Founder, Khrom Capital ManagementValue investor backed by a major university endowment. College dropout has posted some good returns while keeping a. View Eric Khrom’s profile on LinkedIn, the world’s largest professional community . Eric has 1 job listed on their profile. See the complete profile on LinkedIn and. SEC profile for Registered Investment Advisor (RIA) KHROM CAPITAL MANAGEMENT, LLC including address, website, AUM, assets, growth, total accounts.

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Inour Partnership returned 1. As our Partners know, our philosophy is not to disclose investment ideas in our letters, in khdom to prevent commitment bias and to protect our intellectual property. On the other hand, it is valuable for Partners to understand the type of investments Khrom Capital makes. To balance these conflicting goals, we find it prudent to occasionally walk through a particular Khrom Capital investment.

A current investment of ours is in a company called OnDeck, kkhrom operates an online platform for small business lending. We recommend reading this book or seeing the movie.

Khrom Capital Management

It describes the transition that talent scouts made from recruiting players using their personal judgments—which were impaired by cognitive biases and lacked regard for scientific data—to instead employing computer-generated statistical analyses.

The first team to implement this change was the Oakland Athletics. The company has taken advantage of advancements in computing and the proliferation of data to help solve a large problem: The traditional method requires small business owners, who have limited time to step away from their businesses, to dedicate over 20 hours to the loan application process. This problem exists partly because banks lack the incentive to make small business loans. As a result, banks are less likely to engage in lending at the smallest dollar level.

As a result, a low FICO score is the top reason for a small business credit denial.

Hedgeable | Sophisticated Investing Made Simple

FICO also does not help an underwriter decide on the appropriate loan size to offer and interest rate to charge each unique pizzeria. The antiquated process that banks still rely on created the opportunity for OnDeck to disrupt the small business loan market. OnDeck has spent almost a decade building out its OnDeck Score—a credit score for the small business, not the business owner. Small business owners can now complete an online application within an hour from the convenience of their offices and receive funding the same day.

More importantly, among the competitor CEOs whom we spoke with, Noah stands out as the most capable.

We took the time to get to know Noah, and his qualities match what we look for in CEOs. He sticks to a clearly defined goal: When necessary, he takes short-term pain to achieve this long-term objective. Noah drives innovation to keep OnDeck ahead of its competitors: He is highly ambitious and greatly believes in the future of OnDeck, with virtually all of his net worth invested in the company.


As the largest online small business lender, it benefits from the positive feedback loop of its data gathering.

As a result, OnDeck can now underwrite the widest credit spectrum compared to its competitors, which gives it a cost advantage in acquiring customers. Most lenders to small business are clustered at either end of the credit spectrum—from subprime to prime—and offer only one or two products.

OnDeck, on the other hand, has advanced its credit model to a point where it can now underwrite a short duration loan to a relatively new business, a line of credit product to a business with sporadic cash flow needs, or a bank-like multi-year loan to a mature business. For those interested in a simplified example to illustrate the point: Assume that Competitor A and OnDeck capitla for ten sales leads. Moreover, having a wider lending spectrum than its competitors enables OnDeck to generate a relatively higher customer lifetime value.

OnDeck can generally underwrite a small business earlier in its life before it qualifies for a bank loan. We see evidence of this in multiple areas, from customer service to innovation. Comparatively, the average NPS score for a national bank is 9.

In general, NPS leaders outperform on both winning new business and cross-selling to existing customers. The company took the decisioning strength of its OnDeck Score and recently created a platform that allows other institutions to use its underwriting algorithms. These partners include the largest bank in the U. Without needing to do anything, small business owners could be preapproved for a loan just by logging into either their Chase checking account or QuickBooks software.

OnDeck is bringing its superior value proposition and competitive advantages to a very large market.

Khrom Capital 2015 Letter; Long OnDeck Thesis

Small businesses are an extraordinarily large part of the Khrm States economy, accounting for about half its private GDP and workforce. To invest in OnDeck, an investor must have confidence that its underwriting is prudent and that the business can withstand economic recessions. There are several important reasons that give us that conviction. OnDeck lends to small lhrom across more than sectors. Except cpaital the most recent quarters inthe billions of dollars that OnDeck lent over the past eight years have completed their lifecycle.

And it has been a consistent track record: OnDeck lost less than seven cents for every dollar it lent out sinceand only nine cents in It is crucial to understand the nuances of how OnDeck differs from most lenders.

Khrom Capital Letter – Ondeck Detailed Thesis

Unlike a typical lender, whose borrowers are required to send in monthly payments, OnDeck gets automated electronic repayments from its borrowers either on a weekly or daily basis. A typical lender gets insight on the health of its borrowers only 12 times a year. OnDeck, on the other hand, receives data 52 or times per year.


OnDeck is the only publicly traded lender that we know to report a day delinquency ratio to its investors, as opposed to the standard 30 days. Most importantly, OnDeck has a very strong balance sheet. We always seek to compare our holdings to other businesses in order to better understand the risks and opportunities that they may face. OnDeck reminds us of Capital One in the s.

In its first annual report, Capital One discussed how the company was revolutionizing the credit card market through better use of information analytics, or as management called it, Information Based Strategy IBS. One that is extraordinarily data-rich…With this information, we can conduct scientific tests; build actuarially-based models of consumer behavior…Using advanced information technology and sophisticated quantitative analysis, we mine the vast amounts of data we have collected on millions of actual and prospective customers… and tailor products, pricing, credit lines and calital management to meet capitao individual needs and wants of each customer.

But as with almost any innovation, imitators quickly followed. After its first year as a public company, Capital One mhrom significant competitive pressures similar to what OnDeck faces today. In the first half ofas charge-offs and consumer bankruptcies continued the ascent that began a few years ago, several of our competitors either exited the credit card business or retrenched.

Capltal hindsight, what was the appropriate book value multiple to pay for Capital One in its first year as a public company? Let us just say paying even 10 times book value and holding it khro 10 years would have still provided an investor capitl a satisfying return. Accounting rules require OnDeck to expense advertising and loan loss provisions up front, while its interest income is amortized over the life of its loans. A decade from now, small business owners will continue to need capital, and they khroom prefer to access it in the most frictionless and cheapest manner possible, coupled with the best customer service.

OnDeck fulfills these needs, while continuing to enlarge its competitive advantages. We are likely still in the early days of how technology can transform lending.

There are many ways that the underwriting paradigm can evolve in what is now a Big Data world. We remain excited about the investment returns we think we can deliver to our Partners over the next decade. As always, if there is anything you wish to discuss, please feel free to call me. I look forward to writing to you again in the summer.

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