The best startups find pent-up demand and fulfill it in creative ways that give others a run for their money.
Add to that roster Avant, the online consumer lender cracking open the market for so-called near-prime customers--people with slightly tarnished credit ratings who nonetheless need access to financing, without blatantly usurious rates. Avant is part of the leading edge of young companies shaking up the traditional banking industry, which has left a big, yawning gap when it comes to serving this consumer niche. (Competitors include NetCredit and the online loan marketplace Lending Club.)
"There's a dearth of tech-savvy companies working in this space," says Paul Zhang, 28, Avant's chief technology officer and one of three co-founders. "We saw a big opportunity to bring technology and modern underwriting and a modern credit product to a large part of the population."
A history of working together
To make near-prime borrowing accessible for people with FICO scores between 580 and 700, Avant has created a proprietary scoring model, developed by Zhang and co-founder John Sun, 30, chief credit officer. The model crunches big data sets, using more than 500 variables that include metrics found in a FICO score, such as repayment history on credit cards, mortgages, and car loans. It also uses nontraditional data, which may include apartment rental information and cell-phone bill history, as well as nonstructured data, such as whether customers fill out applications using upper- or lowercase letters, and the time of day they apply for a loan.
Avant's founders have a story that's a welcome variation on the standard-issue Silicon Valley theme of starting your business from a college dorm room with a roommate. Zhang and Sun, 30, have been friends since they were nine years old. They met their third co-founder, Al Goldstein, 34, when they both interned for his previous company Enova, a subprime lender Goldstein sold in 2006 to the payday lender Cash America for $250 million.
Impressed with their tech savvy, Goldstein--a serial entrepreneur whose other ventures include Pangea Properties, the online apartment rental site, No. 720 on the Inc. 5000--stayed in touch with the duo after they concluded their internships. From Enova, Sun and Zhang launched a personal financial management product called Debteye in 2011, as part of the Y Combinator incubator program. The product, which aimed to help consumers in financial distress get a grip on their finances, didn't get much traction, Zhang says. But it provided some of the underpinnings for what eventually became Avant, which they launched with Goldstein in 2012.
"We knew the financial services industry very well," Zhang says. "Basically, subprime lenders weren't lending to near-prime customers, and the big banks had all pulled back their lending since the financial crisis."
Venture capitalists take note
Since its launch, Avant has originated $800 million in loans to 200,000 customers. While that's a drop in the bucket compared with the $1 trillion in total outstanding consumer debt, it's still pretty impressive given the company's young age. (The loans range in size from $1,000 to $20,000 and are typically used to consolidate debt, Zhang says.)
And the company has attracted a staggering amount of investment dollars along the way, including $300 million in equity capital from Peter Thiel, KKR, and Tiger Global Management, and $700 million in debt capital from Victory Park Capital and Jefferies Group, among other investors.
Venture capitalists Dan Ciporin and Ross Fubini, partners at Canaan Partners, in Menlo Park, California, say the company's chief challenges going forward will be continuing to acquire customers cheaply, and underwriting its riskier customer niche efficiently and correctly. What's more, Avant's scoring model, and the fact that it's a balance sheet lender holding loans on its books, has yet to be tested in an economic downturn, they say.
Other experts, such as Brian Riley, senior research director of financial research company CEB TowerGroup, question the appeal of loans that, while vastly cheaper than payday loans--for which annual percentage rates can be higher than 500 percent--can still have interest hovering around 36 percent.
"Their credit might help you out of a hole, but consumers need to be cautious about it," Riley says.
Goldstein says the interest rates are comparable to what a near-prime consumer might get with a credit card that charges an annual fee. And since customers are required to pay their loans off within five years, the loans work out to be cheaper than alternatives that let consumers pay for much longer. What's more, as customers pay off their loans, they're eligible for new ones at cheaper rates, based on their repayment history.
In the process of building Avant, Zhang says he and his co-founders have learned how to meet untapped demand in a new world driven by technology and big data. And they're excited about Avant's future prospects, which are likely to include more types of consumer loan products.
"It's an exhilarating experience as an entrepreneur, and the biggest feeling of accomplishment," Zhang says, "when you put so much work into something, and use your bare hands and ideas to build something from the ground up, to see it succeed and grow."