which banks refer applicants to Capital Access or, if the credit score is within an acceptable range (but still lower than the typical 700 minimum required to get traditional financing), use Capital Access’s model to make their own alternative loans. Apart from the added interest revenue that new loans bring in, he said many small businesses use large banks for other financial products (e.g., checking accounts or credit cards), and those banks don’t want to lose that business by declining loan applications.

Goldman tells the story of sitting across the table from a huge international bank and explaining how Capital Access had lent $234 million to that bank’s customers without the bank seeing a single cent in commission fees or an iota of goodwill from helping someone secure a loan. One of the bank executives was shocked by a slide showing an average credit score of 561 (“We’d never fund them!” he exclaimed) and then even more so by the next slide showing a loss rate of only 3.2 percent — less than the rate on the bank’s own small business portfolio. It’s now a partner, Goldman said.

The ZestFinance data model

When I spoke with ZestFinance co-founder and CEO Douglas Merrill last year, he told me a similar story. He said his company’s machine learning-based model — which looks at approximately 70,000 variables in order to assess credit risk — is 40 percent more accurate than traditional models and that large banks and credit card companies we’re already signing up as partners in order to provide capital to lower-credit individuals.

“[If I'm a bank],” Merrill explained, “I don’t have to find those customers, I just have to serve them better.”

Merrill, by the way, will be discussing the world of alternative lending via big data at our Structure: Data conference next month in New York. He’ll be joined by Robert Frohwein of Kabbage, which lends money to small businesses that accept PayPal or sell on web marketplaces such as Amazon, eBay and Etsy, among others.

Of course, the elephant in room with alternative lending is interest rates — namely, how to take on riskier bets without charging usurious rates like payday lenders often do. Goldman said Capital Access is sometimes competitive with traditional banks (charging APRs somewhere in the low teens), but does go quite a bit higher (around 40 percent) as risk goes up. It might not be ideal, “but the alternative is to say no to [some smart, passionate people with compelling stories],” Goldman said. “And our worldview is they deserve capital.”

Feature image courtesy of Shutterstock user yanugkelid.

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The company is preparing a mobile app that will allow users to get unlimited access to a library of books for one monthly price. The app will combine discovery with access and reading, so users will be able to get recommendations and immediately begin reading. The app was designed from the ground up to optimize the reading experience on mobile devices.

The app will feature a growing catalog of books, from national best sellers to classics, both fiction and non-fiction.  Oyster is looking at working directly with publishers, not with authors. The app is being tested right now with a small number of users.

In addition to Founders Fund, Oyster’s new funding comes from SV Angel, Chris Dixon, Founder Collective, Shari Redstone’s Advancit Capital, Sam Altman of Loopt.

The company was founded this past summer by Eric Stromberg, a former business development and product guy at Hunch; Andrew Brown, who worked at Google and Microsoft; and Willem Van Lancker, a former user experience designer for Google Maps. Stromberg told me the idea sprang from his fascination with the transformation of books and what they will ultimately look like in digital form. He said he wants to create a tool for helping people find and read a lot more books than they’re doing today.

“We want to create a product that fits into people’s lives and lets them find books and read all the books they wished they had read,” said Stromberg.

Stromberg said there’s no date for the launch of the app and no price yet. He said he wants to create a social environment that lets people recommend books to each other, similar to how Spotify users can share their tastes with others. And Oyster will also work in the background to learn from a user’s tastes and habits to suggest other books. Stromberg will be relying on his experience at Hunch, which provided personalization and recommendation services to companies.

For publishers, Stromberg said Oyster gives them another way to generate revenue and get their content in front of users. He said Amazon’s Kindle best seller list drives a lot of sales for publishers but it prevents other works from being discovered. Amazon’s lending library also plays in this market but it’s limited to Amazon Prime customers and only allows for one book to be borrowed a month.

There are still a lot of questions about Oyster and whether it can compete against Amazon and other competitors. A lot will come down to its book selection and how Oyster’s talks go with publishers. Stromberg said Oyster will try to focus on quality over quantity. With the success of access-related media providers like Spotify and Netflix, this might be a chance for publishers to test out a paid library model and also lessen their reliance on Amazon.

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Borrowing from and lending to your friends: it’s a very simple idea that could, ironically, end up making money.

Here’s how it works. The lender uploads a tagged photo of what it is they’re willing to lend. The borrower searches for what they want, either through a text field or by scanning the item’s barcode.

If one of the borrower’s friends has it available to lend, then that’s what happens. If not, the would-be borrower gets referred through to iTunes or Amazon to buy the item (generating a referral fee for Why Own It).

The app is the brainchild of Hamburg-based Philipp Gloeckler, whose sustainable goods marketplace AvocadoStore recently turned profitable, and developer Nils Hausig. Stephan Uhrenbacher of Qype and 9flats is also on board as a business partner.

“I had the idea on holiday in Cape Town in January,” Gloeckler told me. “I was bored and thought it would be great to see what my friend had.”

As it turned out, nobody was providing such a service. Why Own It got founded in April, and several months later the first iOS app is out for the German market – despite the fact that it’s all in English. “Germany is just a test market,” Gloeckler said.

The next step is to launch in the English-speaking world – well, the U.S. and U.K. – at September’s Disrupt conference in San Francisco. Then Gloeckler will move to New York to run the business from there.

How come? Well, according to Gloeckler, the German market is too small and full of clones.

“If I have an idea which has an international scope, why stay in Germany?” he asked – an interesting stance to take, given Berlin’s growing reputation as an internationalization hub, but then again Why Own It doesn’t hew to that kind of e-commerce model.

So what kind of stuff gets lent through Why Own It? Fashion accessories, sports equipment, CDs and, according to Gloeckler, a dog. But that’s OK, because it’s all between friends.

“You don’t want to give your car to a stranger but you wouldn’t mind giving it to a friend,” Gloeckler noted.

But isn’t there scope for awkward situations, where you like someone but wouldn’t trust them with your car or dog? “Of course, but you can always block people, or just say you lent it to someone else. You don’t have to accept every request.”

I’ll leave you with this video, which depicts Gloeckler interviewing a bemused-looking Mark Ronson (I have no idea why) about the app. It must be nice to have people lining up to lend you stuff:

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But, as the company eyes a stock market flotation, it’s still struggling to overcome its biggest hurdle: the stigma associated with lending money.

A slew of reports bubbled up over the weekend suggesting the company — which offers people the chance to apply online for short-term loans with interest rates that are pretty eye-watering if you extrapolate them — was talking to U.S. banks about listing on Nasdaq.

Here’s The Daily Telegraph, which suggests that the company concluded London couldn’t offer the right exit opportunity:

“The Telegraph understands Wonga, led by co-founder Errol Damelin, is beginning a ‘beauty parade’ to choose two banks to lead the likely process […]

“A decision on a float has not yet been taken, but it is understood that a float on the London Stock Exchange has been internally rejected by the company’s board. A source indicated that Wonga is looking at its strategic options, and pointed to early 2013 as the likely time if market conditions allow.

“However, there can be no guarantee of a float or a sale, with it remaining a possibility Wonga chooses to simply add to its raft of existing venture capital investors. It is known that Wonga has rejected London as a venue for a market listing as it is felt British investors are more sceptical about growth value and there is a lack of sizeable IPOs in the UK market.”

While its decision to skip the British capital does nothing to help the local startup scene — something likely to irritate investors trying to stimulate the European IPO market — it also raises the question of whether the business hopes it can sidestep public skepticism by crossing the Atlantic to go public.

Just look at recent headlines about the company and it’s clear that money lending carries a stigma that just won’t go away. While crowdfunding services and disintermediating lending sites like Zopa are generally welcomed, Wonga’s approach has been called every name under the sun.

British politicians have criticized Wonga, calling it a loan shark circling the poor and saying it markets too aggressively. Even now it’s accused of “running shy” of its U.K. reputation and pumping up a debt bubble that is “even nastier” than the one at the heart of the 2008 financial crisis.

Of course, the business tries to shake it off. Co-founder Errol Damelin is on the record saying “We don’t walk around feeling hard done by”. But it’s a constant accusation that could cause damage.

There’s an argument that this is just bad press. Payday loans are widely derided, but they are also widely used, and — for many people — a necessary evil. I certainly know that I used payday loan companies pretty regularly when I was trying to make ends meet when I was just starting out my adult life. In tough economic circumstances they fill a gap, even if it’s not a particularly nice one.

But Wonga’s problems aren’t just with PR.

It’s been censured by the Office of Fair Trading, Britain’s equivalent of the FTC, for its debt collection tactics and threatened with fines.

And then there’s the scale issue. While it’s a venture-funded startup, it isn’t really a technology company as such — it’s a finance and marketing business. You can argue, as they do, that the money-matching algorithms and credit scores are tech, but by that logic almost any financial services company — or any modern business, in fact — is a technology company. Scaling up looks a lot more like Groupon than Google. And that’s something that could make investors wary.

Looking to cash out with a public flotation doesn’t necessarily solve any of these issues, and it certainly doesn’t solve the PR problem. And going to the Nasdaq does nothing to alter the popular image that Wonga is running away from a market that loves money but can’t bring itself to deal with the dirty business of lending it.

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Amazon is trying hard to reinvent the library for the digital age, by offering e-book lending through the Kindle via a “Netflix for books” monthly subscription, as well as by offering Kindle e-books through a public-library lending program it launched earlier this year. But it can’t seem to get anyone to play ball with it on either score. None of the major publishers are taking part in the monthly lending program — which the Authors Guild is also protesting — and Penguin just recently pulled its e-books from the public-library lending service, saying it’s concerned about piracy. Going electronic should make books easier to lend rather than harder, but it doesn’t seem to be working out that way for Amazon.

The public library service was launched in September, fulfilling a promise Amazon made in the spring of this year to rollout an e-book program for 11,000 libraries across the United States. The feature allows Kindle owners to borrow books from those libraries with a single click, and even transfers their notes, highlights and other additions from the borrowed version to their own copy if they decide to buy the book. The Kindle Owners’ Lending Library, meanwhile, (the Netflix-style service) was announced earlier this month as part of Amazon’s Prime subscription service, and allows users to borrow one book a month from a pool of about 5,000 books — but none of the big six publishers has agreed to allow its books into the program.

Publishers would rather sell than lend

Earlier this week, book-industry observers noted that Penguin had pulled its e-books from the public-library program over what it said were concerns about piracy (although it didn’t provide any details about what those concerns were). On Tuesday, it restored access to its older titles through the libraries who have signed up for the Amazon service, but said it would not be providing any of its new e-books to the program. As PaidContent has noted, this leaves just two of the larger publishers participating in the service — HarperCollins  and Random House — and one of those (HarperCollins) puts significant restrictions on its books, including a requirement that libraries must buy a new copy if they lend an e-book more than 25 times.

While Amazon is getting the cold shoulder from publishers — which perhaps isn’t surprising, given the book retailer has been stepping up competition with its former partners by signing authors to its own in-house publishing imprints — it’s also apparently reaching out to a group it has helped develop: namely, self-published authors. According to one industry report, Amazon is offering self-published writers a share of a pool of $500,000 as well as the promotional value of having their books in the Kindle Lending Library, provided they agree to sign an exclusive deal with Amazon to represent their books.

Authors who have gone the traditional publishing route, meanwhile, are apparently incensed that Amazon is offering some of their e-books through its Kindle Lending Library without notifying and/or compensating them directly. In fact, the Authors Guild posted a statement earlier this month saying it believes that Amazon is actually in breach of contract with some of the publishers whose books it’s offering to lend — since the Guild says buying books in bulk (as Amazon has done in some cases, so it can offer them for free to subscribers) doesn’t allow the buyer to lend those books in the way Amazon intends.

The Authors Guild says Amazon is not playing fair

The Guild also argues that some of the publishers who have signed up for Amazon’s Lending Library might themselves be in breach of contract by offering their books to be lent — according to the authors’ organization, lending rights are supposed to be negotiated separately, and authors should be getting compensation for participating in those programs. While some writers seem happy for the exposure they would get via the program (which could theoretically lead to future sales) the Guild seems more concerned about getting more cash from Amazon and/or publishers up front.

The bottom line is that everyone seems to agree that electronic books are a boon — to readers, authors and publishers — but no one can figure out how to allow them to be loaned the way traditional physical books can. In some cases (as with Penguin’s refusal to join the public-library program), this seems to be in part a result of a fear of losing control over the content, and in part a fear of being disintermediated by Amazon. And in the case of the Authors’ Guild and the big six publishers, neither seems to deal with Amazon because they see it as a threat to the existing power structure in the industry.

Only Amazon seems to be interested in what users want, which is easy (and cheap) access to electronic books — and in the end, that could be the biggest weapon the retailer has when it comes to getting authors and publishers to play ball.

Post and thumbnail photos courtesy of Flickr users Marcus Hansson and Frederic Della Faille

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The loaner program would allow employees to take a device from a pool of iPads. During the week, employees can do what they like with the device and don’t have to take it back to the store until their time is up, according to the report.

There’s no word on whether the pilot program is a first step before rolling this out across Apple’s retail chain, but that’s a logical assumption, if the pilot program is successful. A lending program for the iPad would help ensure all employees have hands-on familiarity with the iPad and with iOS 5 when it launches, which should be sometime next month.

Apple hasn’t done any lending to retail employees before, but it did actually give away the original iPhone in 2007 to store workers. And retail employees would definitely benefit from more actual experience with the iPad and Apple’s software. It’s a little unfair considering my job, but I often test the knowledge of Apple’s sales staff when I’m visiting a store, and am amazed at how often they either don’t know or are mistaken about a specific device’s capabilities.

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Maybe it’s the onset of spring, but there seems to be a wave of funding announcements in the air, including a whopping round for collective-buying service Groupon that reportedly gives the company a $1.2 billion valuation. In the news today are two companies that have not only raised money from venture investors, but also provide services that revolve around money: Lending Club, a non-bank financing community that allows people to borrow from other members, closed a Series C round valued at $24.5 million; and DebtGoal, which provides online tools for people to manage and reduce their debt load, closed a Series A round of $2 million.

Lending Club’s financing came from Foundation Capital, along with existing investors including Morgenthaler Ventures, Norwest Venture Partners and Canaan Partners. The company, which connects investors and credit-worthy borrowers and says that it has 79 percent of of the U.S. peer-lending market with more than $8.5 million in loans funded every month, argues that its non-bank structure provides lower rates for borrowers and provides investors with higher returns. The company takes a 1 percent handling charge on every loan, and doesn’t guarantee any of them.

The company recently announced that it had surpassed $1 billion in loan demand, hit a monthly record in loan applications in February and issued its 10,000th loan, having now matched people who have received more than $95 million worth of loans since the company was founded in 2006. Prosper, the company’s main competitor, said earlier this year that it has arranged a total of $190 million in loans in its history and has close to one million members.

As Liz reported in December, the peer-to-peer lending sector got a new lease on life recently, when the House of Representatives included an amendment that would see regulation of the sector moved from the Securities and Exchange Commission to a new banking regulator. The SEC had required P2P lenders to meet stringent criteria, including filing to register its loans as securities and clearing other regulatory hurdles. This stunted the market and caused many venture capital groups to shy away from financing companies like Lending Club, Zopa and Prosper, but that cloud seems to have lifted.

If borrowing too much money — through banks or non-bank lenders like Lending Club or Prosper — becomes a problem, then you might become a customer of the other company with funding news today: DebtGoal, which launched in December of 2008, says it is the leader in “online personal debt-management solutions for consumers,” and that its proprietary algorithms can help users save an average of over $35,000 in interest payments and get out of debt 16 years sooner than they otherwise would. Its Series A round of $2 million came from Tugboat Ventures — which describes itself as an “early stage, mentor capital” firm — and Ed Odjana, founder of the debt-management site FreeCreditReport.com.

Odjana and Dave Whorton of Tugboat Ventures have also joined the DebtGoal board of directors. The company also got an earlier seed round of funding from New Cycle Capital that totalled $1.1 million. DebtGoal provides a number of tools for users to manager their debt payments, including a “SmartPay Plan” that calculates an optimal pay-down plan based on the user’s preferences and ability to pay.

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Post and thumbnail photos courtesy of Flickr user Eduardo