The Kabbage Goes Bad As Things Harden for SoftBank

Kabbage, headquartered in Atlanta, is a data and technology company providing small business cash flow solutions. Its suite of products includes Kabbage Checking, providing small businesses a new way to bank; Kabbage Payments, helping small businesses get paid and access the money they earn faster; Kabbage Insights, calculating small businesses’ real-time cash flow; and Kabbage Funding providing access to flexible lines of credit up to $250,000 in minutes. Kabbage has been partly funded by SoftBank Vision Fund. This season, the Kabbage has gone bad as American Express acquires it at a discounted valuation, well below its total raised capital. But it has its loan portfolios to recalibrate though.

The financial terms of the deal are not being disclosed, but reports earlier this month put the value of the acquisition at up to $850 million. For some context, Kabbage had raised nearly $990 billion in debt and equity (and at least $3.5 billion in securitizations), and was valued at over $1.2 billion in its last equity round of $250 million, in 2017, led by SoftBank.

Kabbage has been massively spoiled by Covid-19, and the virus has frozen its core market of small and medium scale businesses (SMB) which it lends to. Most lending fintechs are struggling.

Disrupting traditional banks and their slow and often frustrating approach to evaluating loan applications, Kabbage taps a wide variety of sources, from traditional accounting statements through to social media signals, into its proprietary machine learning algorithms, in order to determine eligibility for issuing loans, and the terms under which a business would pay it back. It was successful enough that Kabbage was also offering its product as a white-label service to other loan providers (including the banks it was disrupting).

But things have been tricky since February, with business dropping off a cliff after many SMBs were forced to shut their doors at the start of the pandemic — with too many of those closures becoming permanent. The company furloughed a significant proportion of its staff at the end of March, abruptly shut down its credit lines for SMBs in April and then slowly brought things back online as one of the three biggest PPP lenders.

This comes at another challenging moment for Japan’s SoftBank, joining Uber, WeWork and other high profile businesses which have struggled in the mega-investor’s portfolio. (SoftBank just lent $1.1 billion to WeWork.) But selling Kabbage is certainly the best move as SMB climate remains tough with the oscillatory nature of the virus; it spreads fast, it stops,  and then it repeats, creating all challenges for citizens, businesses and governments.

The Press Release

American Express (NYSE: AXP) today announced that it has entered into an agreement to acquire substantially all of Kabbage, a leading financial technology company providing cash flow management solutions to small businesses in the U.S. The transaction represents an important step toward American Express’ goal of being an essential partner to small businesses through a broad range of payment, cash flow and financial management tools.

Under the terms of the agreement, American Express will acquire Kabbage’s team and its full suite of financial technology products, data platform and IP built for small businesses. Kabbage’s products include access to flexible lines of credit, online bill payment, cash flow visualization tools, e-gift certificates, and the ability to centralize funds through the company’s recently launched business checking account. This product suite is integrated into a single online platform that uses real-time data processing to help small businesses better understand, forecast and manage their cash flow.

With the addition of Kabbage’s technology, products and people, American Express plans to offer a broader set of cash flow management tools and working capital products to its millions of small business customers in the U.S.

“For several years, American Express has been expanding beyond our industry-leading commercial card products to offer our business customers a growing set of payment and working capital solutions,” said Anna Marrs, President of Global Commercial Services at American Express. “This acquisition accelerates our plans to offer U.S. small businesses an easy and efficient way to manage their payments and cash flow digitally in one place, which is more critical than ever in today’s environment. By bringing together Kabbage’s innovative technology and talented team with our broad distribution capabilities and over 60 years of experience backing small businesses, we can better help our customers successfully emerge from this challenging period and beyond.”

“At Kabbage, we have always made the success of America’s small businesses our primary objective,” said Kabbage CEO and co-founder, Rob Frohwein. “We have built a technology and data platform that provides them with the kind of capabilities and insights often reserved for larger businesses. By joining American Express, we can help more small businesses succeed with a fully digital suite of financial products to help them run and grow their companies.”

The acquisition is expected to close later this year, subject to customary closing conditions. Kabbage’s pre-existing loan portfolio is not included in the purchase agreement.

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