Fintech start-up bridges trade finance gap for small businesses
Greg Karpovsky had a formative experience at university that inspired the creation of Stenn, an online platform providing working capital to international suppliers. He was studying at Moscow State in the 1990s when Jack Welch, then chairman and CEO of conglomerate GE, came to give a lecture.
Young Karpovsky asked Welch what line of business he should consider – markets were opening up rapidly in Eastern Europe and he was already a keen entrepreneur.
Welch’s response was to focus on trade finance. And that set Karpovsky on his journey to creating Stenn.
His first venture, Eurokommerz, focused on providing working capital to small businesses primarily serving domestic trade in Eastern Europe. But Karpovsky had global ambitions. After leaving Eurokommerz, and after other projects, he used his own capital to create Stenn in 2015.
Karpovsky’s goal was to offer money through digital channels to small businesses that trade goods internationally, but lack bank support.
“We have seen that there is a very large market of small businesses engaged in international trade and the digital economy that are significantly underserved by banks,” he says.
“I learned that it was over 20 years ago that there was an opportunity, so I started solving this problem in local markets. I am now trying to develop this idea globally.
The need for trade finance remains pressing. The international trade credit gap stands at $3 billion and is widening, according to the World Bank. A report by Accenture consultants, commissioned by Stenn, estimates that demand for trade finance will reach $6.1 billion over the next four years.
But the supply of finance to small businesses is lagging – a problem exacerbated by the 2008 global financial crisis, which caused big banks to back off from lending more widely.
Recently, supply chains have also come under pressure, hitting smaller suppliers. The Covid-19 pandemic and the war in ukraine have restricted the movement of goods globally, compounding the problem of suppliers receiving payments on time.
Stenn works to solve this issue. It aims to connect small and medium enterprises around the world to developed capital markets. Using its proprietary technology, Stenn can process trade finance applications in as little as 48 hours, in over 70 countries.
It is backed by major global financial institutions, including HSBC and Barclays, but focuses on businesses in need of financing and trade credit protection in the $10,000-10 million range. To date, Stenn has facilitated some $10 billion in funding in total.
“We realized that a lot of goods were sourced from emerging markets, such as China, India and Latin America, so we started meeting with suppliers from those countries and saw how underwhelmed they were. -banked,” says Karpovsky.
“Many of these suppliers serve companies in mature markets, for example the United States and Western Europe. But they also sell directly to the end customer in these markets.”
Although Stenn offers a range of financing options, its bread and butter is invoice financing: advancing payments to suppliers immediately and collecting from their customers later, in return for a commission. Its service allows suppliers to get paid as soon as their goods are shipped, while allowing buyers to receive their products and earn revenue before they have to pay the invoice.
Without invoice financing, suppliers could wait months to get paid when exporting goods to overseas buyers, which can hurt their cash flow and growth.
In return, Stenn charges the supplier a commission of between 0.65% and 4% of the invoice value, and also bears the risk of default by a buyer.
Unlike many other invoice finance providers, Stenn offers larger loans. “This company is doing it on a massive scale, up to $10 million in invoices, which is pretty impressive,” says David Brear, chief executive of fintech consultancy 11:FS.
“In this market, given the cash situation, I think there will be people lining up for this service,” he adds. “The pressures these medium-sized growing SMEs face [are] scary. I can only see Stenn lighten up in this space. So if he has a big enough book from a loan standpoint, the risk is pretty low when it comes to bill financing. It’s a bit of a blue ocean for them given the lack of competition at this scale.
Although banks offer commercial financing, their approval processes tend to take longer than the 48 hours suggested by Stenn. “Banks, in various guises, do some of that, but they make people jump through a lot of hoops,” Brear notes. Shane Burgess, from the venture capital fund BandagedKarpovsky’s adviser, says Stenn is “democratizing access” to working capital for entrepreneurs in emerging markets.
“Karpovsky shaped his worldview not only by sitting in London, he lived in Singapore, he went to meet merchants in China and other parts of the Far East, and he built a good understanding of their sore spot.”
In the heart of Sten’s competitive offering is its technology. “What we sell to investors is risk management,” says Karpovsky. “We can onboard customers, assess credit, manage customer risk; this is what our technology is designed for.
“We are a technology company focused on risk, credit, fraud and compliance management. We call this “risk reduction” for banks. . . 50 percent of [our] people are computer engineers, which allowed us to evolve quickly.
He says Stenn’s technology allows the company to “efficiently source and onboard customers online, as well as assess risk and verify transactions digitally.”
Larry Illg, of the venture capital firm Naspers and non-executive director of Stenn’s board of directors, sees it as a response to a need in emerging countries. “Western capital won’t finance the developing world because, frankly, they misjudge the risk,” he says. “Karpovsky is trying to help bridge the gap [and] bringing Western capital to the developing world; he built technology that can better assess risk.
Earlier this year, Stenn raised $50 million from private equity firm Centerbridge, giving the company a valuation of $900 million and putting it on track to become a “unicorn,” as it’s been dubbed. billion-dollar start-ups.
Even the Covid-19 pandemic has been an opportunity for Stenn. “What we’ve seen during the pandemic, these companies have found it even more difficult to access capital from banks,” says Karpovsky. The group’s later-stage co-founder and chief financial officer, Chris Rigby, believes the “perennial benefit” of being able to extend credit terms with buyers has only been “emphasized by the pandemic”.
However, it is not a risk-free business activity. Or reviews. Invoice financing and its dangers came under intense scrutiny last year, when supply chain finance company Capital of Greensill collapsed. Greensill, who counted former British Prime Minister David Cameron among his advisers, had too much exposure to certain clients, some of whom were in default.
Stenn is keen to point out that he has a different business model. “We have never competed with [Greensill]; we were never in his business,” Karpovsky says.
“It was focused on larger, buyer-led transactions. We focus on suppliers and small businesses, globally. It acted like a bank and didn’t use technology like we do. So we have a different business model.
Brear at 11:FS said, “I don’t think Greensill has tainted the industry as a whole. Invoice financing has been around for a very long time because of the need to bridge the gap between earning the job and getting the job done. For anyone on a smaller scale, cash flow is king.
Karpovsky is keen to continue expanding. “We are going to plan new funding rounds, but we are in a very good position at the moment. We are profitable, which is almost unique for a young technology company.
There’s no sign of his waning ambition either. Where does he see the company’s valuation heading? “We expect to expand about 30 times over the next four to five years,” he says.