Jacob Haar: Financing the financiers expanding small-business lending in America



New Revivalists is a series from ImpactAlpha and Village Capital profiling the people, places and policies reviving entrepreneurship — and the American Dream.

New Revivalist: Jacob Haar, managing partner at Community Investment Management
Place: San Francisco, California
Mission: CIM funds the loans of financial technology firms and other marketplace lenders to U.S. small businesses, particularly those owned by women, minorities or military veterans.
Follow: Community Investment Management

To Jacob Haar, a market that under-lends to businesses owned by women, minorities and veterans is inefficient. To seize that opportunity, Community Investment Management, a San Francisco impact investment firm, is financing a new crop of lenders using data and technology to better understand small-business borrowers.

Traditional small-business lending has relied heavily on outdated underwriting models, such as collateral-based models, that too-often exclude diverse business owners and communities. CIM provides working capital to innovative financiers like StreetShares, which connects military veteran investors to veteran-owned business. StreetShares leverages the loyalty of the military community to reduce risk in financial transactions. Since 2015, CIM has lent more than $300 million to small businesses in the United States — more than half of them owned by women, minorities, or military veterans.

“There is more information out there than ever before, and yet, income inequality, or just inequality generally, is extreme at this point in time and the existing funding models that we have for lending are broken,” Haar, a managing partner at Community Investment Management, told ImpactAlpha. “We need to think differently about the way that we underwrite borrowers. It is less about physical collateral and more about understanding borrowers better.”

ImpactAlpha: How does the Community Investment Management model differ from traditional investing?

Jacob Haar: We are an impact investment management firm that partners with innovative lenders that are making product or operational changes to the way that capital is flowing to small business and underserved communities in the U.S. So, we are providing funding for innovation in lending by looking at markets where there are significantly underserved pockets of the population.

Particularly with rising income inequality and some of the economic changes that we have seen over the last 40 years, we look at different innovative models for how lending can create solutions to get underserved borrowers, who are creditworthy, access to affordable, responsible capital. Our model provides the debt funding for those innovative lenders to scale and demonstrate the solutions that they have until they get to a point of widespread adoption by the mainstream capital market.

ImpactAlpha: How should we think about CIM’s role in serving underserved populations?

Haar: When you think about what our role is—by supporting financial technology—what you are seeing is the ability to change products, change operations, use data and technology to understand parts of the population that were not well-understood previously; and to price risk better so that they are able to offer better products and services to the traditionally or historically underserved.

We made a commitment at the Clinton Global Initiative in 2015 that we would fund over $300 million to small businesses in the United States — half of which would be owned by women, minorities, or military veterans. We surpassed that goal in 2017.

There is a company called StreetShares that focuses on providing debt capital to military veteran small businesses. In their model, StreetShares connects veteran investors to veteran small business borrowers, empowering both the investors and the borrowers. When they came out with the idea, we were an early debt funder of these loans and we helped them scale.

Our capital works with a company like that, one that is interested in serving an underserved demographic, has an idea, has brought together a great team, has raised some early venture capital money but needs the ability to demonstrate and scale their solutions and show that it works; show that it is prudent; and show that it is effective for those borrowers to not only receive capital but also to thrive and succeed.

ImpactAlpha: What is your relationship to public, private, and non-profit capital partners?

Haar: We have a combination of investors: some are foundation endowments that invest mission-related capital with us, others are private individuals or family offices that have an explicit interest in the impact of our work and others that believe that it is a good long-term investment to fund the underserved.

ImpactAlpha: How does data and technology drive the way you approach investment in underserved entrepreneurs?

Haar: There is more information available than ever before, and yet, income inequality, or just inequality generally, is extreme at this point in time and the existing funding models that we have for lending to a majority of the population are broken. Part of that is we are taking a 1970s or 1950s banking model and applying it to an economy that is very different, where 86% of the businesses in the United States today are service-based businesses. They do not have a lot of physical assets to borrow on. So we need to think differently about the way that we underwrite borrowers. We need lending to be less about physical collateral and more about understanding borrowers better.

We need to be able to differentiate one type of business from another type of business because we have all types of information about their customers, their cash flow, their invoices, and there may be technology that is embedded in the process of the business itself. There are all types of ways in which innovative lenders can obtain information or even be a part of the economic process of that business.

ImpactAlpha: What are the next benchmarks for CIM’s investment strategy?

Haar: We have really interesting data where we are funding women-owned businesses, minority-owned businesses and military veteran-owned businesses at significant multiples above where traditional lending markets have funded those populations and demographics. We will continue to look at where the market is inefficient and where there is opportunity to get responsible and affordable capital to the traditionally underserved.

There is also a lot of field-building work that we are engaged in around building the industry, such as borrower protection principles and general responsible practices. It [also] means working with policy makers and regulators as we think about responsible innovation that leads to more financial inclusion in our society.

Recommended reading:

  1. The Financial Diaries: How American Families Cope in a World of Uncertainty by Jonathan Morduch and Rachel Schneider
  2. Lean Startups for Social Change: The Revolutionary Path to Big Impact by Michel Gelobter
  3. Due Diligence: An Impertinent Inquiry into Microfinance by David Roodman

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