Harvard Case - StreetShares, Inc.: Fintech Platform Lending Business
"StreetShares, Inc.: Fintech Platform Lending Business" Harvard business case study is written by Susan Chaplinsky. It deals with the challenges in the field of Finance. The case study is 24 page(s) long and it was first published on : Dec 17, 2019
At Fern Fort University, we recommend that StreetShares pursue a multi-pronged growth strategy focused on expanding its loan portfolio, enhancing its technology platform, and diversifying revenue streams. This strategy aims to capitalize on the growing demand for alternative financing solutions in the small business market while mitigating potential risks associated with the evolving fintech landscape.
2. Background
StreetShares is a fintech company that provides online lending solutions specifically tailored to the needs of veterans and their businesses. Founded in 2011, the company has established a strong reputation for its commitment to supporting military entrepreneurs. However, StreetShares faces challenges in scaling its operations and achieving profitability amidst a competitive market.
The case study focuses on the company's decision-making process as it considers various options for growth, including:
- Expanding into new markets: Targeting new customer segments, such as non-veteran businesses or expanding geographically.
- Developing new products: Offering additional financial services beyond lending, such as payment processing or insurance.
- Strategic partnerships: Collaborating with other fintech companies or traditional financial institutions to leverage their resources and expertise.
- Seeking external funding: Attracting investors to fuel further growth and expansion.
3. Analysis of the Case Study
Financial Analysis:
- Profitability: StreetShares has struggled to achieve profitability due to high operating costs and relatively low loan volumes.
- Capital Structure: The company relies heavily on debt financing, which exposes it to interest rate risk and potential financial distress.
- Cash Flow Management: Managing cash flow effectively is crucial for StreetShares, given the cyclical nature of the lending business and the need to fund loan originations.
Strategic Analysis:
- Competitive Advantage: StreetShares' niche focus on veteran-owned businesses provides a unique competitive advantage, but it also limits its potential market reach.
- Growth Strategy: The company needs to develop a sustainable growth strategy that balances expansion with profitability and risk management.
- Technology and Analytics: Investing in technology and data analytics is essential to improve loan origination, risk assessment, and customer service.
Market Analysis:
- Fintech Landscape: The fintech sector is rapidly evolving, with new entrants and innovative technologies emerging constantly.
- Regulatory Environment: The financial services industry is subject to strict regulations, which can impact StreetShares' operations and growth prospects.
- Customer Needs: Understanding the evolving needs of small businesses is crucial for StreetShares to remain competitive and relevant.
Using Porter's Five Forces Framework:
- Threat of New Entrants: High, due to the ease of entry into the fintech lending space.
- Bargaining Power of Buyers: Moderate, as small businesses have limited options for alternative financing.
- Threat of Substitutes: High, due to the availability of traditional bank loans and other alternative lending platforms.
- Bargaining Power of Suppliers: Low, as StreetShares can choose from various technology providers and financial institutions.
- Rivalry Among Existing Competitors: High, due to the increasing number of fintech lenders and the intense competition for market share.
4. Recommendations
1. Expand Loan Portfolio:
- Target New Customer Segments: Expand beyond veteran-owned businesses to include other small businesses with strong creditworthiness.
- Develop New Loan Products: Offer a wider range of loan products, including lines of credit, equipment financing, and invoice factoring.
- Increase Loan Volume: Invest in marketing and sales efforts to attract more borrowers and increase loan originations.
2. Enhance Technology Platform:
- Improve Loan Origination Process: Streamline the application process and utilize advanced analytics to automate credit scoring and risk assessment.
- Develop a Data-Driven Approach: Leverage data analytics to identify customer segments, optimize pricing strategies, and improve risk management.
- Enhance Customer Service: Implement a user-friendly online platform with responsive customer support.
3. Diversify Revenue Streams:
- Offer Additional Financial Services: Explore opportunities to provide value-added services like payment processing, insurance, or financial planning.
- Strategic Partnerships: Collaborate with other fintech companies, traditional financial institutions, or government agencies to expand reach and access new customer segments.
- Develop a Referral Program: Incentivize existing customers to refer new borrowers.
4. Secure Funding:
- Seek Private Equity Investment: Attract investors to provide capital for growth and expansion.
- Consider an IPO: Go public to access a wider pool of capital and enhance brand visibility.
- Negotiate Favorable Loan Terms: Secure debt financing with lower interest rates and flexible repayment terms.
5. Basis of Recommendations
Core Competencies: StreetShares' core competency lies in its expertise in serving the needs of veteran-owned businesses. Expanding into new customer segments and developing new products should leverage this expertise while mitigating risk.
External Customers: The recommendations are based on the needs of small businesses seeking alternative financing solutions, including veterans and non-veterans.
Competitors: The recommendations aim to differentiate StreetShares from competitors by focusing on a broader market, offering a wider range of products, and leveraging technology to enhance efficiency and customer experience.
Attractiveness: The recommendations are expected to enhance StreetShares' profitability by increasing loan volume, diversifying revenue streams, and optimizing operating costs.
Assumptions: The recommendations assume a favorable economic environment, continued growth in the small business lending market, and the ability to secure funding for expansion.
6. Conclusion
StreetShares has the potential to become a leading player in the fintech lending space by pursuing a strategic growth plan that balances expansion with profitability and risk management. By expanding its loan portfolio, enhancing its technology platform, diversifying revenue streams, and securing adequate funding, StreetShares can capitalize on the growing demand for alternative financing solutions and achieve sustainable success.
7. Discussion
Alternatives:
- Focusing solely on veteran-owned businesses: This approach would limit StreetShares' market reach and growth potential.
- Acquiring existing lending platforms: This could be a costly and risky strategy, with potential integration challenges.
- Partnering with a large financial institution: This could provide access to resources and expertise but may limit StreetShares' independence and control.
Risks:
- Increased competition: The fintech lending market is highly competitive, with new entrants emerging constantly.
- Regulatory changes: The financial services industry is subject to evolving regulations, which could impact StreetShares' operations.
- Economic downturn: A decline in economic activity could lead to increased loan defaults and reduced profitability.
Key Assumptions:
- The small business lending market will continue to grow.
- StreetShares can successfully attract new customers and retain existing ones.
- The company can secure adequate funding for expansion.
8. Next Steps
Timeline:
- Year 1: Implement the recommendations for expanding the loan portfolio and enhancing the technology platform.
- Year 2: Focus on diversifying revenue streams and securing additional funding.
- Year 3: Evaluate the progress of the growth strategy and make adjustments as needed.
Key Milestones:
- Increase loan originations by 20% annually.
- Secure $50 million in funding within two years.
- Launch at least two new loan products within three years.
- Achieve profitability within five years.
By implementing these recommendations and monitoring progress closely, StreetShares can position itself for long-term success in the dynamic fintech lending market.
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Case Description
In November 2017, John Fruehwirth, managing partner of Rotunda Capital Partners (RCP), was considering the final terms of a Series B offer to StreetShares, Inc. (StreetShares), a fintech platform lending company whose principal business was lending to veteran-owned businesses. StreetShares was cofounded by Mark L. Rockefeller and Mickey Konson-both veterans themselves-in 2013, with the mission to provide better access to credit for veteran-run businesses. Since the financial crisis in 2008, banks had been reducing small-business lending, and the founders believed there were over a million veteran-run businesses that could benefit from better access to small loans and other forms of credit. When Fruehwirth first met the two founders in the spring of 2017, initially he thought the company was too early in its development to satisfy his investment criteria-but he was impressed with the company's management and mission. His view changed in October 2017, when StreetShares beat out Kabbage and several other online lenders to pilot a program for MILBANK, Inc., a large military affinity-focused bank, to offer small-business loans to its members. If successful, the pilot would significantly accelerate loan growth. But if the pilot failed, it would leave the firm with more expensive channels for growth and raise doubts about its small-loan business. Fruehwirth was contemplating a Series B-round investment of $20 million for 40% of the company's equity, but needed to determine whether the returns would satisfy his investors, knowing they were highly dependent on the success of the pilot. The case contains RCP's offering memorandum summarizing the merits of the StreetShares investment and Fruehwirth's proposed deal terms. Students are asked to qualitatively evaluate the potential benefits and risks of the investment from the perspective of RCP's investors, and to quantitatively calculate the investment's returns.
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