LendingClub removes banks from the lending process by providing a platform that enables consumers to secure fixed-rate loans and investors to capture the spread on consumer debt. Since 2007, investors have earned a net annualized return of over 9.5%, and borrowers have obtained loans at rates 20%–30% below marketplace alternatives. It’s an approach that has become increasingly popular as Americans, including entrepreneurs seeking funding, find themselves unable to get the loans they need in the poor economy.
Founder Renaud Laplanche started his career as a securities lawyer with New York law firm Cleary Gottlieb. He founded his first company, TripleHop Technologies, in 1999 in order to solve a basic problem: He was unable to efficiently search and retrieve corporate documents throughout the firm’s network and archives. He quickly realized that most law firm professionals –and most workers in America – had the same problem. TripleHop solved this problem and was acquired by Oracle in 2005.
In 2007, Laplanche founded LendingClub, which is based in Redwood City, California. The idea for LendingClub came to him the first time he opened a credit card statement and really paid attention to the 18% interest rate he would be paying if he were to carry over the balance. Laplanche spent the next three months investigating why consumers pay an average of 18% in rates and fees to banks and credit card companies while earning only 2% from the bank on their deposits. After speaking with numerous consumer lending and financial services professionals, he had the answer: bank intermediation costs. Before founding LendingClub, Laplanche had no domain experience in consumer lending other than being one of millions of consumers paying high interest rates on credit cards while earning low yields on CDs and savings accounts.
According to the Federal Reserve, consumer debt (excluding mortgages) is a $2.4 trillion market (with $830 billion represented by revolving credit). The peer lending market currently comprises Prosper and LendingClub, which together issued $13.5 million in loans in July 2010 ($11.5 million from LendingClub, $2 million from Prosper).
In terms of borrowers, LendingClub targets prime credit borrowers with average FICO scores of 720 and low debt-to-income ratios. It targets consumers based on the typical uses for the loans: paying off credit card or other high-interest rate debt, home improvement, moving costs, and wedding expenses. The typical customer is in his or her early thirties and has begun to establish a professional life but has not yet bought a home and built up equity. Many may have lingering debt from their early days out of school.
On the investor side, LendingClub initially targeted self-directed individuals who actively manage or actively participate in the management of their money, with at least a $70,000 net worth and $70,000 in yearly income. Over the past few months, more professional investors have found their way to the platform. In June 2010, 25% of the funds invested came from professional investors (mostly wealth managers, funds and family offices). LendingClub’s primary source of revenue is an origination fee on consumer loans ranging from 2.25%–5%.
When Laplanche founded LendingClub, there was a burgeoning industry then known as “peer-to-peer lending.” The two mains players were Zopa in the United Kingdom and the above-mentioned Prosper in the United States. It was clear that the concept of banking disintermediation would at some point take off, and it was only a matter of crafting the right implementation.
The industry seemed to be focusing on subprime and near-prime consumers at the time. Laplanche took a different approach and focused on higher quality loans (prime and super prime) to offer a less volatile and more predictable investment opportunity (although also carrying a lower expectation of returns) to investors. This strategy paid off when the subprime crisis hit; LendingClub had captured over 80% market share by the end of 2009.
The regulatory strategy of incumbents also left room for improvement: The notes sold to investors were not registered with the Securities and Exchange Commission (SEC), and the peer-to-peer lending players were being regulated as consumer lending companies on a state-by-state basis. Laplanche decided to seek an agreement with a bank to benefit from a nationwide charter and register the investments with the SEC. Other players soon imitated him.
Banks remain reluctant to lend, and credit card companies find it easy to work around government-imposed limits on fees; indeed, fees are increasing. LendingClub competes by offering lower interest, fixed-rate loans. Consumers submit secure online application, and approved loans of up to $25,000 are funded in as little as a few days. For investors, LendingClub enables them to participate in an opportunity that banks and institutional money have historically held to themselves – the spread on consumer debt. Since LendingClub’s inception in 2007, it has outperformed most bond indexes with higher returns and lower volatility. Given the continued unpredictability of the NASDAQ and the S&P 500, investors are increasingly looking for fixed-income alternatives such as prime consumer notes.
The company has raised a total of $55 million thus far: a $2 million self- and angel-funded seed round in October 2006; a $10.5 million Series A from Norwest Venture Partners and Canaan Partners in August 2007; a $6 million Series A1 from NVP and Canaan in September 2008; a $12 million Series B from Morganthaler, NVP, and Canaan in March 2009; and a $24.5 million Series C from these investors plus Foundation Capital in April 2010. The company may raise a strategic round in the next two or three years before IPO. Strategic investors could be mutual funds or brokerage firms.
LendingClub is growing rapidly; July was up 15% vs. June and was the largest month ever with $11.5 million in loans issued. Monthly revenues are now about $600,000, increasing 15% month-over-month. The company is likely to pass the $10 million revenue mark this fiscal year (April 1 to March 31) and reach profitability shortly thereafter, in Q2 2011.
The U.S. consumer credit market ($2.4 trillion excluding mortgages) is larger than the GDP of most nations, and the company believes that there are significant opportunities for growth. In addition to increasing awareness of its offering through PR, online advertising, and partnerships, it has plans to create expanded credit offerings for consumers including auto loans, home equity lines of credit, mortgages, and so forth. On the investor side, LendingClub now offers retirement accounts (IRAs) in addition to standard investment accounts.
Given the potential of the business, the company doesn’t foresee an acquisition in its future. An IPO would represent a potential liquidity event for investors, but the management team does not see this as an exit but as an important stepping stone to enable accelerated growth.
This segment is a part in the series : The 1M/1M Deal Radar 2010