Karat Financial Raises $26M Series A to Support the Creator Economy

The Evolving Landscape of Creator Finance

The creator economy is fundamentally reshaping how individuals generate income, encompassing roles from Instagram influencers to freelance graphic designers. However, conventional banking institutions have been slow to adapt to these changes.

Challenges Faced by Digital Creators

Consider Alexandra Botez, a Stanford alumna who earns a substantial six-figure income through chess streaming on Twitch, boasting an audience of 877,000 followers. Despite her success, she encountered rejection twice when applying for a business credit card. Similarly, the individual behind TierZoo, a YouTube channel with 2.7 million subscribers, faced apartment rental denial due to a landlord’s skepticism regarding the legitimacy of their online business.

Eric Wei, observing this disparity during his tenure as a product manager at Instagram – where he contributed to the development of Instagram Live – partnered with Will Kim, a former investor at seed fund Lucky Capital, to establish Karat Financial.

Introducing Karat Financial

Karat Financial was conceived as a more suitable banking solution tailored for digital creators. Recently, the company announced the successful completion of a $26 million Series A funding round, spearheaded by Union Square Ventures, with additional participation from GGV Capital and SignalFire.

“Traditional banks require a thorough understanding of an applicant to establish trust,” Wei explained to TechCrunch. “This trust is the prerequisite for extending credit, processing payments, and safeguarding funds. For instance, if Alexandra Botez commands an audience of 800,000, and even a tenth subscribe to her Twitch channel, a reliable income stream can be calculated, enabling a more refined underwriting process than current banking models allow.”

Beyond the Top 1%

Karat’s mission extends beyond assisting only the most prominent digital creators. Even self-employed small business owners and gig economy workers often struggle to secure housing without traditional employment verification like letters and pay stubs.

The creator economy continues to experience rapid expansion – with over two million creators earning more than $100,000 annually. Furthermore, VC firm SignalFire estimates that over 46.7 million individuals possess a sufficient online following to potentially monetize their content on a part-time basis.

A Sustainable Trend

“The growth of this sector has been remarkable,” Kim stated. “Even if its longevity is questioned, it has already demonstrated resilience over a fifteen-year period.”

Wei and Kim initiated Karat in 2019, subsequently gaining acceptance into Y Combinator’s Winter 2020 accelerator program. By June 2020, Karat launched its inaugural product, the Karat Black Card – a credit card specifically designed for creators – and secured $4.6 million in seed funding from investors including Twitch co-founder Kevin Lin.

The Karat Black Card: A New Approach

“Our evaluation process centers on recognizing creators as legitimate businesses,” Wei clarified. The Karat Black Card distinguishes itself by eliminating interest charges and fees, generating only a modest profit from bank interchange fees. Karat also offers the option to advance funds for sponsorship agreements at no cost to the creator.

For example, an influencer receiving $1,000 for a sponsored video may experience a significant delay in payment. Karat provides immediate access to these funds, with repayment due upon receipt of payment from the sponsoring company.

Impressive Growth and Investor Confidence

Karat has demonstrated substantial growth, achieving 50% month-over-month increases and processing eight-figure transaction volumes since its launch last year. Notably, over 30 creators have invested in Karat, including prominent figures like Jared Leto, 3LAU, Nas Daily, and Josh Richards – all achieved without any expenditure on influencer marketing.

“Providing exceptional service to creators naturally encourages them to share their positive experiences with others,” Wei observed.

The company’s investor network has expanded to include YouTube co-founder Steven Chen, Twitter co-founder Biz Stone, former TikTok CEO Kevin Mayer, and former Wealthfront CEO Adam Nash, among others.

Future Vision: A Comprehensive Financial Infrastructure

Karat’s long-term objective transcends simply providing creators with a line of credit. While the credit card served as a proof of concept, the company aspires to establish a complete financial infrastructure for creators.

This includes facilitating the launch of merchandise lines, assisting with business incorporation, securing mortgages, obtaining business loans, and streamlining tax filing processes. Wei anticipates these expansions following the company’s Series B funding round, unlocking a more substantial revenue stream than interchange fees.

“We adopted a conventional fintech strategy for Karat’s rollout,” Wei explained. “We began with a simple offering before expanding and scaling into additional products. The card is merely a stepping stone; our primary goal is to leverage it to refine our underwriting model, build creator trust, and ultimately become the Square for creators.”

Demand for Comprehensive Financial Services

Wei and Kim are already receiving requests from their high-profile clients to serve as their informal financial advisors.

“We appreciate the sentiment, but these services are not yet available,” Wei responded. “We plan to develop them after securing our Series B funding, and we will, of course, charge fees for our expertise, providing a superior level of service than currently exists.”

With the recent Series A funding, Karat intends to expand its team through new hires and initiate the development of new product offerings.