Come hell or high water, Evan Malter is determined to improve the fortunes of Main Street businesses. He has just struggled with how to do it.

Malter first rushed to the aid of moms-and-pops in 2001, with a Boston-based web design company called Fingerprint. "It was very much about empowering small businesses at a time that I knew they could gain more from the Internet than a Macy's could," says Malter, a one-time sports announcer and recovering  finance guy. But by 2005, the cost of the technology had plummeted. "You could spend $495 to set up a website, and it was good," he says. Sympathizing with his customers' financial struggles, "I told them, 'You should just do that.'"

Act Two began seven years later. Malter had recently moved to California from Australia, where he'd been a stay-at-home dad raising two sons. "We were settling in in San Diego, and my wife came home one day with a bag of groceries she bought at Target," says Malter. "And it struck me how crazy that was. In Australia you go to the butcher for meat. You go to the fruit guy for fruit. You go to the florist for flowers. That's how communities are supposed to work."

As an economics major, Malter understood that on one level it made more sense for Bruegger's to provide his morning nosh than the third-generation bagel maker in his neighborhood. "Efficiency means we should be producing bagels en masse in one place and shipping them around," he says. But the local guy "is putting everything in his heart into his bagels." The demise of small businesses would be tragic for American communities. "Efficiency," says Malter, "will kill character."

Malter determined that the best lever to help Main Street was access to capital. The U.S. Small Business Administration estimates that close to $100 billion worth of small business loan demand goes unfilled. Malter saw a partial solution in the then-new JOBS Act, which made it easier for small companies to raise money through crowdfunding. Requirements for investments under $100,000 were the least onerous for the mom-and-pops he cared about. So Malter created Raise99.com, a platform through which small businesses could raise as much as $99,000 in $1000 chunks from 99 local investors.

But there was a problem. "I very quickly realized I was doing the one thing I didn't want to do, which was bring Wall Street into Main Street," Malter says. He gives the example of a pizza shop owner who suddenly finds himself possessed of shareholders. "He is going to start considering, 'Hey, do we need the maître d'? Do we need to continue locally sourcing the cheese that everyone loves?'" says Malter. "These store owners are very proud. They want to do right by the people who stepped up for them." That could mean lowering their standards in order to pay dividends. He realized he would have to try again.

The loyalty solution

Malter's next idea was ingenious. There are five C's of credit analysis. Small businesses often score well on character and on conditions (how the money will be used). Some are persuasive about their capacity to repay. But capital and collateral--especially in the case of service businesses--often sink their prospects.

Malter posited that mom-and-pops possess an overlooked sixth "C": customer loyalty. Locals who can't start their day without an everything bagel from Sidney's Scrumptious Spreads represent a reliable stream of revenue, analogous to accounts payable at a b-to-b company. Individual customers "could not tell us enough about a business to de-risk it for an investor," says Malter. But if a small business could establish that there was a community of patrons committed to continue buying, "that would be more efficient than the due diligence done by an investor or a bank. And the customer would not have to put anything at risk. They would just have to demonstrate that they love that place."

So in 2013 Malter launched ZipCap, a startup that lends to small businesses at low rates, based on their ability to elicit customer commitments to buy. A Main Street company would sign up with ZipCap and then ask its regular customers to join an "inner circle" by pledging to spend $400 there over 12 months. Once at least 100 customers joined, the small business became eligible for a loan worth 50 percent of that "loyalty capital" from ZipCap, which was backed by accredited investors. ZipCap charged the small businesses either a monthly fee of $99 or a small fraction of customers' transactions.

Businesses could control the rewards or incentives they offered, but Malter encouraged them to avoid discounts or get-your-sixth-sandwich-free-deals. Those incentives speak more to hunger for bargains than affection for a particular business. Invitations to special events and gift cards upon annual renewal were a better option, he suggested. Customers should be motivated by the opportunity to "make an impact on a business you love in your community and be recognized for it," says Malter.

In 2014 ZipCap began a pilot in Michigan, with 10 small businesses including a bookstore, a café, and a coffee shop. Malter had originally planned to launch in California, but decided to go where the economic need was greatest. He later added seven more pilot companies, including some in San Diego, where ZipCap is based.

Brown & Deline Salon, in Ann Arbor, was among the second wave of pilot sites. Sarah Thomas, the salon's office manager who was in charge of the program, says it took just a couple of months to fill out the salon's inner circle, and that all but a couple of clients fulfilled their pledges. At the end of 12 months Brown & Deline offered people who renewed $20 toward their next visit. Inner circle members also received invitations to special events. "There is a reward, but they were not as interested in that as just in helping us out," says Thomas. "They were excited to be part of the salon."

ZipCap's pilot ran for two years, tracking customer spending across 10,000 transactions. The company used that data to determine whether inner-circle members honored their commitments and also to develop predictive models for customer behavior. It learned, for example, that statistically "at a coffee shop, a customer who visits on Monday is more loyal than a customer who visits on Tuesday," says Malter. External sources delivered additional insights. For example, linking transaction timestamps with weather data enabled ZipCap to determine whether someone who visits a business when the temperature is below 30 degrees is more loyal than someone who visits only when it is above 30 degrees.

To ensure loyal customers got that warm glow from supporting beloved merchants, ZipCap sent periodic emails thanking them. The company also reached out to the 16% of inner circle members who had not fulfilled their pledges in 11 months, nudging them to to buy and offering gift cards for the balance of their commitments. Although there was no penalty, more than half of those who received the nudge said, 'Thank you so much. I wanted to support Beezy's Café,'" says Malter, citing a business in the ZipCap pilot. "'I just happened to be traveling a lot this year. I didn't quite get to it. But absolutely tell me how I can buy the gift card.'" By the pilot's end, 93 percent of customers had fulfilled their pledges.

"The analogy I use is a Fitbit for shop local," says Malter. "People want to make sure they get their 10,000 steps in every day. Likewise, people want to shop local. They just sometimes need someone to remind them to do so."

A better FICO score

By the beginning of this year, though, Malter concluded regretfully that ZipCap wouldn't scale. Working with individual small businesses is always tough, and the process for starting and running the programs was too complex. "The biggest opportunity to make a large impact was to make the program more simple, free for businesses, and to share our value proposition with partners who could easily integrate and bring networks of businesses into our platform," says Malter.

Time for another pivot. Today Malter is remodeling ZipCap from a lender to small business into a decision-making tool for lenders to small business. Banks and other credit providers are eager to help these companies but lack sufficient information to assess the risks and opportunities, Malter argues. His startup--now rebranded Count Loyalty--will issue reports comprising insights gathered from loyalty programs, also expressed as a loyalty score. "We will be a better FICO score," says Malter.

Rather than rely on money-strapped mom-and-pops for revenue, Count Loyalty will sell to banks and online lenders. Currently Malter envisions a model whereby scores are free and the company charges for reports, with prices likely starting at around $19. It will also sell real-time updates on the status of borrowers and customized modeling.

In addition to getting the service free, small businesses can set up their loyalty-tracking programs by themselves in less than three minutes, using apps that can be downloaded to any IOS or Android device. The business has also opened its APIs to a handful of point-of-sale and loyalty program providers. Small businesses using those products will automatically be tracked and scored by Count Loyalty.

Letting small companies plug into its systems on their own removes a massive barrier to growth. Malter's short-term goal is for 10,000 mom-and-pops to receive a loyalty score. If he reaches 100,000, he says, "we will have achieved the critical mass necessary to merit attention from all organizations making decisions about small businesses." That includes vendors and landlords as well as banks.

The new model is a better use of the startup's resources, says Robert Foster, interim chairperson of the Social Venture Network and a professor at University of San Diego, who has been following Malter's efforts. "If you think about ZipCap from a lending perspective, customer acquisition is notoriously expensive," says Foster. "That's not what ZipCap's strength is. It is really assessing the creditworthiness or helping others better assess the creditworthiness of businesses."

And with loyalty still coin of the realm, "it helps fortify an emotional connection between the customer and the business," says Foster. "That is going to be a great counterbalance to these larger stores and have a growing impact on local communities."

Malter says he wants to launch with 10 lenders onboard. So far he has six. One is Old National Bank, an institution with more than 150 retail branches, based in Evansville, Illinois. Client loyalty "is one of the most valuable intangible assets that a small business can hope to have," says Todd Clark, region CEO for Old National's central and western Michigan markets. If the model works, "it could potentially differentiate us from other financial institutions and increase the number of clients that we could positively impact."

Malter likens Count Loyalty's institutional clients to George Bailey from It's a Wonderful Life: bankers who know their customers intimately. "I want to take you back to a time when there was a local banker," says Malter. "He got his hair cut at Bob the Barber's, and he went to Larry's Bar to unwind. If someone opened a bar across the street, that banker would be able to say to you, 'No one is leaving Larry's. Everyone loves Larry.'"

Published on: Dec 21, 2016