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The Big Factor in Fintech

January 20, 2016

Menlo Ventures is thrilled to announce that we are leading a $40 million Series C investment in Bluevine, a next-generation, technology-enabled SMB factoring business. Our investment in Bluevine is a culmination of research we having been doing in the broader SME lending category. We think Bluevine is building a business—addressing the factoring market—that is disruptive, very durable, and potentially massive, and we are very pleased to be partnering with Eyal Lifshitz, CEO, and his very capable management team on this journey.

Bluevine provides short-term financing to businesses through a process known as factoring. Factoring is a transaction in which businesses sell their unpaid invoices—typically with 30- to 90-day payment terms—at a discount to lenders, in exchange for working capital. The practice has been around since the Mesopotamian Era. Its persistence is likely attributable to the fact that is a very accommodating and durable instrument.

For one, factors, like Bluevine, do double-sided underwriting, i.e., they not only underwrite the small business client, but they also underwrite the company who is ultimately obligated to pay the invoice (i.e., the debtor). This is important because there are a variety of small and medium sized businesses that are risky credits on their own, but who are doing business with larger companies, Fortune 1000 companies or even the government. By factoring these companies’ invoices, Bluevine is often assuming the risk of “Chevron-type” paper but is being paid for the risk of underwriting a smaller SME. And the SME is getting working capital they would not get otherwise—everyone wins.

Flexibility and short payback periods (i.e., quick feedback loops) are other attractive elements of Bluevine’s model. Once an invoice is paid off, usually in 30–90 days, Bluevine is whole and the client is no longer on the hook—there is no potential for “debt spiral.” But the client still has access to a line of credit—they can sell more invoices if they choose to. Importantly, Bluevine can deepen its relationship with high-quality clients with proven track records of repayment by increasing their lines of credit. If, however, macro-economic conditions change, or a specific industry goes belly up (just look at U.S. oil producers), Bluevine can quickly reduce credit limits and or tighten underwriting.

The aforementioned characteristics make factoring a very resilient industry in economic downturns, which is often not the case for verticals in which lenders are required to underwrite long-term or unsecured loans. But that’s not the only reason we like factoring. We also like it because it is a massive, fragmented market. In the U.S. alone, factoring is a $100 billion per annum industry. SMBs account for approximately 20 percent of the market.

There over 1,000 non-bank factors who service SMBs and specific verticals and these factorers are primarily local, manual, and difficult to work with. Factoring has its inherent points of friction (more underwriting, notifications, constant monitoring, etc.) Traditional factors do not have technology to automate underwriting or make selling invoices as easy as one click. They still operate in the mode of faxes and phone calls. And they charge additional fees, because all of that labor is expensive.

Bluevine is to factoring what Betterment is to traditional wealth management, RealtyShares is to REITs or Zenefits is to health insurance: It is using technology to automate manual workflows (underwriting, fraud, onboarding processes, verifications, etc.) and it has exposed this technology to the customer via a very intuitive and easy to use UI. Customers love it. In fact, they rave about it. And they use it over and over again. Bluevine has seen monthly origination volume grow 10x year over year but has managed to keep repeat volume constant—around 65% per month. We love businesses that have delightful products that result in strong repeat rates. Bluevine has that in spades.

We are delighted to be working with Eyal and his team on this journey, and we are proud to be adding Bluevine to the Menlo fintech portfolio, which includes companies like RealtyShares, Betterment, Check, and Digital Insight.