When Mark Rockefeller sought a loan to grow his startup business, his team approached Wells Fargo. Rockefeller wanted to borrow $25,000 for the business, StreetShares, and the bank demanded $28,000 as collateral. This proposition made no sense to his team.
“I said ‘You’re out of your mind,’” he joked in an interview with Opportunity Lives. Ironically, StreetShares itself lends to small businesses, and so Wells Fargo tipped its hand by illustrating the very problem that Rockefeller’s borrowers faced: rigid standards from a behemoth financial institution.
“We said ‘This is why we’ll succeed,’” Rockefeller said. “We even considered creating a social media campaign about how we left Wells Fargo.”
Launched last summer, StreetShares is an online lending platform specializing in helping military veterans start small businesses with one or three year loans under $50,000.
StreetShares CEO Mark Rockefeller, pictured at a Veteran Entrepreneur Training Symposium in June.
“Veterans should be used as an asset, because that’s what they are,” said Rockefeller, an Air Force and Judge Advocate General (JAG) veteran who served in Iraq. “We’re taking the veteran status and turning it to their economic gain.”
Because its funding model is based entirely on private lenders (also known as “high net worth individuals”), the firm is able to avoid much of the bureaucratic red tape imposed by Dodd-Frank and other financial regulations. Its tech-savvy nimbleness is a competitive advantage, as well as the thumb-on-the-scale it gives veteran entrepreneurs through lower interest rates for their loans than a bank would offer.
“Frankly there’s a regulatory arbitrage to what we’re doing,” Rockefeller said, pointing to constricted lending under tight regulatory regimes that makes it difficult for borrowers to start small businesses. “What’s filling that gap, frankly, are online loan sharks. We provide a market-based solution.”
Lenders compete to auction down the lowest price of StreetShares’ loans, a process the company bills as “Shark Tank meets Ebay.” The loan is spliced into pieces, with investors able to lend as little as $25 per project; this helps the lender with portfolio diversification. At the end of the auction, the borrower pays a blended interest rate of the average for each slice, with the loan payment deducted automatically from the business’s checking account to the holder’s StreetShares account. Rockefeller said lenders feel good because they are helping veteran entrepreneurs while also getting a return on their investment.
“Veterans should be used as an asset, because that’s what they are”
“We underwrite them similar to banks, but we’re more permissive, however we’re not subprime lenders,” said Rockefeller, who also said banks typically require a credit score of 660, two or three years of financial performance and approximately $200,000 in annual revenues. Rockefeller’s team requires just one year of operations, $25,000 in business revenue and are more flexible on the credit score.
“This isn’t startup lending, but this is their first loan,” he said.
Rockefeller said there’s a differential in the rates that military veteran lenders pay compared to non-vets. Veterans charge 200 basis points less when they loan to borrowers on the platform. Some 75 percent of borrowers are veterans, though the team hasn’t parsed out whether veterans get lower borrowing rates than non-veterans.
StreetShares helps veterans by providing them with access to capital to help them get their small businesses off the ground.
So far, some 150 investors have lent $1 million for 45 projects, though Rockefeller said applications doubled from November to December last year so these numbers are likely to spike in 2015. The projects range from a media production and design firm to a spa retreat to a unique firm called Combat Flip-Flops that employs workers in conflict zones like Afghanistan and Colombia. Under a motto of “Business, Not Bullets,” the company hires workers in these areas to create clothing and shoes that are sold around the world.
Matt Griffin, Combat Flip-Flops CEO and Army veteran said he heard about StreetShares from an online veterans business forum. He said his company had applied for several loans, but every bank turned them down due to its dangerous locales.
“StreetShares was a game changer for Combat Flip Flops,” Griffin told Opportunity Lives. “They believe in the mission, recognize the return, and trust that we’ll get it done. Because of StreetShares, we can finance production, book steady factory hours, and put people to work in conflict areas.”
Rockefeller said many StreetShares lenders are institutions such as hedge funds looking to “do well by doing good.” StreetShares itself backs five percent of the debt and leaves the rest to investors.
“It’s so we have skin in the game every single time,” Rockefeller said. “The investors trust us.”
Rockefeller, 37, said he is especially interested in helping rehabilitate the public perception of combat veterans.
“I feel good about what I’m doing, even from a cultural and philosophical perspective,” said Rockefeller, who spoke of a recent presentation he gave to potential lenders in San Francisco several months ago. He said audience members were skeptical of the idea of investing in veterans, “‘Aren’t they a riskier bet?’” he said he was told.
“The inputs they’re getting aren’t accurate,” Rockefeller said, pointing to well-funded publicity campaigns seeking money for returning soldiers, whom he said suffer suicide at a rate of 22 per day. “That’s their cause, to scream about PTSD, TBI [traumatic brain injury] and suicide. It’s almost like talking out of both sides of our mouth. On one side, it’s ‘All vets are fragile,’ but on the other side, ‘Hire us.’”
Unlike the post-WW2 economy, veterans face limited access to capital and less community banks.
He said this perception stems perhaps from a deeper mistrust of the military, a tension Rockefeller saw during his time as a law student at Columbia University, one of several Ivy League schools with historically icy views toward the Armed Forces.
“Some of the ignorant descriptions of the military – we’re racist, violent, misogynistic, and so forth – is nonsense,” he said. “The military integrated before the rest of society, we salute based on merit and rank, not race …There’s a battle for how my generation returning from Iraq and Afghanistan will be characterized.”
Rockefeller contrasted opportunities available to veterans from earlier generations with today’s. He pointed to Syracuse University data showing some 49 percent of veterans in the Greatest Generation returning from World War II eventually owned or operated their own business, enabled by some 13,500 commercial banks, many of them small and community-oriented.
“It was like the George Bailey scenario,” he said. “[Today’s veterans] want to do what their parents did, but it’s post crisis, post Dodd-Frank, and it’s difficult.”
He cited research showing that the number of commercial banks has now dwindled to just 6,000, diminishing the personal interaction veterans have and their ability to gain financing.
“We’ve recreated that using technology,” Rockefeller said. “We can create something that was lost.”
Carrie Sheffield is Senior Writer at Opportunity Lives. You can follow her on Twitter @carriesheffield and on Facebook.