Starting a business in the United States requires being courageous, someone who embraces the idea of success as a long shot. In fact, to be a successful entrepreneur, it is probably best to be the sort of person who ignores the odds entirely.
That’s because the odds for new businesses staying in business are not very good: 96 percent of businesses will never celebrate their 10th anniversary.
The worst part about the grim statistic, Nav CEO and Co-founder Levi King told Karen Webster for this week’s edition of the Monday Conversation, is that it doesn’t need to be that high. Many of those businesses that have failed, he said, were actually “on the runway” toward being successful businesses, but they ran out of runway before they could get airborne — a runway measured in cash.
King himself is something of a self-admitted outlier. He started five successful small businesses (SMBs) before founding Nav. Those businesses ran the gamut from manufacturing to financial services, the latter being Lendio.
It would be easy to assume that five successful runs at starting and scaling a small business would make King an expert on starting one and keeping the cash flowing properly. In fact, he said, every new business was a new opportunity to learn just how much he didn’t know.
“I will say at presentations, ‘How many people in this room have the experience of raising hundreds of millions in venture capital [VC], taking out 30 commercial loans at once and being literally electrocuted multiple times over the course of a single job.’”
Not many takers. The electrocution, he noted, was an unusually unique feature, but the experience of securing financing for SMBs was not.
That was what inspired the founding of Nav as a business financial management app that gives SMBs free access to business and personal credit reports, as well as suggestions for how to improve their ratings, then matches them with financing products that meet their needs. Nav’s goal, he noted, is to break down the black box that continues to surround SMB financing, and help small businesses either access the right financial products or get themselves into a position where they can do so in the future.
What Businesses Don’t Know Can Hurt Them
It’s easy to overlook the power and importance of SMB financing, King noted, because, on its own, it’s “kind of boring.” Yet, without personal credit cards maxed out by President Sergey Brin and CEO Larry Page of Alphabet, there might well have been no Google. Without credit from his own suppliers in early days, King said, his first manufacturing business would have failed.
It is an area that is overlooked, he noted, because most people don’t realize how extremely large the segment is, or how many opportunities are in it. Whenever he mentions that Nav is in the business of SMB financing, someone will often respond about OnDeck or Kabbage. While both of those firms are important players in opening up financing for some SMBs, the phrase “tip of the iceberg” barely captures how little of the market they represent, he said.
“[On Deck and Kabbage] are a very tiny piece of B2B credit,” King told Webster. “There [is] $4 trillion to $5 trillion of businesses lending money back and forth as trading partners. It is vastly overlooked in the financial technology ecosystem and, because it can be kind of dull to talk about, people don’t think about it as the huge category it is.”
That huge category can also be difficult to understand clearly, particularly from the point of view of an entrepreneur who is probably not a financial services expert — and is, thus, exploring their credit options with blinders on. Some may not know how to get credit from a lender, or realize the importance of finding supplier financing arrangements. They may also not realize how important their personal credit ratings are in their business underwriting decisions, that the type of businesses they are starting could greatly affect the risk profiles that lenders will assign them, or that there will be times when, even though their businesses are expanding, they look like credit risks because their cash flows are tied up in receivables.
Nav helps businesses get ahead of what they don’t know by essentially showing them what they don’t know, and what they are unlikely to know going in.
To offer that insight, the company combines data from the personal credit bureau ratings and point-of-sale (POS) systems, as well as the checking account information that the businesses allow Nav to plug into, and runs it all through Nav’s proprietary artificial intelligence (AI). Nav then gives the business a profile that shows where it is succeeding, where it needs to improve and shows its financing options.
When the customers choose a financing option provided by Nav, apply for it, are accepted and take the loan, Nav gets paid. That happens about half the time. The other half of the time where they don’t, he noted, those businesses get to use the profiling tool for free. He said that’s all part of serving the SMBs, making them wiser about their credit risks and options, and capable of making better credit choices.
“The heart of our model is helping businesses understand, track and fix their data over time,” King said.
Evaluating Customer Credit
Fixing data, of course, is premised upon focusing on the right data.
Webster wondered if FICO scores would continue to be viewed as both relevant and important, considering the growing chorus of voices that have called the system out-of-date and too backward-looking to be useful. King noted the FICO has its issues, but that anyone saying the FICO is at immediate risk of going dead “is probably trying to talk someone out of some VC funding.”
That doesn’t mean that FICO gets everything right, he said. Consumers like his father, who don’t use credit cards, look like a big risk, despite the assets they are sitting on — as well as businesses that don’t have a long-enough history to impress, but are obviously successful when looking at their POS sales data.
“[FICO] has spent hundreds of millions of dollars perfecting [its] score to predict one thing: the likelihood [that] someone will go 90 days past due on a payment. It’s valuable, particularly if it is coupled with the data about cash flow that we cannot know in real time,” he said.
Climbing The Ladder
Nav doesn’t have formal data about the businesses it works with, and how those businesses have performed with the financing with which they were matched. However, King said, the testimonials the company receives, and they data it has, is encouraging.
Among the consumers it matches with offers, Nav sees them not only return, but improves the terms of the loans they are getting. One customer, he noted, has successfully used the platform 22 times over five years to continually improve his borrowing access.
“It’s an outlier, but it is pretty cool,” King said.
The goal going forward, now aided with more than $40 million in Series C funding, is to keep breaking down the black box that prevents small businesses from getting inside the box to understand their financing options.
“Mistakes are expensive if I want to borrow money,” he said. “The difficulties for small businesses in understanding credit and how that applies to getting financing, that drove me nuts when I was in business, and that is what led to this company. I want to solve that problem through technology and at-scale so that anyone — in any business, anywhere in the country, [with] any amount of time in [business] — has a guide to get through.”
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