There are more than 50 million creators in the creator economy with 3.2 million who consider themselves full-time, pulling in six-figure incomes. As creators continue to spin online content into legitimate businesses, Karat Financial aims to position itself as an indispensable resource where they believe traditional banks haven’t been.
Karat Financial launched out of stealth last year coming from Y Combinator’s Winter 2020 batch and raised $4.6 million in seed funding from the likes of Twitch cofounder Kevin Lin, Coatue, and SignalFire. And today, the company is announcing a combined $26 million in funding that includes $11 million in Series A led by Union Square Ventures and an additional $15 million in debt financing.
In a way, this fundraising round legitimatizes Karat Financial’s mission to reframe content creators as full-fledged entrepreneurs.
“Symbolically, this is really important, because part of what we do is explaining to the financial industry what it is to be a creator, as well as explaining to creators how to think about their financials,” says Eric Wei, cofounder and co-CEO.
Wei, a former product manager at Instagram, started Karat with Will Kim, a former analyst for Goldman Sachs, as a way of giving content creators the financial resources they found traditional banks were denying them. Their inaugural product, the Karat Black Card, approves applicants based on their income and social-media followers rather than Fico scores. Also, the Karat Black Card’s rewards system offers customizable cash-back options based on a creator’s industry.
“The creator economy didn’t exist 15 years ago, and now it’s a $50 billion industry—that’s crazy,” says Kim, who shares the CEO role with Wei. “That’s what we see as an opportunity here: With the emergence of any new economy, there’s going to be a need for new tools, and credit is foundational to all of that.”
At launch, Karat Financial was built more for mid-level creators who have established a sustained following but are at the point in their business where they need to level up. Currently, the average Karat Black Card member has an annual income of $500,000, 250,000 followers across their social accounts, and $50,000 in savings.
However, the company is looking to broaden their pool of applicants.
“What we’re moving to is anyone can go to our waitlist and share their information because we’ve realized what we care about is your full-time business that benefits from a [corporate] card more than anything,” Wei says.
Karat Financial joins the growing list of fintech startups catering to underserved communities. From Greenwood, the Black-centered neobank; to Daylight, which offers financial services to LGBTQ community, the question is often “does X group really need their own financial platform?”
“I think this industry is going through a once-in-a-multi-generation period of transformation,” says Ryan Falvey, founder and managing partner of Financial Venture Studio, a VC firm specializing in fintech. “The big banks in this country are not interested, nor are they able to serve most consumers—full stop.”
To Falvey, big banks are primarily focused on growing the wealth of current customers as opposed to growing the number of new ones. To boot, traditional banks make most of their money from credit card services and transactions rather than debit or charge cards.
“They also generally don’t really want to be serving a lot of low-income consumers, which includes most Americans and almost all the people under the age of 30 in this country,” Falvey says. “What that means is you have an interesting opportunity to build a brand and market share in an environment where the incumbents are not investing a lot.”
That said, a key point to consider for these upstart financial services is the use case, which Falvey admits he didn’t see at first with Karat Financial when he looked at the business while it was in Y Combinator. “I’m not sure we were convinced that [Karat Financial] had a distinct enough use case,” he says. “But as I’ve learned more about the space, it seems like it might’ve been a miss. The creator economy really exploded last year.”
In that explosion, creators, including Twitch streamer and chess player Alexandra Botez, were in need of financing to capitalize on the boom.
Botez started her Twitch channel in 2017, and over the course of two years grew from 20 viewers to averaging around 400 per stream. But the one-two punch of the pandemic giving more people time to learn the chess and the overwhelming popularity of Netflix’s drama The Queen’s Gambit inspired a skyrocketing interest in the game, which benefited Botez’s channel, BotezLive. Botez incorporated as an LLC last spring, bringing on her sister to stream with her full-time and hiring an assistant and video editor.
However, when she went to open a business line of credit at Chase, she hit a snag. Despite having a credit score over 800 and a personal credit account with the bank, they rejected her. “They refused to tell me anything. They were like, ‘just try again in a certain amount of time.’ So then I did. I tried it again in a certain amount of time, and they rejected it again,” Botez says. “I was like, I’m never working with Chase even if I can, you assholes! It was really frustrating.”
Botez began hearing similar stories from creators. As fate would have it, she and Wei were in the same year at Stanford University. So when Wei needed creators to join Karat in its early days, Botez was an obvious choice.
“I understood the pain points so well that when they were pitching me on the call, within the first 30 minutes, I was like, this is incredible. Can I please be an angel investor?” says Botez, who is in fact a backer in Karat. “I realized how huge of a pain point this has been for me, for other people in the space, and how much potential there is here to build the financial infrastructure for creators.”
For Wei and Kim, the goal is to broaden that financial infrastructure beyond a charge card and into other services like tax preparation. “There are so many existing traditional institutions out there, why are people coming to us? Because those traditional institutions haven’t done a good job of reaching out to a new population that’s underbanked,” Wei says. “We want to be the very first and top choice for creators to come to and build more for them. All the existing [banks] out there haven’t done that yet. They failed. That’s why we’re here.”