Posted on Wednesday, Jan 10th 2018
According to The 2017 Americas Alternative Finance Industry Report, the alternative finance market across the US, Canada, Latin America, and the Caribbean has grown 23% to $35.2 billion in 2016. A leading Billion Dollar Unicorn in this sector is Social Finance or SoFi.
Social Finance’s Journey
San Francisco-based Social Finance Inc. or SoFi was founded in 2011 by Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady. CEO Mike Cagney worked at Wells Fargo & Co. in the 1990s before starting a technology company and then a hedge fund. He met the other co-founders at the Stanford Graduate School of Business, and together they started a student loan pilot funded by individuals.
Initially, Social Finance was a lending program for students of Stanford University and other elite colleges that used funds raised from alumni. Its basic model is that since the borrowers are socially connected with alumni, they are less likely to default on loans. It believes student loans provide a beachhead for it to sell them additional products and services in the future.
Today, it has extended the model to low-rate mortgages and personal loans of up to $100,000. It targets high earning young professionals known as High Earners Not Rich Yet or HENRYs rather than people refinancing credit cards, the target market for online lenders like Lending Club and Prosper.
Social Finance calls its borrowers ‘members’ and if they default on loans, all the members and investors know about it and reach out to help them find jobs. SoFi currently has 250,000 members and originates $1 billion in credit per month.
Social Finance’s Financials
Social Finance does not disclose details of its revenue but maintains that it is profitable. It reportedly originated $8 billion in loans in 2016. It expected revenue of $650 million and profit of $200 million on a pre-tax basis in 2017.
It is venture funded and has so far raised $2.15 billion in funds from Silver Lake Partners, GPI Capital, Institutional Venture Partners, Willington Management, Third Point Ventures, Thomvest Ventures, Wicklow Capital, Discovery Capital Management, RPM Ventures, DCM Ventures, Renren, Innovation Endeavors, Baseline Ventures, and SoftBank Group. Its last round of funding was in February 2017 when it raised $500 million in new funding led by Silver Lake Partners, with participation from SoftBank Group and GPI Capital at a valuation of over $4 billion. An earlier round of funding led by SoftBank Group was held in August 2015 when it raised $1 billion at a valuation of about $4 billion.
SoFi planned to use the money to speed up its expansion from student loan consolidation into asset lending, banking, and geographically into Australia. Earlier in February 2017, it acquired Zenbanx, which has a relationship with a deposit bank in Delaware. In June 2017, it applied with state regulators in Utah and the U.S. Federal Deposit Insurance Corp for a bank charter. However, following the departure of several senior employees including former CEO Mike Cagney, former CFO Nino Fanlo, and former CTO June Ou, it withdrew its application.
SoFi is believed to have held discussions for a potential acquisition by several companies. It had received offers of $6 billion from a foreign bank and $8 billion from Charles Schwab. SoFi reportedly would have considered a sale for $10 billion. Now, the company is looking to go public in 2019.
FinTech stocks have not been faring well in the public markets. Elevate Credit was the only one to go public last year. Its stock is trading at $7.9 with a market capitalization of just over $332.7 million. It reported revenue of $580 million and a loss of $16.5 million in 2016.
Lending Club, which went public in 2014 with a valuation of over $10 billion is currently trading at $4 with a market of $1.67 billion. In 2016, it originated $8.6 billion in loans, recorded revenue of $496 million, and a loss of $146 million.
Apart from the existing competition, SoFi also faces new threats from Amazon, PayPal, and Square that have started to roll out online loans to their huge customer bases.
More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns.
This segment is a part in the series : Billion Dollar Unicorns
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