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Billion Dollar Unicorns: OnDeck Scoring in Small Businesses Instant Loans

Posted on Tuesday, Mar 17th 2015

According to a survey of small businesses conducted by the Federal Reserve Bank of New York, to process a loan, a small business has to spend at least 26 hours, approach 2.6 financial institutions, and submit 2.7 loan applications. Billion Dollar Unicorn club member OnDeck is trying to make a big difference in cutting all this effort.

OnDeck’s Offerings

New York-based OnDeck was founded in 2007 by Mitch Jacobs to help small businesses with the process of getting loans. Their platform aggregates and analyzes data points from dynamic, disparate data sources to assess creditworthiness of small businesses more accurately. Small businesses can apply for a term loan or line of credit through their platform and the website analyzes their credit ratings and can process business loans immediately.

OnDeck uses several data points that include customer bank activity, government filings, tax, census data, reputation, and social data to come up with the OnDeck Score. The businesses are then approved for loans depending on their credit score and can receive funds the same day that they apply on OnDeck’s website. Each loan that OnDeck issues also undergoes their proprietary automated underwriting process. Nearly two-thirds of their loans are underwritten using a fully-automated underwriting process that does not require manual review.

Most of their loans range in size from $5,000-$250,000 and come with credit terms of 3-24 months. OnDeck’s financial products are specially designed for small businesses and thus offer fixed interest amounts and automated daily or weekly repayments. Keeping in mind the flexibility that a small business needs, they do not have rigid collateral requirements for their loans. Most of their term loans and lines of credit are collateralized through a security interest on their customers’ assets.

OnDeck funds these through credit agreements that they have in place with leading financial institutions including banks such as Deutsche Bank, Goldman Sachs Group Inc., KeyCorp, and US commercial lender BBVA Compass.

Their product has been received well in the market and they are now looking at international expansion. Last quarter, they initiated a pilot program to originate small business loans in Canada.

OnDeck’s Financials

OnDeck earns revenues by charging their customers an interest charge that ranges from $0.17 per dollar for a 6-month loan to $0.33 per dollar for an 18-month loan. Additionally, they also levy a 2.5% loan origination fee. For larger businesses, the rates are different since they offer special 12-24-month loans that cost an origination fee of 2.5% and an APR of 19.99%-39.99% based on business performance.

OnDeck has reported strong revenue growth over the years. They ended the year 2013 with revenues growing 155% to $65.2 million and an adjusted EBITDA loss of $16.3 million. For the December ended quarter, OnDeck saw revenues grow 118% over the year to $50.5 million. They ended the 2014 with revenues of $158.1 million. GAAP net loss for the quarter improved from $5.6 million a year ago to a loss of $4.3 million. For fiscal 2014, losses have reduced from $24.4 million to a loss of $18.7 million.

Among other operating metrics, loan origination volume has increased to a record $369 million in the quarter and a record $1.2 billion for the year. Combined Direct and Strategic Partner channel originations grew to 59% of origination volume and 70% of units for the full year, compared with 44% and 54%, respectively, in the previous year.

For the current quarter, OnDeck estimates gross revenues of $52 million-$54 million and an adjusted EBITDA loss of $2 million-$3 million. They expect to end the year with revenues of $254 million-$258 million and adjusted EBITDA loss of $2 million-$4 million

OnDeck has huge market potential. Analyst Oliver Wyman has estimated that there is a potential $80 billion-$120 billion in unmet demand for small business lines of credit.

Till December 2014, OnDeck was venture funded with $180 million in funding from investors including Tiger Global Management, Institutional Venture Partners (IVP), Industry Ventures, Peter Thiel, Google Ventures, Keybank, Deutsche Bank, Square 1 Bank, RRE Ventures, First Round, Sapphire Ventures, Fortress Investment Group, Goldman Sachs, SF Capital, Village Ventures, Khosla Ventures, and Contour Venture Partners. Their last round of funding was held in March 2014 when they raised $77 million at an undisclosed valuation. Additionally, they have also raised $300 million in debt to finance their operations.

In December 2014, OnDeck went public and raised $200 million by selling shares at $20 each. Soon after listing, the stock had reached a high of $28.98. Currently, their stock is trading at $21 with a market capitalization of $1.46 billion.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns.  Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : Billion Dollar Unicorns


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