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ANALYST REPORT PART 1 ONLINE LENDING FINTECH Including data from the PitchBook Platform, which tracks more than 33,000 valuations of VC-backed companies. AUGUST 2016
ANALYST REPORT
PART 1
ONLINE LENDING
FINTECH
Including data from the PitchBook Platform, which tracks more than
33,000 valuations of VC-backed companies.
AUGUST 2016
ContentsCREDITS & CONTACTPitchBook Data, Inc.
JOHN GABBERT Founder, CEO
ADLEY BOWDEN Vice President,
Market Development & Analysis
Content, Design, Editing & Data
EVAN B. MORRIS Analyst
NIZAR TARHUNI Senior Analyst
GEORGE GAPRINDASHVILI Managing Editor
JENNIFER SAM Senior Graphic Designer
NICK LINTON Graphic Designer
Contact PitchBookpitchbook.com
RESEARCH
EDITORIAL
SALES
COPYRIGHT © 2016 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.
Analyst Note 3
Overview 4
Early Development 4
Basic Business Models 5-6
Strategy 6
Market Applications & Segments 7
Student & Consumer Loans 7-8
Small Business Lending 8-9
Addressable Market 9-10
Scalability 10-12
Risks to the Marketplace 12
Private Investment & Corporate M&A 13
Venture Capital Activity 13-16
Active & First-time Investor Growth 16
Institutional Involvement & Risk Mgmt. 17
Moving Forward 18
Select Company Profiles 19-24
2 PITCHBOOK FINTECH
ONLINE LENDING
Analyst NoteCommercial banking stands as one of the oldest and most static
industries, insulated from disruption by regulatory moats and capital
intensity. Banking has begun to change; the post-crisis regulatory
and macro environment opened the door for online lenders to enter
traditional banking business lines. Venture capital and institutional
investors of all stripes have lined up to fund this innovation. Technology
has substantially reduced barriers to entry for lending platforms
to manage risk, attract borrowers and facilitate markets in online-
originated notes. This change was sparked by regulation forcing a
mispricing of risk, leading to reluctance of banks to engage in certain
revenue-generating lending activities and creating niches for online
lenders to rapidly gain market share in both established and emerging
segments. On the backside, the extended period of low yields in fixed
income has generated growing interest for retail and institutional
investors alike to invest in higher yielding online-originated credit
instruments.
In the first part of PitchBook’s Fintech Analyst Report series, we dove
into the emerging online lending industry to document the challenges
faced by online lenders and the growing ecosystem claiming to mitigate
the issues that rocked credit markets in 2007-2008. Questions remain as
to how this rapidly scaling industry will weather some very public storms.
As these platforms face growing pains, a hybrid model has emerged,
combining balance sheet and marketplace lending and promising to
ameliorate the inherent moral hazard of loan originators. This model
offers the best bet for the industry to weather the next phase of the
credit cycle.
Evan B. Morris
3 PITCHBOOK FINTECH
ONLINE LENDING
OverviewEARLY DEVELOPMENT
While consumers and business owners quickly saw the internet as a
convenient way to monitor their finances, it took several decades for
the option of entirely bypassing brick and mortar banks to materialize.
E-Loan, founded in 1997, offered an online platform for consumers
to compare loan terms across multiple lenders while slashing broker
fees; for a time the company also offered direct origination mortgages,
as well as CDs. The platform popularized consumer access to FICO
scores, a then-opaque metric used by banks as a standardized measure
of creditworthiness. Wall Street’s voracious pre-crisis appetite for
mortgage-backed securities prompted investment banks to turn to non-
bank originators for loans to securitize. Though not all of these entities
operated online, non-banks accounted for over 30% of all residential
mortgages in the years immediately preceding the financial crisis.
Quicken Loans became the market leader among non-bank originators
by offering mortgages and lending products through an online portal.
Other than aggregation of mortgage originators and credit card issuers,
online platforms for lending directly did not take off until after the
financial crisis. The downturn not only caused material losses from
certain credit instruments, but the monetary policy response of slashing
interest rates to the zero bound reduced the future expected returns in
fixed income portfolios. Retail investors’ newfound distrust in financial
institutions further bolstered the conditions for unproven investment
platforms to attract interest. While VC-backed Prosper pioneered peer-
to-peer lending in 2006, it took until after the crisis for retail investors to
trust online platforms.
A wave of upstarts began to facilitate direct investments by retail
investors in slices of online-originated loans in amounts as low as $25.
There was ample opportunity to profit from compressing the spread
between borrowing and lending. Renaud Laplanche became inspired to
found Lending Club after realizing that his credit card would charge him
18% interest while he earned less than 1% on his savings account. Prosper
and later Lending Club and others experienced exponential growth
when many early retail investors in peer-to-peer reported solid double-
digit returns. Subsequently, an entire ecosystem developed around peer-
to-peer lending, providing reporting, analytics and secondary markets.
This attracted the interest of institutions that wanted to leverage their
resources to generate outsized returns in the asset class.
Non-bank lenders grabbed a 30% market
share in the years leading up to the
financial crisis. Quicken Loans became
the leader by marketing to borrowers
through an online portal.
A loss of faith in traditional financial
institutions opened the door for startup
online lending platforms to attract
borrower and investor interest.
4 PITCHBOOK FINTECH
ONLINE LENDING
BASIC BUSINESS MODELS
The new wave of online lenders emerged initially under two distinct
business models: balance sheet lenders and marketplace lenders. In
addition to the use of novel technology, both business models rely
on non-deposit funding. Marketplace lenders continue to evolve as
peer-to-peer scales beyond what retail investors can support, pushing
platforms to increasingly solicit institutional capital. These companies
match buyers and sellers while minimizing their own balance sheet risk.
Revenue comes from the collection of an up-front origination fee, as
well as a servicing fee throughout the duration of the loan. These deals
come with lower margin per loan, thus requiring substantial need for
external investment. A lack of visibility into lending models has caused
compression in the spreads these platforms are able to generate in
fees due to investor uncertainty. Much of the spread they are able to
collect goes toward customer acquisition since a large share of the
revenue comes from non-recurring sources. Using the public financials
of Lending Club as an example, origination fees average 4.47% per loan,
accounting for a whopping 87% of the company’s revenue. Furthermore,
expenditures on customer acquisition may not pay off in the long run.
The target market of debt consolidation, with the goal of getting totally
out of debt, does not lend itself to repeat customers.
Prosper took eight years to issue its first $1 billion in loans, relying
overwhelmingly on retail investors. Once it tapped into institutional
capital, the company took only six months to issue the second billion.
When peer-to-peer lending platforms first emerged, these loans were
entirely fractional, i.e. small investments were pooled and lent to a single
borrower. In 2012 as the asset class matured and demand increased from
institutional investors, Lending Club and Prosper began marketing whole
loans to single investors. This has evolved into full-blown securitizations.
PeerIQ, a marketplace lending analytics platform focusing on the
securitizations market, notes a rapidly increasing average size of
securitizations, growing from $64 million to $267 million from 2013 to
2016.
Balance sheet lenders originate loans from their own capital or raise
funds from Industrial Lending Corporations (ILCs). One popular ILC
is Utah-based WebBank, fully owned by Warren Lichtenstein’s Steel
Partner Holdings (NYSE: SPLP). Balance sheet lenders such as Avant or
Marlette Funding hold the loans on their balance sheets and collect the
net interest margin (NIM) or spread between cost of capital and yield.
This strategy brings in greater cashflow to the company over the life of
the loan, but comes with risks from charge-offs and defaults, as well as
Marketplace lenders evolved from peer-
to-peer lenders scaling beyond what
retail investors could support.
Balance sheet lenders hold loans on
their balance sheet, leading to longer
term cashflows, but greater exposure to
market volatility and defaults.
Marketplace lenders remain dependent
on one-off origination fees collected
when they make the loan, and modest
servicing fees. They must maintain
lending volume in order to generate
revenue.
5 PITCHBOOK FINTECH
ONLINE LENDING
exposure to capital markets. To mitigate duration risk, these players tend
to focus on high-interest, short-term loans. These firms serve as bank-
like financial intermediaries, but without the high-friction cost structures
such as the expense of maintaining physical branches.
STR ATEGY
Most of these emerging online lenders have provided credit to segments
directly impacted by post-crisis legislation, which became neglected or
mispriced by banking and government institutions. These target markets
include consumer unsecured credit, small business lending, student loan
refinance and high earning millennials with limited credit history. Further
on, we’ll dive into each of these segments and how upstart lending
platforms find novel ways to price risk, mitigate defaults and spur
much-needed credit creation. These methods include the integration of
alternative datasets and analytics, applied behavioral finance and non-
traditional repayment schedules.
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ONLINE LENDING
Market Applications & SegmentsSTUDENT & CONSUMER LOANS
It’s no secret that rising higher education costs in the US have burdened
graduates with boatloads of student debt. According to the Brookings
Institution, outstanding federal student loan debt quadrupled between
2000 and 2014 to reach $1.1 trillion. Federal Stafford Loans account for
over 90% of outstanding loans and pay a fixed interest rate of 4.66% to
all undergrads and 6.21% to graduate students, irrespective of indicators
about ability to repay such as the institution attended or degree earned.
More than 70% of federal loan defaults are made by borrowers from
for-profit institutions such as DeVry or University of Phoenix. Traditional
lenders offer private loans at a floating rate spread + LIBOR, typically
around 8%.
Online student loan refinancers have focused on regulatory arbitrage of
offering better rates to recent grads with strong career prospects but
low FICO scores due to limited credit history. These lenders emerged
as peer-to-peer lending platforms for alumni of elite institutions such as
Wharton and Stanford, to lend directly to current students. SoFi Founder
and CEO Mike Cagney refers to the ideal borrowers as HENRYs—high
earners not rich yet. These represent the top 5-10% of earners aged 25 to
40 with high free cash flow and the potential to earn more. Student loans
are also an ideal clientele since debt-laden digitally savvy millennials
prefer operating online.
While all of these lenders have promised to bring banking relationships
back to their interpersonal roots, they have also doubled down on
increasing the accuracy of predictive analytics. Traditional FICO scores
can be misleading for borrowers with limited credit history. Online
lenders have augmented traditional credit scoring with alternative
datapoints including job title, employment history, spending habits and
income. Lenders speed up the approval process by allowing users to
quickly import data directly from social media sites such as LinkedIn and
transaction history from online banking platforms. The biggest deterrent
to this alternative approach is the lack of track record for alternative
credit scoring. Lending based off of criteria other than FICO score has
only been around for about five years. To gain broader acceptance
of these models, online lenders will need to weather a full credit and
interest rate cycle. Adoption of secondary markets will only further
refine these criteria.
Federal student loans (over 90% of the
market) pay a set rate irrespective of the
institution attended, degree earned or
the student’s creditworthiness, opening
a profitable niche for students whose
credit profile warrants a lower rate.
Online lenders utilize proprietary credit
scoring using data from social media and
other alternative sources to augment or
replace FICO scores.
7 PITCHBOOK FINTECH
ONLINE LENDING
Consumer and student loan lenders can operate as either balance sheet
or marketplace lenders. Peer-to-peer platforms Lending Club (NYSE:
LC) and Prosper off-set loans with notes auctioned to the public, don’t
use leverage and carry no credit risk. These loans are typically sold in
bulk to institutional investors; some of the large players have even begun
offering securitized loans. In 2Q 2016 we saw a total of six securitization
deals: three backed by student loans, two by unsecured consumer
loans, and one by SME loans. Establishing relationships with the existing
financial services ecosystem will facilitate a more robust market for
securitizions and institutional capital, making these firms less dependent
on VC equity funding. Firms such as Avant and Marlette Funding have
approached the segment using a balance sheet lending strategy. Avant’s
sub-prime target market faced disproportionate exposure to the sell-
off in low-rated high yield credit in the first half of 2016. The massive
ramp in issuance preceding a planned IPO may have led the company
to drop standards in order to print massive outstanding issuance
numbers. Furthermore, the strategy of targeting borrowers who want
to consolidate their debt may result in adverse selection bias toward
those with extant issues managing personal finances, especially with
no enforcement mechanism to force them to actually cancel their other
lines of credit.
SMALL BUSINESS LENDING
According to a Harvard Business School case study, small businesses
have created two-thirds of US jobs since 1995. Even so, these enterprises
have become increasingly shut out by traditional banks. To apply for
a loan, the average small or medium enterprise (SME) must fill out 25
hours of paperwork which in turn takes several weeks to process before
a credit decision is made. This low velocity of money wastes critical time
in which a small business may have urgent need for funds. Many of these
companies have both poor accounting and record-keeping. Furthermore,
the idiosyncrasies of small companies make finding comps difficult if not
impossible. For banks, this makes the transaction costs of lending
$100,000 equal to lending $1,000,000.
Small business lending has always been the domain of smaller
community banks. However, the consolidation of banking accelerated by
the crisis has halved the number of community banks since the mid-80s.
This phenomenon contributed to deepening the fallout of the financial
crisis. Recent reforms increasing capital requirements and oversight
have made the paperwork and analysis for a low-yielding loan not worth
the cost for banks. As banks have consolidated and grown risk averse,
The largest online lenders have
increasingly looked to securitization as
a source of capital, facilitating a more
robust market for online-originated
loans.
Traditional banks require mountains of
paperwork before they even consider
extending credit to small/medium
enterprises. High fixed costs make
servicing the smallest companies cost
ineffective.
8 PITCHBOOK FINTECH
ONLINE LENDING
they’ve pulled away credit from small businesses when they needed it
most. This exacerbates the cyclicality of the business cycle, and has led
many businesses to fail during and after the financial crisis.
Many of the promising entrants into small business lending leverage
novel forms of data to make lending decisions. Technology companies
not thought of as lenders, such as Alibaba (NYSE: BABA), PayPal (NAS:
PYPL) and Square (NYSE: SQ), use proprietary transaction data to lend
merchants cash advances. These working capital lines of credit are paid
off from a small slice of future transactions. This repayment method
gives increased flexibility for lumpy sales. OnDeck (NYSE: ONDK) and
Kabbage offer more traditional lines of credit, but are able to avoid
mountains of paperwork by employing data imported from tax software
such as Intuit (NAS: INTU), as well as social media (e.g. from Foursquare
which can track foot traffic). This transaction and social media data
can be imported and processed far more quickly and efficiently than
traditional metrics inputted by hand through paperwork.
Marketplace lenders have tapped into the small business market as well.
UK-based Funding Circle—backed by Index Ventures, Accel Partners,
Blackrock, USV and others—offers term loans to small businesses in the
UK and US and just expanded to the Netherlands, Germany and Spain
by acquiring German lender Zencap. The company originally offered
loans through an online auction process, but has since transitioned to
a proprietary model to assess credit risk and price loans. The company
resells loans to individual and institutional investors under the guise of
earning a high return (it estimates 7.5%—note that fixed income yields
are lower in Europe) while supporting small business. While this figure
sounds reasonable, these platforms will need to survive an entire credit
cycle before all of the risks are sussed out.
ADDRESSABLE MARKET
Founders of online lending platforms have kicked around lofty numbers
for future market size. Avant founder and CEO Al Goldstein claimed in
2014 that he had a vision for his company as the “Amazon of financial
services,” with a future $100 billion valuation on the same scale as bulge
bracket banks. Many of these lofty projections imply that online lending
can scale outside of consumer and small business loans into a diverse
array of lending products including mortgages. In order to make this
happen, Avant will need to expand beyond offering personal loans to
sub-prime borrowers hoping to pay off credit card debt to auto loans,
credit cards and mortgages. Mike Cagney, founder of SoFi, which has
cracked the $10 billion origination mark, aims for a valuation of around
Small business’ social media integration
and use of accounting and payments
software supplies rich datasets for online
lenders, eliminating paperwork and
offering lending products tailored to
specific business' needs such as lumpy
cash flows due to seasonality.
Avant was named “Chicago’s fastest
growing startup since Groupon” by
Crain’s Chicago Business.
9 PITCHBOOK FINTECH
ONLINE LENDING
$30 billion. SoFi has already expanded from student loan refinancing
for the most creditworthy borrowers graduating from elite programs
to mortgages for similarly “elite” borrowers, including interest-only
options with faster underwriting and less restrictive liquid net worth
requirements than traditional lenders.
According to research from PeerIQ, there have been more than $50
billion in cumulative online originations from alternative lenders as of
the end of 2015. Looking solely at consumer unsecured originations
(including student loans), Orchard estimates that originations have
totaled $23.1 billion from 2Q 2013 through 1Q 2016. Both data providers
note a decided slowdown in 1Q 2016 corresponding with a shift in credit
markets. According to a 2015 Goldman Sachs report on the rise of
shadowbanks, traditional lenders stand to lose $209 billion in unsecured
personal lending and $177 billion in small business lending to online
upstarts. In order for these platforms to justify lofty valuations, they
will need to not only realize their potential in current verticals, but also
tap into much larger markets such as the US mortgage industry, which
originates $1.2 trillion annually.1
SCAL ABILIT Y
The need for diverse and institutional capital has favored the largest and
most well-established online lenders. For these lenders to continue to
scale, however, the industry needs great transparency and additional
data around loan performance so that investors can accurately
assess risk and trade loans in a liquid market. Prosper’s 2008 class
action lawsuit alleging the sale of unregistered securities prompted a
settlement that obliged the platform and fellow lender Lending Club
to register with the SEC. The costs of SEC registration increase the
barriers to entry for peer-to-peer lenders and thus put a constraint on
new platforms. More recently, allegations that publically traded online
lender Lending Club mismarked loans sold in bulk to Jefferies has
rocked the nascent industry. Prosper, the only peer-to-peer lender to
weather both the financial crisis and the settlement of an early class
action lawsuit from investors, announced in May that it would lay off over
28% of its staff due to declining loan volume. Furthermore, a Supreme
Court ruling in Madden vs. Midland Funding called into question the
claimed exemption from state usury laws. These challenges have
brought up questions as to how online lenders can continue to rapidly
scale while maintaining outsized returns for investors. For one, a more
1 Ryan M. Nash and Eric Beardsly. “The Future of Finance, Part 1: The rise of the new Shadow Bank,” Goldman Sachs Equity Research, March 3, 2015, pg. 12, [http://www.betandbet-ter.com/photos_forum/1425585417.pdf], accessed July 2016.
Prosper’s settlement of a 2008 class
action lawsuit alleging the sale of
unregistered securities forced SEC
registration upon the industry, increasing
barriers to entry for future lenders.
10 PITCHBOOK FINTECH
ONLINE LENDING
liquid market for online loans would create a positive incentive structure
to maintain loan quality by facilitating the price discovery that would
allow marketplace lenders to compete on more than coupon. The fact
that institutions typically purchase these loans at par indicates that the
originator does not factor into how they trade.
Platforms have emerged to intermediate between institutional investors
and upstart originators. Startups such as Orchard, Blackmoon, PeerIQ,
MonJa and dv01 connect lenders and institutional investors, facilitating
loan markets by integrating data with advanced features such as
portfolio analytics, strategy development through backtesting and
performance reporting. The firms facilitate a combination of marketplace
and balance sheet lending that Blackmoon calls composite lending and
Orchard calls a hybrid model. These intermediaries aim to combine the
transparency of marketplace lenders with the greater interest revenue
of balance sheet lenders by providing lending platforms with more
real-time feedback on the quality of their credit models. Balance sheet
lenders transform into composite lenders to hedge against duration risk
and dilute less of their equity with venture raises.
Securitization of online-originated loans remains another essential piece
to the puzzle for these lenders to attract long-term, low-cost capital.
Through 2Q 2016, cumulative securitization issuance has reached $10.3
billion according to PeerIQ, with the peak issuance occurring in 4Q
2016 with a par value of $2.7 billion. Marketplace lender securitizations
are similar to ABS (asset-backed securities) in other consumer credit
classes; they have similar WALs (weighted average life—the average
amount of time until a dollar of principal is repaid), offering prices and
subordinations, yet are rated lower than comparable securities. This
perception gap remains a challenge given the high profile issues faced
by some of the largest online lenders.
Marketplace lending was not immune from the recent volatility in credit
markets. Student loan securitizations weren’t as affected as consumer
ABS, as spreads widened less on a relative basis. Junior tranches also
fared poorly on secondary markets, some of which can be attributed
to more senior debt weighted toward student loans. Lenders have also
begun increasing rates per investor demands. For example, Lending
Club increased rates for borrowers four times since 4Q 2015. First in
response to the fed hiking rates, second in response to market volatility,
third to account for increased delinquencies and fourth to give investors
higher returns.
An emerging ecosytem around online
lending aims to institutionalize the space,
offering analytics, reporting and other
features to platforms and institutional
investors alike.
Securitizations of online-originated loans
have been rated lower than comparable
securities despite similar performance
metrics.
11 PITCHBOOK FINTECH
ONLINE LENDING
Accurately pricing risk in a secondary market would mitigate the
inherent moral hazard of originators. The window for outsized returns
through simple exposure to the asset class has closed. Investors will
demand increased reporting analytics and visibility into the individual
loans themselves in order to run their own trading algorithms. Studies
of private direct lending have found that borrowers of traded loans
perform better than equivalent non-traded loans, i.e. those that
originators keep on balance sheets. The reputational risks of an
originator’s portfolio underperforming in the secondary market have
greater residual effects than the lost yield if held on their balance
sheet. In other words, the long-run knock on effect from underwriting
underperforming loans in an efficient marketplace platform are worse
than the short-term losses from charge-offs.
RISKS TO THE MARKETPL ACE
Questions remain over how the industry will react to a downturn in
credit markets. The primary concerns center around investor appetite,
transparency, fraud and diversity of capital. A shift in investor sentiment
has begun to cause a contraction in capital allocation to credit, limiting
the ability for existing borrowers to roll over their debts. Cracks have
already emerged; Avant, a consumer balance sheet lender that uses
machine learning tools to replace FICO scores, cited softened investor
demand for loans when announcing multiple rounds of downsizing
this spring and summer. This came just a year after a $400 million
investment partnership to sell loans to KKR, Victory Park Capital and
Jefferies. Questions remain as to how many borrowers are using online
lenders to pay off other online loans. Anonymity and use of alternative
data outside of the FICO system may compromise the ability of lenders
to evaluate borrowing on other platforms. The exclusion of a potentially
impactful hard credit check has been touted as a feature, not a bug.
There may be increased opportunity for borrowers to commit fraud due
to lax controls on the use of funds for their intended purposes.
The stacking of multiple online loans
stands as one potential blind spot due
to loose controls at rapidly scaling
platforms.
12 PITCHBOOK FINTECH
ONLINE LENDING
ONLINE LENDING DEAL FLOW & CAPITAL INVESTED BY YEAR
(ON LY EQ U IT Y I NVE STM E NTS I N CLU DE D)
Source: PitchBook
*As of 7/22/2016
Private Investment and Corporate M&AVENTURE CAPITAL ACTIVIT Y
The increased regulatory burden on banks after the financial crisis,
combined with advances in data and analytics, has driven an interest
in fintech, and we’ve seen a rapid influx of equity funding enter the
online space to facilitate growth. Online lending platforms have their
own regulatory, analytical and developer costs that must be funded
through venture capital. The applicability of technological, financial and
regulatory expertise has prompted bets on the space by a diverse group
of investors, including traditional venture capital and private equity
firms, hedge funds, mutual funds, corporate VC arms and financial
services executives-cum-angel investors. Since the start of 2011, online
lending has attracted $12.6 billion in capital across 463 completed
deals. Investment in the space has increased exponentially this decade,
reaching a zenith in 2015 when nearly $5.2 billion in capital was invested
across 132 completed deals.
$64
$502
$553
$825
$3,5
42
$5,1
84
$2,1
3418
3831
69
117
132
66
2010 2011 2012 2013 2014 2015 2016*
Deal value ($M)
Deal count
Top companies by $ raisedTotal raised ($M)
SoFi (Social Finance) $1,376.6
Lending Club $1,332.7
Kabbage $870.8
Square $779.8
Assetz Capital $757.6
Avant $654.2
OnDeck $363.3
GreenSky Trade Credit $360.0
Prosper $333.9
CommonBond $294.6
Funding Circle $274.1
Biz2Credit $250.0
QuarterSpot $237.3
Harmoney $210.0
Ppdai $210.0
Fundation $202.7
auxmoney $196.4
WeLab $185.0
Weidai.com $177.0
LendUp $176.6
Renovate America $169.7
Eloancn $146.6
Jimubox $131.2
Kilowatt Financial $125.0
Source: PitchBook
*As of 7/22/2016
13 PITCHBOOK FINTECH
ONLINE LENDING
ONLINE LENDING DEAL FLOW & CAPITAL INVESTED BY QUARTER
(ON LY EQ U IT Y I NVE STM E NTS I N CLU DE D)
$54
$182
$167
$128
$339 $1
18
$162
$142
$173
$348
$250
$498
$471
$2,3
23
$645
$750
$2,2
27
$1,5
62
$1,2
84
$839
48
33
117
128
75 6
13
22
8
1821
29
25
31 32 3235
41
24
32 32
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010 2011 2012 2013 2014 2015 2016
Deal Value ($M)
Deal Count
Source: PitchBook
The largest deal in the period was the Series F round of student loan
refinancer and consumer lender SoFi, which raised $1 billion of equity
capital in August 2015. To illustrate the range of investors in the space,
participants in the round led by Japanese telecom conglomerate
SoftBank included hedge fund Third Point; mutual funds Wellington
Management and The Hartford; private market secondary investment
platform SharesPost; Chinese social network RenRen; and a number of
traditional venture capital firms.
The 2015 peak in investment saw lots of hot money flow into the online
lending space. Online lenders were awash in capital in 2015, raising $3.4
billion in VC funding alone. The recent popular scrutiny of high profile
online lenders has meant unprecedented interest, but also a slight
pause in private investment. In the first half of 2016 we saw just $2.2
billion invested across 65 deals; comparing 1H 2016 with 2H 2015 yields
a significant 44% drop in terms of capital invested. On balance, the
consistently robust deal count indicates that innovative upstarts have
continued to raise capital even as the industry faces challenges. Notable
recent transactions include financial goal setting platform Payoff, which
raised $47 million in June, and small business instant cash advance
lender Kabbage, which raised a $135 million Series E and increased its
revolving credit facility to $900 million in 4Q 2015.
The drop in VC and other private funding comes at a time when
platforms are desperate for more diverse funding and sticky capital.
The only two $100 million+ equity rounds
in 1H 2016 have been Chinese lenders
WeLab and Wedai. The largest YTD
funding in a US lender was in Payoff led
by Chinese firm Tencent.
14 PITCHBOOK FINTECH
ONLINE LENDING
Online lending platforms have a strong preference to form long-term
partnerships with both equity and debt investors rather than one-off
transactional agreements. This leads to investors commanding more
power in the online lending ecosystem than in other tech sectors. We’ll
likely begin to see platforms cut costs and soon accept down rounds,
as the increased regulatory scrutiny of the industry comes with higher
compliance costs. In order to accommodate hot money, some platforms
dropped lending standards. This will lead to underperformance that
will cut into the equity of balance sheet lenders, and reduce investor
demand for loans sourced by marketplace lenders. While we’ve already
seen substantial layoffs at high-profile lenders including Avant, Lending
Club, CommonBond and Prosper, platforms will also need to raise
additional equity, perhaps accepting a drop in valuation in the form of a
down round.
REGIONAL DEALFLOW
Naturally, fintech has developed in concentration around a handful of
urban centers with significant resources in both finance and technology.
Given the human capital intensive nature of the business, nearly
two-thirds of equity investment in the space since 2010 has gone to
startups located in the top five cities/regions. The Bay Area accounts
for a whopping 34.4% of equity capital, the majority of which can be
accounted for by the two most capitalized lenders: Lending Club and
Prosper. New York accounts for 10.5% of equity funding, with many
analytics platforms domiciled in Silicon Alley. These firms have tapped
EQUIT Y INVESTMENT IN ONLINE LENDING BY REGION (# AND $B) S INCE 2010
37.2%
34.4%
10.5%
10.4%
5.3%2.2%
50.7%
16.4%
10.0%
8.5%
7.6%
6.8%
Other
Bay Area
New York
London Metro
Los AngelesMetroGreater China
Source: PitchBook
*As of 7/22/2016
Source: PitchBook
*As of 7/22/2016
Online lending platforms have to balance
the interests of equity backers, loan
investors and borrowers.
15 PITCHBOOK FINTECH
ONLINE LENDING
ACTIVE EQUIT Y INVESTORS IN ONLINE LENDING
53
93 96
166
278
351
148
2010 2011 2012 2013 2014 2015 2016*
Source: PitchBook
*As of 7/22/2016
FIRST-TIME EQUIT Y INVESTORS IN ONLINE LENDING
53
7669
119
212
237
84
2010 2011 2012 2013 2014 2015 2016*
Source: PitchBook
*As of 7/22/2016
Top investorsDeal count
QED Investors 17
Sequoia Capital 11
Ribbit Capital 10
Canaan Partners 9
Thomvest Ventures 8
Foundation Capital 8
Index Ventures 8
First Round Capital 8
Union Square Ventures 7
Victory Park Capital 7
Kleiner Perkins Caufield & Byers
7
Baseline Ventures 7
Accel Partners 7
Renren 6
Nyca Partners 6
Kima Ventures 6
500 Startups 6
Accion 6
DCM Ventures 6
Source: PitchBook
*As of 7/22/2016
into the large pool of Wall Street talent not only to recruit employees,
but also for advice and a source of capital. Likewise, London has
accounted for 10.4% of capital invested and 8.5% of transactions. While
it’s no secret London leads other financial hubs in areas like payments
and blockchain, the lower barriers to entry for starting a bank in the UK
make the abundance of online lending deals surprising.
16 PITCHBOOK FINTECH
ONLINE LENDING
INSTITUTIONAL INVOLVEMENT & RISK MANAGEMENT
The low interest rate environment of recent years was ideal to push
institutional investors toward an unproven but potentially lucrative asset
class. Institutional investors began to chase yield in their fixed income
allocations, as sovereign and corporate credit began to trade at record
low levels thanks to central bank asset purchases. As we stand now,
over a third of outstanding sovereign debt trades at negative nominal
yields. Furthermore, duration has expanded, forcing investors to be
exposed to even greater price sensitivity for lower and lower yields. It is
in this environment that higher-yielding shorter duration assets become
attractive. Loans on the Orchard Platform have a weighted average
coupon of 13.7%.
Marketplace loans come with additional complexity compared to other
fixed income assets. In addition to the standard risks of prepayment and
default in the mortgage and consumer lending space, marketplace loans
have many asymmetries around monthly payment date and underwriting
standards that vary across origination platforms. Furthermore, investors
must evaluate the risk of whether or not the originators and servicers will
survive a downturn. Platforms must disclose contingency plans in case of
bankruptcy in order to assuage investor concerns.
One major contingency is a lack of diversity in capital sources for online
lenders. Many US lenders have relied on short-term warehouse lending
from industrial lending corporations typically incorporated in regulation-
light jurisdictions such as the states of Utah, South Dakota and Delaware.
In order for online lenders to diversify their capital base, they must
facilitate institutional investments in their loans. Lenders must cater to
increased due diligence and reporting needs of more sophisticated
investors.
Increasingly, these institutional investors are relying on third-party
platforms to make their data as transparent as possible to assess all
manner of risks. Platforms such as dv01, Orchard and PeerIQ offer
solutions for more robust analytics than can be run in Excel. Investors
need to be able to drill down into loan and cohort level data in order to
run analysis and backtesting on performance. Given the short history of
the industry, investors must familiarize themselves with the underwriting
practices of upstart online lenders. This means an extra level of scrutiny
of the data. Due to the limited comps, investors utilize data from the
most established players in the industry such as Lending Club and
Prosper, as well as comparable ABS products. In order to get an idea
of how loans performed during a downturn, investors can purchase
alternative historical datasets from the financial crisis. Investors can
utilize traditional consumer credit card securitizations from Experian
and Equifax to model out similar borrower profiles in a distressed macro
environment.
The space has benefited from the recent
macro environment’s impact on fixed
income, making high-yielding, short-
duration securities a relatively attractive
investment.
17 PITCHBOOK FINTECH
ONLINE LENDING
Moving ForwardThe threat to continued innovation in the online lending space stems
from an immature secondary market for trading these online-originated
securities. Fears swirling around the industry remain firmly grounded
in the experience of 2008. As we witnessed firsthand eight years ago,
poorly understood illiquid products can cause a great deal of pain for
financial institutions, especially once the pool of counterparties shrinks
due to external shocks. Reducing complexity lowers funding costs for
originators and increases liquidity for online-originated ABS products.
Platforms that grew too fast using hot money will struggle. Layoffs will
continue in the near term, as companies continue to thin expenses while
weathering a cyclical slow in originations. Further, the aforementioned
attention being paid to cost cuts also stems from companies seeking
to find spend discipline as they attempt to prepare their respective
businesses to secure permanent capital via the IPO markets. The IPO
window has remained relatively narrow for most businesses, so new
platforms undergoing growing pains similar to online lending have an
even steeper hill to climb.
Spreads between speculative high-yield debt and risk-free treasury
securities have shrunk to historically low levels recently. We expect
yields to remain suppressed below historical levels for the foreseeable
future and think online-originated loans will benefit from this outcome as
investors scour for yield and re-allocate their credit portfolios.
Lastly, the influx of capital into online loans is only made possible with
heightened transparency and sophisticated tools to help analyze both
single and packaged loan products. We think the development of a
secondary market for such loan products will continue to mature over
the next 12 to 18 months as more institutional investors funnel capital
into the space. Further, private backers won’t shy away from providing
equity capital, but transactions may well become smaller as private
investors look to invest in the peripheral ecosystem of the space, and
not necessarily into the core marketplaces, many of which have already
received significant amounts of capital.
We hope this report serves as a valuable resource as you continue to
explore this nuanced sector. As the industry continues to mature, we’ll
keep a close eye on it and provide updates as developments unfold.
As always, feel free to reach out with any comments or questions at
18 PITCHBOOK FINTECH
ONLINE LENDING
Select company profiles
LENDING CLUB (NYSE: LC)
Location: San Francisco, CA |
Year Founded: 2006 | Capital Raised to
Date: $1.1B* First Funding Date: May 2007 | First Funding Amount: $2.0M
IPO Date: December 2014 | IPO Amount: $870M
*Includes IPO amount and $55M of known pre-IPO debt
Description: Founded in 2006, Lending Club serves as ostensibly the
most well-known and largest online peer-to-peer lending marketplace.
The company facilitates personal and business loans, as well as financing
for elective medical procedures, leveraging technology and a zero-
branch infrastructure to drive costs down and charge borrowers lower
rates. Having helped fund more than $18.7 billion in loans to date, the
company itself doesn’t assume the credit risk of the loans it helps sell,
but simply connects borrowers and investors via its online platform.
Recently, the company has come under heavy scrutiny following the
ousting of founder and CEO, Renaud Laplanche. The ousting follows a
scandal in which the company had misrepresented a portion of a $22
million loan package sold to an investor in order for the loans to meet
the client’s requirements. While Laplanche had called for an internal
investigation, according to media reports the board had determined
that the ex-CEO hadn’t offered a full account of what he knew about the
aforementioned sale. In addition, Laplanche was invested in an external
investment vehicle that had been a buyer of Lending Club loans. His
personal interest in the vehicle, Cirrix Capital, was never disclosed to
the board, yet Laplanche had submitted a proposal to the firm to allow
Lending Club to invest in the fund, despite failing to disclose his personal
stake.
19 PITCHBOOK FINTECH
ONLINE LENDING
ONDECK (NYSE: ONDK)
Location: New York, NY | Year Founded: 2007 |
Capital Raised to Date: $464M
First Funding Date: February 2007 | First Funding Amount: $2.2M
IPO Date: December 2014 | IPO Amount: $200M
Description: OnDeck is a provider of online small business loans.
Founded in 2007, the company’s proprietary credit scoring system
leverages advanced analytics to make real-time lending decisions and
deploy capital to businesses in as little as 24 hours. Its credit analysis
process encompasses a thorough evaluation of thousands of data points
regarding a business individual’s needs in place of evaluating personal
credit in order to better quantify risk. To date, the company has lent over
$4 billion to more than 50,000 customers across 700 industries.
PROSPER
Location: San Francisco, CA | Year Founded: 2005 |
Capital Raised to Date: $361M
First Funding Date: April 2005 | First Funding Amount: $7.5M
Latest Funding Date: April 2015 | Latest Funding Amount: $165M |
Latest Funding Post- Valuation: $1.87B
Description: Founded in 2005, Prosper is the first US marketplace lender,
providing a platform that matches borrowers with both institutional
and individual lenders. Through its flagship loan product, borrowers
get access to low-rate, fixed-term loans that promise to come with no
hidden fees or prepayment penalties. The company allows individuals to
request loans between $2,000 and $35,000, while allowing individual
lenders to invest as little as $25 in each loan listing they select; Prosper
handles the servicing for all loan transactions.
SOFI (SOCIAL FINANCE)
Location: San Francisco, CA | Year Founded: 2011 | Capital
Raised to Date: $1.42B
First Funding Date: October 2011 | First Funding Amount: $4.0M
Latest Funding Date: August 2015 | Latest Funding Amount: $1.0B |
Latest Funding Post- Valuation: $3.58B
Description: With over $10 billion in loans issued to date, SoFi is a large
player in the marketplace lending space and the largest provider of
student loan refinancing products. Similar to other online lenders, the
company incorporates enhanced technology and analytics into its
underwriting process, but also evaluates unique items such as career
experience and undergraduate/graduate school degree programs
20 PITCHBOOK FINTECH
ONLINE LENDING
studied when assessing creditworthiness. In addition to dominating
the student loan refinancing market, the company provides mortgage
lending and refinancing solutions, personal and parent loans and wealth
management services. Lastly, SoFi continues to find success selling
packaged and securitized loans to qualified institutional investors.
Despite the recent concerns sparked by the recent Lending Club scandal,
the online lender recently completed one of the largest consumer loan-
backed bond sales of 2016, completing a $380 million offering that
saw 28 investors participate. According to media reports, the offering
generated demand of nearly three times the amount of bonds that the
company was looking to initially sell. The sale was completed in mid-
June.
AVANT
Location: Chicago, IL | Year Founded: 2012 |
Capital Raised to Date: $1.357B
First Funding Date: May 2013 | First Funding Amount: $9.0M
Latest Funding Date: September 2015 | Latest Funding Amount: $325M |
Latest Funding Post- Valuation: $2.0B
Description: Avant, which operates under the name AvantCredit in the
UK and Canada, is a marketplace lending platform that leverages big
data and machine-learning algorithms to offer a highly customized
approach to streamlined credit options. At its core, Avant is a tech
company that is dedicated to creating innovative and practical financial
products for all consumers. More than 310,000 loans have been
issued worldwide through the Avant website. The company laid off
60 employees in May and is reportedly downsizing further by offering
voluntary severance packages.
ORCHARD
Location: New York, NY | Year Founded: 2013 |
Capital Raised to Date: $44.7M |
First Funding Date: December 2013 | First Funding Amount: $2.7M
Latest Funding Date: September 2015| Latest Funding Amount: $30M |
Latest Funding Post- Valuation: $145.5M
Description: Orchard offers technology and data to the marketplace
lending industry, powering the interactions between institutional
investors and loan originators. Using the company’s platform, investors
21 PITCHBOOK FINTECH
ONLINE LENDING
are able to understand, access and execute marketplace lending
investments; products and services include market data & research, an
order management system and detailed reporting & analytics. For users
looking to access lenders, Orchard provides access to a diverse group
of institutional investors who use the company’s platform to purchase
marketplace lending assets. The company has raised $44.7 million in
venture funding and was last valued at $145 million with a $30 million
Series B it secured in September 2015.
PEERIQ
Location: New York, NY | Year Founded: 2014 |
Capital Raised to Date: $8.5M
First Funding Date: September 2015 |
First Funding Amount: $8.5M| Latest Funding Date: September 2015 |
Latest Funding Amount: $8.5M
Description: PeerIQ is a financial information services company that
provides institutional investors with tools for analyzing, assessing and
managing risk in the peer-to-peer lending market. PeerIQ’s analytics
platform aggregates industry data from leading P2P platforms and
offers sophisticated credit analytics, independent benchmarks and
reporting to enhance efficiency and increase liquidity across the
emerging asset class.
DV01
Location: New York, NY | Year Founded: 2015 |
Capital Raised to Date: $7.5M
First Funding Date: 2015 | First Funding Amount: $2.5M
Latest Funding Date: June 2016 | Latest Funding Amount: $5M
Description: The analytics and reporting platform increases liquidity
by simplifying all aspects of loan and bond investment, from portfolio
management to securitization. To date, dv01 has provided investors
real-time insight into more than $23 billion of loans from the biggest
marketplace lenders, including Lending Club and Prosper.
22 PITCHBOOK FINTECH
ONLINE LENDING
COMMONBOND
Location: New York, NY | Year Founded: 2011 |
Capital Raised to Date: $318.8M*
First Funding Date: November 2012 | First Funding Amount: $1.0M
Latest Funding Date: July 2016 | Latest Funding Amount: $30M ||
Latest Funding Post- Valuation: $230M
*Includes up to $250M of known private debt
Description: Founded in 2011 by three MBA students, CommonBond
is an online lender that utilizes technology to lower student loan costs.
The company both funds and refinances student loans, claiming to save
its members more than $14,500 on average over the life of their loans.
The company has also serves as the first pioneer of the “one-for-one”
model, partnering with Pencils of Promise to fund the education of a
student in need for every loan funded on its platform. Recently, the
company announced two major announcements: a $300 million funding
that comes as a combination of equity capital to fund operations and
lending capital to fund loans, as well as the acquisition of Gradible, a
provider of loan evaluation resources to provide suitable repayment
plans for different financial situations. With the acquisition, employers
will be able to use CommonBond to help employees properly assess
their student loan repayment options while also enabling companies to
contribute directly to their employees’ monthly student loan payments,
a benefit that many millennials have begun to seek out in the workplace.
The online lender has funded more than $500 million in loans, and with
it’s most recent capital injection, it has surpassed the $1 billion mark in
financing across equity and debt.
FUNDBOX
Location: San Francisco, CA | Year Founded: 2012 |
Capital Raised to Date: $107.5M
First Funding Date: January 2013 | First Funding Amount: n/a
Latest Funding Date: September 2015 |
Latest Funding Amount: $50M
Description: Fundbox leverages deep data analytics to accelerate cash
flow and clear invoices for small business. The Fundbox risk engine
taps into numerous data signals within its network to assess customers
and invoices for risk, using existing accounting, e-invoicing and payroll
software to allow small businesses to choose which invoices to clear. The
company has underwritten more than 39 million invoices and helped
more than 30,000 SMBs across the US.
23 PITCHBOOK FINTECH
ONLINE LENDING
K ABBAGE
Location: Atlanta, GA | Year Founded: 2008 |
Capital Raised to Date: $316.5M |
First Funding Date: November 2009 |
First Funding Amount: $700,000 | Latest Funding Date: October 2015 |
Latest Funding Amount: $765M | Latest Funding Post- Valuation: $1.63B
Description: A financial services data and technology platform, Kabbage
provides fully automated funding to small businesses in as little as
minutes. The company leverages data generated through business
activity such as accounting, online sales, shipping and dozens of other
sources to understand performance and deliver funding in real time.
Through its Karrot brand, Kabbage also offered consumer loans via its
automated platform, though the company recently announced that it will
no longer focus on the consumer segment.
FUNDING CIRCLE
Location: London, UK | Year Founded: 2010 |
Capital Raised to Date: $300M |
First Funding Date: February 2010 |
First Funding Amount: $1.1M | Latest Funding Date: April 2015 |
Latest Funding Amount: $147.2M| Latest Funding Post- Valuation: $1.15B
Description: Funding Circle is an online marketplace exclusively focused
on small businesses. More than $2 billion has been lent through the
platform to 15,000 businesses in the UK, US, Germany, Spain and the
Netherlands. Businesses can borrow directly from a wide range of
investors, including more than 47,000 individuals, the UK government,
local councils, a university and a number of financial organizations.
UK-based Funding Circle launched in the US in October 2013 and
holds headquarters in London, San Francisco and Berlin.Description:
Funding Circle is an online marketplace exclusively focused on small
businesses. More than $2 billion has been lent through the platform to
15,000 businesses in the UK, US, Germany, Spain and the Netherlands.
Businesses can borrow directly from a wide range of investors, including
more than 47,000 individuals, the UK government, local councils, a
university and a number of financial organizations. UK-based Funding
Circle launched in the US in October 2013 and holds headquarters in
London, San Francisco and Berlin.
24 PITCHBOOK FINTECH
ONLINE LENDING
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Limited Partners Name (2,716)# Limited Partner Type # Affiliated Funds
# Affiliated Investors
1
2
3
4
5
6
7
8
9
10
11
12
13
New York State Common Retirement Fund
Pennsylvania State Employee’s Retirement S...Pennsylvania Public School Employee Retire...
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AUM Private Equity
Private Equity (%) HQ Location HQ Ph
312192
158157
169136
185126
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163147
Add Column
176,200.00
25,900.00
50,500.00103.35
178.50
59,700.00
516,206.00104,300.00
405,900.00
24,700.00181,980.00
13,919.80
25,900.00
8,040.00103.35
178.50
5,916.00
516,206.007,800.00
405,900.00
24,700.0018,371.00
8%
12%22%17%
42%
12%
7%8%
4.5%
7.3%10%
Albany, NY
Harrisburg, PA
Harrisburg, PA
Basking Ridge, NJ
New York, NY
Boston, MA
New York, NYAlbany, NY
Bloomfield, Ct
Springfield, MA
Quebec, Canada
Layouts:
LP Summary Layout Save Save As
126 104,300.00 7,800.00 8% Albany, NY
157 103.35 103.35 17% Basking Ridge, NJ
COMPANY SIGNALS
LiquidPlanner Seattle, WashingtonBusiness/ Productivity Software... -
Series BLast Inv. Type
May-2014Last Inv. Date
4Investor
Growth RateSize Multiple
45People
$24.32MVal. May 2014
Company Name
The Stiller
Bonobos
Growth Rate
10.2%
19.65%
Size Multiple
1.32K
150K
Total Capital Invested (millions, USD) Deal Count
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2.73xx avg.
76th %ile
115%98th %ile
weekly
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