Growing number of online lenders aim to disrupt banks

Kathryn Petralia Jonathan Ebinger PCE14 IMG_3862

From its beginnings as a startup at the Plug and Play Tech Center in Sunnyvale, Calif., Lending Club has vowed to disrupt the banking industry. The company, which moved out of the incubator and into its San Francisco-based headquarters in 2011, offers a peer-to-peer lending model that aims to cut out banks’ high margins and make online lending a viable alternative to banks.

As of December, the venture-backed Lending Club has facilitated $3 billion in loans and is a rumored IPO candidate in 2014.

When Jeff Crowe, managing partner of Norwest Venture Partners, spotted Lending Club at Plug and Play, he said he knew then that CEO Renaud Laplanche was conceptually on to something.

In 2007, the idea behind Lending Club could be massive, a huge market opportunity, Crowe told VCJ, an affiliate publication of peHUB.

“It wasn’t obvious to people then, but the idea of consumer lending through a peer-to-peer model is obvious to everyone now,” he said. “Entrepreneurs who make the most money are the ones who start something when it’s not obvious. In 2014, online lending is obvious. But it wasn’t then.”

The business is so obvious now, a number of startups have launched in recent years focused on online lending catering to certain groups, such as small businesses, the underbanked and students. Some incorporate the peer-to-peer model, while others are using the data-driven approach to speed the lending approval process.

Lending Club is the most capitalized of the bunch. Since the company was hatched at Plug and Play Tech, Lending Club has now raised more than $221 million in total funding, according to Thomson Reuters (publisher of peHUB and VCJ).

In addition to Norwest, which is the largest single shareholder, backers include Google Ventures and Foundation Capital, which together invested a $125 million round in May 2013 at a reported valuation of $1.55 billion. The round involved existing investors selling an undisclosed number of shares to Google and Foundation. Other investors in Lending Club include Canaan Partners, Morgenthaler Ventures (now known as Canvas Venture Fund), Kleiner Perkins Caufield & Byers, SVB Financial Group, Thomvest Ventures, Union Square Ventures and Gold Hill Capital.

A number of the online lending startups are newer entrants, having been launched in the last few years.

San Francisco-based Social Finance launched in 2011 and has raised more than $77 million in funding to provide students with loans. Toronto-based Financeit, which was also founded in 2011, has raised $13 million to date to provide financing to small businesses. And New York-based Lenddo, bases credit scoring on a user’s social graph to provide loans to the underbanked. It’s financed with $10 million.

This is a good time to be a fintech entrepreneur, said Gardiner Garrard, co-founder of TTV Capital, an Atlanta-based firm that invests in technology-enabled financial services.

“Valuations are frothy right now, and there are plenty of venture firms looking for fintech deals,” Garrard said.

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. To subscribe to VCJ, please email Greg.Winterton@ThomsonReuters.com.

Photo: Kathryn Petralia, COO and co-founder of Kabbage, and Jonathan Ebinger, general partner of BlueRun Ventures, speak at Venture Alpha East on March 26. Photographed by Rob Paul for Thomson Reuters. All rights reserved.

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