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  • Writer's pictureVeronica Irwin

The exception to the fintech downturn

Good morning, and welcome to Protocol Fintech. This Thursday: Keep’s pitch to investors during a downturn, the backlash to the blockchain backlash, and a startup hires a “PR jedi master.”


The exception to the downturn rule

Kathryn Petralia and Rob Frohwein, two of the co-founders of Kabbage, have devised a way to offer forgivable loans, or what they call “vesting cash plans,” for businesses to offer employees. By signing up with their new startup, Keep Financial, employers will be able to distribute a cash bonus to employees on a regular basis so long as the employee agrees to stay at the company for a designated period of time.

Keep shows that innovation is possible, even in a downturn. Fintech has been hit harder than other sectors by the sharp decrease in valuations assigned to public companies and growth-stage startups.

  • Keep announced $9 million in funding in May, in a round led by Andreessen Horowitz. Launchpad Capital, Thomvest Ventures, Cambrian Ventures and Worklife Ventures participated in the round. The hefty sum illustrates how seed funding is more readily available than growth-stage funding right now, especially for a team with a strong idea and a track record.

  • The startup is taking some of the concepts that made stock options such a popular compensation vehicle for Silicon Valley while putting them within reach of smaller businesses that might never contemplate issuing shares to employees. Frohwein offers the example of a $5,000 bonus to cover a tradesman’s initial cost of materials if they stay at a company for a year.

Keep Financial is doing things differently — but by the books. It’s a licensed lender in 46 states, underwrites risk and manages the loan.

  • According to Frohwein, the business model was a no-brainer. He first discovered employer-forgivable loans as a lawyer early in his career, when he was representing a young doctor who was offered a loan that incentivized him to work in a rural area.

  • Most employer-forgivable loans are similar. Offered in a variety of industries to cover tuition, equipment needed for a job or major life purchases like a down payment on a home, they’re administered by the employer through a bank.

  • Frohwein and Petralia started talking to HR leaders about why they didn’t offer these types of loans to keep employees around. They told him they’d do it in a heartbeat if it weren’t for the execution challenges.

  • Those include tax and legal obstacles, which may explain why startups haven’t been lining up to tackle this opportunity

Investors are still betting on teams. Petralia and Frohwein sold Kabbage to American Express in 2020, giving them a track record.

  • “What stands out about Rob and Kathryn is how good they are at translating real-world experiences into financial services products,” said Launchpad Capital founder Ryan Gilbert. Andreessen Horowitz general partner Anish Acharya cited the “massive and fragmented compensation market” as well as the co-founders’ reputation.

  • The business model is appealing, too. Keep allows employees who leave a company before the loan vests to repay over time at relatively low rates, but interest isn’t the real revenue source. Instead, it’s looking to make money on the fees it charges businesses — fees that will likely be far lower than the cost of replacing valued employees.

Now the question becomes: If Keep Financial has cracked the code on forgivable loans, what’s to keep a bunch of other startups from copying their work? Frohwein is unbothered by that scenario, daring the competition to try it. “Folks should copycat us — copycat the product, do it,” he said. “We have a lot of vision for how to extend this product, extend this company and really help fix recruiting and retention.”

— Veronica Irwin (email | twitter)

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