As the co-founder and chief operations officer of Kabbage, the innovative Atlanta-based alternative lending company, Kathryn Petralia has spent her career empowering small businesses to make a difference in people’s lives. Before helping to grow Kabbage from three employees in 2009 to 330 today, she was one of the founders of WorthKnowing.com, a consumer financial services portal eventually bought by CompuCredit and TransUnion, and then became vice president of strategy at Revolution Money, an online credit startup. To get where she is today, this Florida native took quite a detour from her original plan to be an English professor after she got her B.A. in English literature from Furman University in Greenville, S.C., and had entered grad school. At Kabbage, she has been instrumental in pioneering a new, automated way to lend money which has deployed about $2 billion to about 70,000 small business borrowers.
New York Financial Press (NYFP): Although you were an English major in college, we bet you didn’t write your thesis on Adam Smith.
Kathryn Petralia: No, in fact, it had to do with a Salman Rushdie novel, Midnight’s Children. My emphasis was on post-colonial fiction… I have maintained a love of writing and grammar; one of our employees gave me a t-shirt that says, “I’m silently correcting your grammar.” It hangs proudly at my desk.
NYFP: So how did you go from thinking about the Oxford comma to being one of Kabbage’s co-founders?
Kathryn Petralia: You have to go back to 1979 when my parents gave me my first computer. It was a Radio Shack TRS-80. I was 9-years-old at the time. I guess it was unusual to have a personal computer in the ’70s, but I learned how to type that summer using the software programs on my computer. I’ve always been comfortable with technology. I’ve never written a line of code, and I’m not a software developer. I have, however, always appreciated and enjoyed the relevance that it has to our personal lives as well as to business.
NYFP: What inspired you to embark on this career path?
Kathryn Petralia: I think everybody gets where they are because they take advantage of the opportunities that are presented to them. That’s how I followed this crazy path. I certainly could not have prescribed it… When I was in graduate school, a family friend who had invested in a data-compression business called me up and said, “Hey, you know something about computers, don’t you? Can you help me figure something out about this business?” That was in 1994. They wanted to deploy this compression to enable customers to download software directly via the internet. In the early days you had to have, like, 14 discs to load your operating system. The idea was to make it easier but you needed some pretty strong software to do that. So, that was my first exposure to using the internet to solve a business problem.
NYFP: So then you started an internet company and eventually ended up at CompuCredit, a specialty finance company in Atlanta, where you stayed for seven years.
Kathryn Petralia: That’s where I got my operational chops in the consumer credit arena.
NYFP: Is that where you met Rob Frohwein, the future co-founder and current CEO of Kabbage?
Kathryn Petralia: Yes, but I took a detour for about a year at Revolution Money. Rob had the idea but it was a slightly different concept that was inspired by eBay’s recently launched API. There were a lot of search companies trolling their sites basically to get product information that they could use for search results, and that was creating significant latency for eBay users. Rob was working with a company that was using that data to identify whether items listed on eBay were counterfeit or fraudulent, and he thought, “Wow, there’s a lot of really rich seller level and buyer level transaction information here, and I wonder if you could use that to underwrite a small business loan on eBay.” When I was at Revolution Money, he called me up to talk about it again, and I said, “You know, that really is an interesting idea—let’s do that.” So I left Revolution Money and we started Kabbage.
NYFP: You incorporated on Feb. 12, 2009. How did you keep your startup alive through the Great Recession?
Kathryn Petralia: We just kept taking one step after the other. We were very fortunate that we found some local investors. We hired our first employee in late 2009…and we went live with our beta version of the platform in 2010. We didn’t really go live in a meaningful way until May of 2011. The reason for the delay was that we were busy building a technology platform. That’s an important distinction. With most of the lenders in this space, the year they started is the same year they started booking loans—and that’s easy to do if you’re offering an installment loan because you can basically run that on a spreadsheet. We weren’t trying to prove that small businesses needed access to capital. We were trying to deliver it in a unique and automated way.
NYFP: These days your company is considered one of the industry’s leading innovators.
Kathryn Petralia: Yes, we are, although CAN Capital really started this alternative small business finance space.
NYFP: Did you enter this space because the big banks had stopped lending?
Kathryn Petralia: Well, that’s actually not what happened. Small businesses seeking less than a quarter of a million of dollars have never been able to get capital. They’ve always relied on either personal credit or home equity, or a rich uncle, which is a rarity, to get access to capital to grow. It’s not that banks don’t want to serve these businesses; they simply lack the tools and the technology necessary to make smaller loans profitable. That’s the opportunity CAN took advantage of in the late ’90s, and OnDeck in 2007. We learned when we were raising money for Kabbage in 2009 that there were players out there serving small businesses, but what we were surprised to learn is that they weren’t really using technology in a meaningful way. Most of what happened on the back end was very human-intensive. My background was in consumer lending and payments, which has been automated since the ’90s. So when Rob had brought up the idea, I was like: “Of course, you should automate that! Why wouldn’t you?” But apparently that was new for small business lending, and we didn’t know that. What we did was really unusual, and that’s one of the reasons we are a leader in this space with respect to deploying technology.
NYFP: What else sets Kabbage apart?
Kathryn Petralia: The other thing that’s really important is the way we access data. It’s not just how we use the data, but it’s how we get the data. Our customers give us authorized access to third-party data that we not only get at the point of origination but to which we stay connected, so that every day we can see business performance over time, and that allows us to offer a unique credit product. We offer a line of credit—not one-time credit—and that’s uncommon in this space.
NYFP: Kabbage has certainly expanded since its humble beginnings.
Kathryn Petralia: Yes, we have a grown quite a lot. But we try to stay lean as much as possible…and we’re able to stay lean because we have such a strong focus on technology and automation that we frankly require fewer employees than most folks in the industry. Our customers have a fully automated experience and don’t require significant interaction with our customer service folks, though they are always available if needed. All of our underwriting is automated. The entire application process is automated. That means we require far fewer employees.
NYFP: Where do you see Kabbage growing in the future? You’re still privately held. Any notion that you’ll be going public any time soon?
Kathryn Petralia: Nope, we still have a lot to do to realize what we believe our potential is. That would just be a distraction…[Essentially,] we run two businesses. In the U.S. our direct lending business in the U.S., where we’ve deployed about two billion dollars to small businesses directly. We also operate a platform business where we license our technology to third-party financial institutions that they use to give their customers the same experience we provide to ours. Those partners include global, plus-trillion-dollar banks, like ING and Santander. We’re already live in Spain with ING, and are launching in June with Santander Bank in the U.K.
NYFP: How do you position yourselves in this increasingly competitive environment?
Kathryn Petralia: Well, we’ve always been a little bit different. We offer a unique product and the application process is incredibly efficient.
NYFP: What’s the range of your loans?
Kathryn Petralia: Our lines of credit range from $2,000 to $150,000. We started by making small business loans to eBay sellers, and they were generally fairly small businesses. Our first line was between $2,000 and $12,000. We quickly expanded to serve other online businesses, and a couple of years ago expanded to serve all small businesses, both online and brick & mortar. The reason for the transition in our approach is that, quite frankly, we needed to wait for the data to become available. The proliferation of APIs has enabled us to expand to more and more businesses, not just in the U.S., but also abroad. Real-time access to third-party data is a very central point for Kabbage. It’s really the core around which everything else is built. So now we are serving small businesses, including eBay sellers, but 80 percent of our customers are brick-and-mortar businesses. Everything from construction companies to medical practices, law firms, retail, restaurants, spas/salon, you name it.
NYFP: Who’s your favorite client?
Kathryn Petralia: My favorite Kabbage client is Dude Wipes. Their product helps dudes stay clean. The idea is rather than using your grandpa’s Cottonelle wipes for the back of your toilet, dudes might be more receptive to a Dude Wipe, and that’s been their business. They’ve been a Kabbage customer and they’re really large, in fact. You can get their products in drug stores, retailers, Amazon. They’re growing into a much bigger company.
NYFP: How has Kabbage adapted to the greater scrutiny of this marketplace by federal regulatory agencies?
Kathryn Petralia: It hasn’t impacted our business as significantly as some because we’ve always operated as a highly regulated entity. We partner with a bank, and that bank issues every loan we make. We don’t sell the actual loan but we do securitize the receivable. This is an important distinction. Most marketplaces sell the whole loan and that includes the relationship with the lender. We’re only selling the underlying loan…Kabbage bears some of the risk of loss, which is a little bit different from marketplace loans where the originator has no risk for future losses. We’ve been through a couple of FDIC audits already with our bank, which is an FDIC-regulated entity. We have a lot of policies and processes in place that are more in line with consumer lenders; even though we’re a commercial lender we have a very consumer-oriented approach, which is very important.
NYFP: What do you find rewarding about this job?
Kathryn Petralia: Every day I am surprised and humbled by how grateful our customers are for access to this kind of capital, and how desperate they are for it. When you use your personal credit to run your business, you artificially deflate your own credit quality because you become highly leveraged on personal loans. That lowers your credit score and makes your cost of personal borrowing greater. You and I don’t have to put our homes on the line in order to get our jobs done every day but small business owners do—or they’re asked to by traditional lenders. Our customers have been so happy about the ease and the simplicity of the process as well as the fact that we say “yes” more than we say “no.” Our Net Promoter Score is 64, which is in line with some of the world’s best-loved brands, like Amazon and Apple, which is a testament to our customers’ enthusiasm and need for the products we offer.