Kevin Song, founder and CEO of withco
Kevin Song, the founder and CEO of Withco.Withco
  • The CEO of Withco, Kevin Song, saw his family grocery store fail when a landlord doubled the rent.
  • His company purchases real estate for small businesses and offers them a rent-to-buy option.
  • Ken Chenault, Venus Williams, and Opendoor CEO Eric Wu participated in a $30 million fundraise.

In 2020, the number of small businesses in America shrank by almost one-third, even though a record number started businesses as the economy bounced back from COVID-19-related restrictions that year.

The pandemic was a flash point, but growing consolidation has long been a trend in the American economy.

Twenty years ago, Kevin Song, the CEO and founder of Withco, saw his mother and father shutter their grocery store in Brooklyn, New York. The store, which once sponsored Little League Baseball teams and helped with local school bake sales, was successful with exception of one financial risk his parents couldn't control. Its landlord sold the business to a developer, who promptly doubled their rent.

"They lost their business in a matter of weeks," Song said, recounting how quickly the family's generational trade fell apart. The blame, he said, lied with both the landlord and his parents.

"They did it to themselves, in a way," Song said. "They were running a healthy business, part of which meant being a great community member and steward. But because they didn't own that property, it led to an existential crisis."

This experience prompted Song to start Withco in 2019. The company, which creates a rent-to-own model for small-business owners, is coming out of what he called stealth mode, where it has tested the product with a "double-digit" number of small businesses.

The tests have since attracted some big investors. On Tuesday, it closed a $30 million fundraise led by Canaan, Founders Fund, Initialized, and NFX. The funding also included Danny Meyer's Enlightened Hospitality Investments, the homebuilder Lennar's venture arm, former American Express CEO Ken Chenault, the tennis star Venus Williams, the superstar Will Smith's Dreamers VC, and assorted founders and CEOs of Affirm, DoorDash, Hippo, Invitation Homes, Plaid, and Opendoor.

With its coffers full, Withco plans to enroll 100 small businesses in its programs this year. Song told Insider he hoped the company could "make it exciting again" to operate a small business in America.

"The cards are being stacked against small businesses in a meaningful way," Song said.

While challenges are many for small businesses, real estate is often at the heart of their most troublesome issues, Song said. Other than experiencing his parents' misfortune, the "check-engine light" for him became illuminated by the gentrification making matters worse for local businesses, and that's being magnified by the media. He was inspired to take a road trip across the country to see how these problems existed far beyond Brooklyn and Los Angeles.

The Withco business model is fairly straightforward. Song's team looks to both brokers and small businesses for leads on landlords willing to sell and for merchants who'd like to own a building. After underwriting the business' financials, Withco purchases the real estate and begins collecting a market-rate rent, with a fraction set aside as the business owner's future down payment.

In roughly five years, the merchant should be able to purchase the building from Withco at a predetermined price, Song said. The company hasn't yet turned a small-business renter into an owner, as it was founded only two and a half years ago.

The rent-to-own model has become prominent in the residential world even as some companies have been criticized for not living up to their promises and, sometimes, preventing people from owning a home. Recent transactions indicate Wall Street's interest, with Blackstone purchasing Home Partners of America for $6 billion in June and Divvy raising $200 million from Tiger Global Management and others two months later in a deal valuing the startup at $2 billion.

Withco's niche of "small-business commercial" properties differs greatly from residential markets, Song said. The market for small commercial properties is much more illiquid, with fewer fundraising options, which makes it inherently riskier for owners. As a result, Withco has less to gain from acquiring the properties than in finding businesses that will ultimately become permanent owners, he said.

The startup is open to deals across the nation but has so far focused on Texas, as well as the Southeast and Midwest, and on companies in the medical, automotive, and food industries. It been considering deals exclusively on stand-alone single-tenant buildings but plans to expand to other types of real estate and maybe even other small-business services.

Read the original article on Business Insider