Fintech startup closes trade finance gap for small businesses
Greg Karpovsky had a formative experience at university that would inspire the creation of Stenn, an online platform that provides working capital to international suppliers. He was studying at Moscow State in the 1990s when Jack Welch, then chairman and CEO of conglomerate GE, visited to give a lecture.
The young Karpovsky asked Welch what industry he should consider — markets were opening quickly in Eastern Europe, and he was already an avid entrepreneur.
Welch’s response was to focus on commercial finance. And that set Karpovsky on his journey to create Stenn.
His first venture, Eurokommerz, focused on providing working capital to small companies mainly serving domestic trade in Eastern Europe. But Karpovsky had global ambitions. After leaving Eurokommerz, and following other projects, he used his own capital to establish Stenn in 2015.
Karpovsky’s goal was to offer cash through digital channels to small businesses that trade goods on an international scale but lack bank support.
“We saw that there is a very large market of small businesses engaged in international trade and the digital economy that is dramatically underserved by the banks,” he says.
“I learned that there was an opportunity more than 20 years ago, so I started solving this problem in local markets. I am now trying to develop this idea on a global scale.”
The need for trade finance remains urgent. The gap in international trade credit is $3 billion and growing, according to the World Bank. A report by consultants Accenture, commissioned by Stenn, estimates that demand for trade finance will reach $6.1 billion over the next four years.
But financing for smaller businesses is lagging – a problem exacerbated by the 2008 global financial crisis, which saw big banks pull back from lending more broadly.
Recently, supply chains have also come under pressure, affecting small supplier companies. 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 is working on addressing this problem. It aims to connect SMEs worldwide to developed capital markets. Through its proprietary technology, Stenn can process applications for trade finance in as little as 48 hours, in more than 70 countries.
It is backed by major global financial institutions, including HSBC and Barclays, but focuses on businesses needing funding and trade credit protection in the $10,000 to $10mn range. To date, Stenn has facilitated around USD 10 billion in financing in total.
“We realized that a lot of goods are bought from emerging markets, like China, India and Latin America, so we started meeting suppliers in those countries, and we saw how dramatically they were underbanked,” explains Karpovsky.
“Many of these suppliers serve businesses in mature markets, such as the US and Western Europe. But they also sell directly to the end customer in these markets.”
Although Stenn offers a variety of financing options, its bread and butter is invoice financing: prepaying suppliers immediately and collecting from their customers later, for a fee. The service enables suppliers to be paid as soon as their items are shipped, while allowing buyers to receive their products and generate some revenue from them before having to settle the bill.
Without invoice financing, suppliers can end up waiting months for payment when exporting goods to overseas buyers, which can hurt their cash flow and growth.
In return, Stenn takes a fee from the supplier of between 0.65 percent and 4 percent of the invoice value, and also assumes the risk of a buyer defaulting.
However, unlike many other providers of invoice financing, Stenn offers larger loans. “This company is doing it at scale, up to $10 million in invoices, which is pretty impressive,” says David Brear, CEO of fintech consultancy 11:FS.
“In this market, given the cash flow situation, I think there are going to be people queuing up for this service,” he adds. “The pressures facing these mid-sized growing SMEs [are] scary. I can only see Stenn cleaning up that space. So if it has a big enough book from a lending perspective, this is pretty low risk when it comes to invoice financing. It’s a bit of a blue ocean for them given the lack of competition on this scale.”
Although the banks offer trade finance, their approval processes tend to take longer than the 48 hours offered by Stenn. “The banks, in various forms, do some of this, but they make people jump through a lot of hoops,” notes Brear. Shane Burgess, of venture capital fund Stripe, an adviser to Karpovsky, says Stenn is “democratizing access” to working capital for entrepreneurs in emerging markets.
“Karpovsky shaped his view of the world not just sitting in London, he’s lived in Singapore, he’s gone out to meet merchants in China and other areas of the Far East, building a good understanding of their pain point.”
In the heart of Stenn’s competitive offer is the technology. “What we sell investors is risk management,” says Karpovsky. “We can onboard customers, assess credit, manage client risk – that’s what our technology is designed to do.
“We are a technology company focused on managing risk, credit, fraud and compliance. We call it ‘de-risking’ for banks. . . 50 percent of [our] people are computer engineers, which has allowed us to scale quickly.”
He says Stenn’s technology allows the company to “source and efficiently onboard customers online, as well as to risk assess and verify transactions digitally”.
In the picture: Stenn Technology’s mobile app makes it easy for customers to get the finance they need © Emre Akkoy/Alamy
Larry Illg, from the venture capital company Naspers and a non-executive director on the board of Stenn, sees that it meets a need in emerging nations. “Western capital will not finance developing countries because, frankly, they misprice the risk,” he claims. “Karpovsky is trying to help bridge the gap [and] bringing Western capital to developing countries; he has built technology that can improve price risk.”
Earlier this year, Stenn raised $50 million from private equity firm Centerbridge, giving the company a $900 million valuation and putting it on track to become a “unicorn,” as $1 billion start-ups are called.
Even the Covid-19 pandemic has been an opportunity for Stenn. “What we saw during the pandemic, these companies found it even more difficult to access capital from banks,” says Karpovsky. Co-founder and late-stage CFO Chris Rigby believes the “enduring benefit” of being able to extend credit terms with buyers was only “highlighted by the pandemic.”
However, it is not a business activity without risks. Or critics. Invoice finance and its dangers came under scrutiny last year, when supply chain finance firm Greensill Capital collapsed. Greensill, which counted former British Prime Minister David Cameron among its advisers, was overly exposed to certain clients, some of whom defaulted on their payments.
Stenn is keen to emphasize that it has a different business model. “We never competed with [Greensill]; we have never been in the business, says Karpovsky.
“It was focused on larger transactions, which were buyer-led. We are focused 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 on 11:FS says: “I don’t think Greensill has polluted the industry as a whole. Invoice financing has been around for a very long time because of the need to bridge the gap between winning the work and doing the work. For anyone on a smaller scale, cash flow is king.”
Karpovsky is keen to continue expanding. “We will plan new equity rounds, but we are in a very good position at the moment. We are profitable, which is almost unique for a young technology company.”
Nor are there any signs of his ambitions abating. Where does he see the valuation of the company heading? “We plan to grow about 30 times in the next four-five years,” he says.
