Finance

Ex-Robinhood staffers start up a fintech

Several former employees of stock-trading platform Robinhood Markets are building a new fintech startup for small businesses.

San Francisco-based Parafin, which is also backed by some of Robinhood’s early venture investors, is reaching small businesses via partners to offer online cash advances, a type of financing that’s repaid as a percentage of a business’s daily sales. Parafin is an early-stage alternative to the likes of Square Inc.’s Square Capital, Stripe Inc.’s Stripe Capital, and other providers of financing for small businesses.

Parafin’s Chief Executive Sahill Poddar, who was Robinhood’s head of machine-learning, teamed up to launch Parafin with Ralph Furman, president of the startup and one-time data scientist at Robinhood, and Vineet Goel, the new company’s chief product officer, who served as head of risk and fraud engineering at the online market.

The founders saw an opportunity to build on their fintech-infrastructure development experience at Robinhood, they said, and apply it to small businesses that have seen a dwindling supply of capital during the pandemic.

“It was so obvious that small businesses are struggling,” Furman said. Parafin also plans to expand to offer other financial products like bank accounts and insurance to small-business clients.

One of Parafin’s first clients is Mindbody, a software provider to tens of thousands of fitness and other small businesses. It will use Parafin to power its Mindbody Capital financing arm, according to a spokesperson. Mindbody’s small-business clients will be offered customisable financing options within their Mindbody software dashboards. Mindbody chose Parafin as its capital supplier because of its strong technical offering, low financing rates for small businesses and ability to move fast, the spokesperson said.

Poddar said Mindbody customers will be charged fees of between 6% to 15% on their Parafin financing.

Parafin turned to early Robinhood backers for their own venture capital. The startup raised a $30m Series A round led by Joshua Kushner’s Thrive Capital this month, which followed a $4m seed round in October of last year led by Ribbit Capital. Nick Shalek, general partner at Ribbit, and Gaurav Ahuja, an investor at Thrive, are on Parafin’s board.

Other investors in Parafin include Index Ventures and SV Angel, as well as individuals, including Robinhood’s chief executive, Vlad Tenev, and his co-founder, Baiju Bhatt.

Parafin is in the process of closing a warehouse debt facility of up to $150m from Atalaya Capital Management and Jefferies Funding, on which it will draw to offer capital to small businesses, Furman said.

READ Revolut gets US stock broking approval to take on Robinhood

Distributing its credit products via partners like Mindbody helps lower Parafin’s costs and make its business model efficient, Ribbit’s Shalek said.

“These marketplaces and [software-as-a-service] providers and other enablers of the digital economy are getting big, and are either helping create or reaching new types of small businesses that we don’t think we can reach effectively through other channels,” Shalek said.

Many businesses are seeking to layer on financial services to add new revenue streams. In the small-business world, e-commerce platform Shopify was an early mover by building out Shopify Capital, for example. More recently Toast, a restaurant-software company that went public this month, set up Toast Capital. Payment processors like Square, PayPal Holdings and Stripe also offer credit products.

About 8% of small businesses with employees sought merchant cash advances last year, compared with 89% that were looking for loans or lines of credit, according to a survey by Federal Reserve banks. But cash advances had among the highest rates of approval, at 84%, in 2020, while business loans had among the lowest, coming in at 57%, according to the survey.

READ Here’s why Robinhood is going on a college tour

While cash advances have high rates of approval, research shows that online loans of various types can introduce risks to small businesses. Overall, net satisfaction by small businesses with online lenders, including providers of cash advances, dropped to 25% last year, from 37% in 2019, according to the Fed survey. Small businesses are most satisfied with credit unions out of all types of capital providers.

“We are categorically distinct from online lenders,” Poddar said, adding that Parafin’s fees are low, transparent and aligned with the performance of the borrower.

“We only get paid back when the [small business] makes sales,” he said. Because the company offers financing through its partners, without needing to spend as much on marketing directly to small businesses, it can keep its fees low, he added.

Write to Yuliya Chernova at [email protected]

This article was published by Dow Jones Newswires

Most Related Links :
todayuknews Governmental News Finance News

Source link

Back to top button
Native News Post