Micro-lending for the rest of us...Also, real time accounting?

Lorna and I were talking over dinner about businesses going under, sometimes for really dumb reasons. For instance, you hear about mostly-profitable small businesses that can't get financing on the same terms they could before.

And so we were wondering why nobody we know can invest in (or even provide high-interest loans to) these companies. They just close up shop and disappear (like bank executives on a private jet? Hm, not really.)

It's pretty clear these guys can't go do an IPO to get financing. And angel/VC/private equity is interested in massive upside, not short-term loans to operating businesses.

But if you come back to it, why can a regular person invest in a public company? Because there are annual reports, and the SEC, and reasonable penalties for doing the wrong thing. And as a result you get something we call transparency, and people can sort of understand (after the fact) what's going on in a public company. And people go to jail for saying the wrong thing at the wrong time.

For private equity, something else happens: you get a small number of investors, typically with high net-worth, so nobody prevents them from taking big risks. In most cases, you actually get an inside view of a company's books. They're not public, but they're known to the parties who are investing.

The problem with all these old systems is that they ignore computers and the internet.

How do we get financing to small private companies without making them go through Sarbanes-Oxley and hire PriceWaterhouseCoopers to do their annual reports?

Well, how about we have them use accounting software that posts all their financial data online instantly, and make a market for investors who want to take risks based on that data?

Consider what happens if companies that want financing in this market commit to use one of these "open" accounting systems in their day-to-day operations (not paper, or one set of internal books and another for the public), and you'll have a million eyes to look over every receipt. Find a way to make this software free, and integrate it with all the accounting systems that are in place today.

Who would sign up for this? Well lots of small business owners, if the business they spent 20 years building is facing bankruptcy. Eventually, companies could have their privacy or the benefit of easy financing, or some mix in the private equity model.

And who else should do this? Right now, we're also trying to figure out how to build more regulation into our financial system.

But isn't the problem lack of information? With information, there are people to crunch the numbers. With mega-billion-dollar companies and form 10-K, there isn't much transparency at all. It's hard to understand, really.

But couldn't we build a real-time accounting system, with a variety of privacy models, to fix this really? Use it in government, use it for financial firms that get bailout money, use it for small businesses that need emergency lending.

Related thoughts: I think you might find some inspiration in Glen Kelman's opening of Redfin's financial model. Great stuff, and really not shocking enough to keep it private, if investment could flow more freely as a result.

1 comment:

  1. OnDeck www.ondeckcapital.com, is doing a lot of what you suggest, lending to small business based on daily view of data. It's going well.