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Apple Pie Capital strives for new finance normal


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“It’s the way the world is going,” says Denise Thomas, CEO and founder of ApplePie Capital, about linking financing with the internet. Her firm just received a capital infusion.

There’s an interesting statistic floating around that 71 percent of millennials would rather visit the dentist than just listen to a message from a bank. And anyone who has slogged through an SBA loan application might happily sign up for a root canal instead.

No, in the age of the internet, there’s little love for the traditional way to get a loan, the rules and the endless paperwork—if there ever was. Luckily for millennials, they can do just about all their banking through their phone. For business owners, however, banks were among their limited options.

In all those sentiments, ApplePie Capital founder and CEO Denise Thomas saw an opportunity. “It’s the way the world is going. If I can do so much on the internet, why can’t I do my financing?” pondered Thomas, who founded and self-funded the pioneering financing source in 2014.

Funding rolls in

A couple rounds of funding and a couple years later, the company has funded more than $55 million in loans and returned $4 million to investors. And with a fresh infusion of $16.5 million from QED Investors and Fifth Third Bancorp as well as a $180 million loan purchase agreement from TowerBrook Capital Partners, the company is surging further forward in the franchise space, and has some new ideas in the making.  

Denise Thomas

Denise Thomas, ApplePie Capital’s CEO

“What’s exciting is that we will have the runway to do some interesting things around our long-term vision and strategy, which has always been to be a full lending solution for brands,” said Thomas, who said new products were in the pipeline already. “If you imagine the future, where we’re doing loans but we’re also offering other services that are integrated, that just begins to streamline and makes life easier—and also provide more favorable programs to the borrowers because of the bank relationship.”

Frank Rotman, a founding partner at QED Investors, believes ApplePie’s model is something special, even among fintech companies. “We’re big fans; we’ve been with them since formation. When we get involved when a company is forming, it has to be a pretty special company,” said Rotman. “I’m a big fan of zero-acquisition cost channels, when someone hands you a customer because it solves a problem for them—that’s a fantastic business. There aren’t many businesses that can actually deliver on the promise of a zero-acquisition cost channel.”

And without Thomas at the helm, he said it would be a very different company. “Denise is a force of nature,” said Rotman. “I couldn’t imagine a 22-year-old from Silicon Valley coming in and saying to a franchise owner that built their franchise over a 20-year period— ‘we’re going to come in and meet your needs.’ But Denise can go in and with full confidence and say, ‘We’re going to listen to you, we’re going to help you, we’re going to help structure loans that work for you and your franchisees, and if not, we’ll tell you why not.’”

That force hides behind a smiling, talkative woman who embodies a casual Californian disposition despite Thomas’ two-decade background in technology and financial services. Her question of “why not financing?” was the spark. The evolving sandbox where she played long before it was dubbed fintech fueled the flames.

Fintech serves as a broad catch-all term for technology that eases the flow of money, and Thomas knows the segment well. (See an article about competitors on page 52.)

While she was CMO of a company that empowered pre-IPO shareowners to sell their shares, she was exposed to a pair of companies refinancing consumer debt and packaging it as an investment vehicle. “I thought, ‘This is pretty smart, these guys are taking credit card debt and refinancing it at a lower rate.’ Who doesn’t win?” said Thomas.

But there was nothing of the sort for business loans, and she quickly saw why. There’s little way to forecast how a loan will do at an untested business—giving a loan to Joe’s Pizza Shack is just too big of a risk to streamline the process.

But franchising, with its endless vetting, franchisee requirements and relatively predictable growth pattern, might work. So before jumping into yet another venture, she interviewed prospective and actual franchise owners about how they get funded. She said she got consistent answers.

For new franchisees and small multi-unit operators, growth meant either an SBA loan, give up substantial equity or roll over their corporate 401(k). Sometimes a community bank would help if the borrower had a good track record or enough on deposit, but generally, operators between one and 10 locations had a lot of trouble with financing.

“So I said, ‘Wow, that’s painful.’ So what would it be like if it were different?” said Thomas, and she had to find out. “I self-funded the company with the help from a lot of people that worked nights and weekends until we got to a stage were we could actually raise venture capital.”

So, tucked in the heart of San Francisco’s Financial District, Thomas and a handful of smart people began partnering with brands to help franchisees get better access to capital.

Just like those refinancing companies, ApplePie packaged business loans and sold them to institutional investors and allowed accredited investors to get into the mix through an online marketplace.

And to ensure the loans were a good investment, brand partnerships were put at the core of the model. Be it a thriving growth brand like Hand & Stone Massage and Facial Spa, Jersey Mike’s or Nothing Bundt Cakes or mature growers like 7-Eleven or Jan-Pro, strong brands offer predictability for investors. They wanted to get into the valuable asset class, but didn’t want the risk of comparable investment vehicles.

“Our model starts with the brand. We believe that the brand track record and history is a really good indicator of future performance,” said Joshua Jansen, vice president of business development. “And when you have a big enough dataset you know that brands know how to pick franchisees; they know how to return profits to the franchisees so they reinvest.”

A vetting layer

The ability for strong brands to be picky about franchisees means another layer of vetting for investors. In fact, it’s not the people who can’t get a traditional loan that borrow from ApplePie. On average, they have $2 million in the bank and a credit score over 750. They could easily go to a bank, but they prefer to get money for a new location, an acquisition or a remodel in less than 30 days through a fully digital process—even if the rates are a little higher than a traditional bank.

Thomas said that efficiency will keep getting better as they invest in new technologies and partner with more franchised brands because it just doesn’t have to be that hard.

“Our loans are 30 times the size of a consumer loan, but they are only five times as complex,” said Thomas. “So when we follow in the footsteps of other successful online lenders in using technology to make the borrower experience much more pleasant, we are able to obtain even greater internal efficiencies than others.”

So those who would rather find a dentist’s chair than hear anything from a bank, Thomas’ vision of a new normal could make finance easy—sorry dentists.

“I think that in retrospect it will all be viewed as a standard instead of a wow,” said Thomas. “Amazon won because they continued to address the need of their consumer and they did it better and better and better, and the products are no longer able to differentiate themselves other than being a good product. The best product and the best service win, always.”

There’s a lot to win. Even sticking with a select few franchises, it’s a massive market and a major problem-solver for franchises stuck in the gap between an initial loan and a traditional bank’s requirements.

“The space itself is $30- to $40 billion of new franchisee opportunities a year, and then you have all the refab-refits, which it’s a little bit unknown how big that is, but it’s another $20- to $30 billion,” said Rotman. “It’s not a small market. You add that up, that’s a $60 billion a year opportunity.”

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