* Company hopes to turn profitable by early 2012
* ZestCash CEO is former Google CIO Douglas Merrill
* Short-term loans seeing increasing interest from VCs
By Sarah McBride
SAN FRANCISCO, July 21 The economy has
consumers in a stranglehold, and some tech entrepreneurs -- and
well-heeled venture-capitalists -- are taking notice.
Los Angeles-based ZestCash is the latest in a string of
short-term consumer-loan companies to win VC backing, landing
$11 million in Series A equity financing from a group led by
Lightspeed Venture Partners and GRP Partners, plus $8 million
in debt financing.
That is on the heels of the $2.3 million that rival Pawngo
raised last month from Lightbank, the investment fund of
Groupon co-founders Eric Lefkofsky and Brad Keywell, and the 73
million pounds in Series C funding UK-based short-term lender
Wonga got earlier this year from a group led by Oak Investment
A new crop of short-term, high-tech lenders hope to fill a
niche neglected by commercial banks, extending credit -- at
sky-high rates -- to riskier borrowers that need a quick cash
infusion. With the aid of software, they figure out which
would-be borrower in severe need is most likely to be able to
repay the loan, typically of a few hundred dollars.
Borrowers who use such services -- say, to fix a car --
tend to be less financially stable compared with mainstream
borrowers, said Arjan Schutte, managing partner of Core Venture
Partners, which specializes in non-traditional financing.
But ZestCash and its competitors are counting on turning a
profit by figuring out who is likely to be able to pay back the
loan. It is a big pool: some 21 million U.S. households are
underbanked, meaning they have bank accounts but also rely on
alternative financial services such as payday loans or
check-cashing services, according to the Federal Deposit
That corner of finance is "one where application of
technology is opening up new avenues to run business," said
Jeremy Liew, managing director of Lightspeed.
At ZestCash, where the co-founder and chief executive is
former Google (GOOG.O) chief information officer Douglas
Merrill, that technology includes using Google-style algorithms
to find likely candidates among the pool of loan applicants.
Co-founder and chief risk officer Shawn Budde, who formerly handled the subprime credit card portfolio at Capital One
(COF.N), brings banking chops to the business.
To build its loan model, Zestcash applied what Merrill
calls "a big-data approach," poring through numbers from 20
million loan transactions across California. It came up with
several hundred variables to use in evaluating loans, many of
them used in counterintuitive ways.
For example, a bankruptcy typically counts against a
customer who applies for a traditional loan. But with ZestCash,
if the bankruptcy is in the last couple of years, it actually
works in the customer's favor.
"If you declared bankruptcy fairly recently, you are paying
attention to your financial situation," Merrill said, adding
that focus means the customer is more likely to pay back a
The loans aren't cheap. A ZestCash customer with a typical
loan -- $500 for five months -- would end up paying a total of
$860, or $360 in fees.
But that's much cheaper than consumers' other options if
they have poor or thin credit, said Merrill. For example, a
$500 payday loan rolled over for five months would likely cost
about $1,400, said Merrill, meaning the customer would pay $900
The typical ZestCash customer uses the funds for healthcare
expenses or car repairs, said Merrill. He was inspired to
launch the service when his sister-in-law, a working single
mother driving on icy roads in Washington state, needed money
for new tires.
Merrill plans to use the new funding for purposes such as
marketing and expanding beyond ZestCash's current service area
of Utah, Idaho, Missouri and South Dakota.
The company has a loanbook of "a few million dollars" and
believes it will turn an operating profit early next year.
Merrill said its current default rate as a percent of all loans
was in the low 20s.
Additional investors included Flybridge Capital in the
equity portion of the funding round and Lighthouse Capital
Partners for the debt portion.
(Editing by Edwin Chan; Editing by Gary Hill)