Hi everyone, Charley here.
As y’all might have heard, I helped my company Alloy launch our new credit underwriting decision engine yesterday! A big reason why I joined the team earlier this year was to bring this to reality in partnership with our engineering and product teams, so I’m really really excited. As a result, I thought it would be interesting to spend a bit of time breaking down why I think the timing is so unique for this product and provide a bit of historical context.
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What's Old Is New Again
The 2000’s era of fintech saw the rise of P2P lending with the likes of LendingClub, Prosper, SoFi, CommonBond, and many more starting with various initial wedges. The whole premise was the idea that by leveraging the power of the internet (as well as building up a marketplace/community), P2P lending companies could more efficiently match lending supply + demand, price risk, and service loans.
While I believe Prosper started first, I find LendingClub to be a fascinating case study of what’s happened and what’s happening. Initially launching on Facebook, it was an app with the idea that members within similar communities could better “price” risk. The company raised a Series A in 2007 and started to grow rapidly. The SEC soon came into the market and required every P2P lending platform register, which caused a quiet period in early 2008 with each platform pausing loan origination while waiting for approval. Approval came later that year, and LendingClub continued to grow at a rapid pace, soon raising over $60M+ in VC funding over 2010-2012 and attracting a who’s who of investors such as Mary Meeker of Kleiner Perkins, USV, Google Capital, and many more. In August 2014, LendingClub filed to go public and ended up raising over $900M in the largest US tech IPO of the year, with the stock trading up 56% on the first day at an $8.5B valuation.
Things started to go downhill from there. In 2016, investors were increasingly less interested in participating on LendingClub’s platform (Prosper, SoFi, and others experienced the same problems). As a result, the firm had to continue to raise target interest rates to attract new investors, which in turn continued to drive the stock price down. Furthermore, in April of 2016, an employee reported to LendingClub’s CEO and founder Richard Laplanche that the dates of $3.3M of firm loans had been altered. Further investigation would reveal other issues with various loans and just a month later, Laplanche would be forced to resign (but don’t count him out by any means, he’s now the cofounder and CEO of unicorn lending fintech Upgrade). At this point, LendingClub’s stock had been down 70% from the IPO and would continue to drop and finally in December 2019, LendingClub announced the official end of P2P lending as they transitioned their focus purely to institutional investors.
Fast forward to today, and LendingClub looks almost completely different. Rather than being a pure play P2P lender, it has positioned itself as a next gen neobank - driven by its acquisition of Radius Bank in February 2020 and a full banking charter that was granted later that year too. In October of 2020, the company was valued at $350M. Just one year later, investors have driven the valuation back up to $3.37B.
Public and Private Both Gaining Steam
What’s occurring in the public markets has also been rippling down into the private markets. VCs over the previous few years haven’t been as interested in lending due to historically lower multiples and the difficulty it took to get to massive scale. However, a few macro trends have seemingly reversed VC interest in lending again.
- Consumer fintech products are looking to increase LTV amongst their user base, and lending is a natural progression.
- Infrastructure providers (Alloy and the like 🙃) are going deeper into the finance stack, enabling more and more platforms to easily offer other financial products. We’re even starting to see the rise of “embedded lending” with new startups.
- Low interest rates have driven investors to seek yield in new areas + fintech is now more “mainstream”. As an example, Ramp was able to raise a debt facility led by Goldman Sachs just two years after company formation. That speed would have been unheard of just five years ago.
- More founders willing to tackle lending head-on, and many equipped with learnings from the generation prior.
- Rise of alternative data. Thanks to companies like Plaid, Codat, Atomic, Argyle, Pinwheel, Prism, Truework, etc - there’s a ton of new alternative data sources that provide additional signal for underwriting.
As a result, technology driven lending has become a hot space again - and I’ve even seen it firsthand here at Alloy. While the company started as an onboarding decision engine focused around KYC/Fraud, we were starting to get more and more requests from our customers that wanted to use our product for underwriting decisions, which is why we decided that it was finally time to commit to a first class product around it. (okok I’ll stop shilling it, but we already work with great companies offering lending products such as HMBradley, Aspiration, Gemini, Coast and many more).
In general, I’m a believer that increased distribution, awareness, and competition leads to more choices for consumers and businesses, so I’m very excited to see this next generation of lending start to emerge. As to whether outcomes are going to be LendingClub 2014, 2019, or 2021, time will tell :)