Who Needs Equity Crowdfunding? Dealstruck Builds Crowdlending Market
After President Obama signed the JOBS Act more than a year ago, Ethan Senturia says he studied the provisions for crowdfunding startups under Title III, and came to the conclusion that it would be more trouble than it was worth.
Today crowdfunding boosters are still waiting for regulators at the Securities and Exchange Commission to devise the rules needed to make investor crowdfunding work. Meanwhile, Senturia and computer scientist Russell McLoughlin are building Dealstruck, a San Diego startup that serves as a kind of Kickstarter for business debt.
Instead of crowdfunding by raising investment capital, however, Dealstruck operates an online marketplace that matches qualified small-to-medium businesses with lenders made up of rich people who meet the qualifications of individual accredited investors. The investors are basically providing loans instead of making equity investments. With the Dealstruck online exchange, Senturia contends that profitable and growing businesses can get affordable loans on fair terms, with a minimum of administrative hassles. At the same time, individual investors can earn attractive returns while putting their money to work in the local economy, he says.
“We looked at Title III pretty closely,” says Senturia. “There’s a lot of friction and costs associated with it. You have to get your financials audited by a [certified public accountant], and you have to make certain disclosures to the SEC. We said, ‘Let’s try to create a framework that operates under existing rules and regulations, and that doesn’t come with the regulatory burdens of the JOBS Act.’”
Senturia and McLoughlin started Dealstruck last year, and made an auspicious showing in the fall at the San Diego Tech Coast Angels’ Quick Pitch competition (winning the “best pitch” award) and as a semi-finalist at the San Diego Venture Group’s 2012 PitchFest. Dealstruck already has counted $1.5 million in commitments from more than 40 individual investors, Senturia says. The first loan request to be posted on the Dealstruck website, for a $250,000 business loan, was funded in five days, with 21 individual lenders participating.
Angel investors also provided Dealstruck’s startup capital, although Senturia would not say how much has been raised so far.
The startup faces some stiff competition, however. Aside from traditional banks, (which are ready to be disrupted, according to Senturia), Dealstruck must differentiate itself from innovative lenders like the Capital Access Network, as well as Web-based startups like New York’s On Deck Capital and Atlanta-based Kabbage.
Unlike Lending Club, which specializes in unsecured consumer loans, Dealstruck loans are secured by business assets and personal guarantees from the owners.
Senturia says there also are big differences between Dealstruck and On Deck Capital, which is a direct lender (meaning they lend their own money), whereas Dealstruck is a platform that empowers accredited investors and institutions to allocate their own capital. On Deck Capital also focuses on providing short-term working capital loans that tend to be smaller, higher risk, and more expensive than loans on Dealstruck.
In an e-mail, he writes: “On Deck’s typical loan is $30,000 for [about] 6 months at effective annual interest rates of 20-40 percent. Dealstruck focuses on larger loans, typically over $100,000, for terms between one and five years with rates of 5-15 percent. Our borrowers are typically prime or near-prime and are seeking permanent working capital to help grow without the hassle of the bank or the expense of traditional alternatives.”
The goal is to “create an institutional asset class out of small business debt,” says Senturia, who had dreamed of becoming a Wall Street bond trader while studying for his MBA at the Wharton School of the University of Pennsylvania.
It seemed as if he was on his way, too, when he joined Lehman Brothers as a debt research analyst after graduating in the spring of 2008. But the job ended when Lehman collapsed just three months later. It was followed by a similar stint that didn’t last much longer at Barclays, the company that took over what was left of Lehman.
In 2010, Senturia joined San Francisco-based Ampush Media as a vice president, running Internet marketing for the Facebook advertising specialist. “The company was founded by colleagues from Wharton with whom I worked on a few small-time entrepreneurial endeavors in college,” Senturia explained in an e-mail. “We had all become slightly disillusioned by our Wall Street careers and decided to take a stab at doing some[thing] entrepreneurial together again… I was the first employee at Ampush Media and I was there from the first day.”
In fact, Senturia says he actually moved back to San Diego, where he had grown up. (His father, the inimitable San Diego serial entrepreneur Neil Senturia, is executive chairman at Dealstruck.) “I’m big into being outdoors and I love being close to family, so I’m fortunate to call San Diego home,” writes the younger Senturia. “Nothing would give me more pleasure than building a successful startup in San Diego and doing my small part to help contribute to San Diego entrepreneurship.”
Ethan Senturia says he was introduced to McLoughlin, who worked previously as a computer scientist at the Lawrence Livermore National Laboratory, through a mutual friend he met as part of the Startup Leadership Program in San Diego. “We both were fresh off our prior startups and looking for our next adventures. Not only did we become good friends quickly, but we realized we had highly complementary skill sets and decided to join forces on Dealstruck.
The Dealstruck CEO says individual investors are unhappy with the kind of returns available from traditional short-term, fixed income instruments. U.S. corporate bonds pay just above 3 percent, while average yields on investment-grade debt worldwide has been trading at record lows of roughly 2.3 percent. At the same time, many business owners are dissatisfied with their financing options amid much stricter requirements imposed by the banking industry following the excesses that triggered the great recession of 2008-09.
“Everyone is out there trying to find ways to juice their returns,” Senturia says. “It’s really hard to find anything that pays more than 3 percent.”
Dealstruck says it can offer investors more attractive returns at risk-appropriate rates between 5 and 15 percent. Borrowers submit their loan request online, and learn within 48 hours whether they are eligible to be listed on the Dealstruck website. Once approved, information about a business and its capital needs are listed on the website for a prescribed time, typically 30 days. The website also provides a way for prospective lenders and businesses to exchange messages about aspects of the deal. A borrower gets one loan (from a Dealstruck subsidiary) and repays the loan through one regular payment. Dealstruck administers the fractional payments to lenders, who essentially view their part of the deal as a fixed income investment.
The startup makes money mostly through fees that come with originating a business loan, although lenders also are charged a service fee, Senturia says.
Dealstruck combines a credit analysis of each deal offering with the ability for lenders to select the businesses in which they want to invest. In the process, Senturia says Dealstruck transforms small business debt into a potentially scalable asset class. He could turn out to be a bond trader after all.