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LendingClub And Billion-Dollar Valuations Are Just The Beginning For Online Lending

This article is more than 9 years old.

Last week marked the first ever-initial public offering for an online lending platform when LendingClub raised nearly $870 million in its IPO.  LendingClub was priced at $15 per share but opened the day on the NYSE well above that at $24.75 per share before closing the day at $23.43 thus implying a company valuation of $8.9 Billion.  This valuation exceeds the valuation of some of the largest banks in the country including Comerica , City National and CIT Group and marks the 18th largest IPO of the year.  And just days later, OnDeck, the leading online lending platform for small businesses, debut its own IPO raising $200 Million at a valuation of $1.3 Billion.  LendingClub’s IPO appeared to have rubbed off as OnDeck ’s share price soared by as much as 40% on opening day.

These IPOs are just a taste of things to come for the online lending industry.  In fact, 2014 has been online lending’s biggest year with more than $8.6 Billion worth of loans funded through these platforms; a number that exceeds all other years combined.  Although LendingClub and Prosper lead the pack having collectively originated over $8.5 Billion worth of loans for consumers since inception, other formidable platforms have emerged to offer online loans to students, small businesses and real estate.   These platforms have collectively raised over $1.3 Billion of Venture Capital from notable investors such as Blackrock, Google , Sequoia Capital, Kleiner Perkins and T.Rowe Price, and have originated over half a million loans to borrowers across the country.

The last year also marked the first ever-public securitization for an online lending platform when SoFi, the leading online lending platform for student loans, securitized approximately $152 Million of its loans, which were rated Single-A by Canada’s DBRS.  OnDeck followed with its own securitization of $175 Million worth of fixed rate notes that were rated BBB (Class A) and BB (Class B) by DBRS.  These two securitizations bring the total dollar volume of loan securitizations for online lending platforms to over $1.2 Billion.

But things weren’t always so rosy for the online lending industry.  LendingClub and Prosper both had humble beginnings and navigated through both financial and legal hurdles before finally becoming the two leading online lending platforms in the world.  From the worst economic recession since the great depression to an SEC shutdown and class action lawsuits, both platforms have overcome great odds.  Although execution and a phenomenal team have been paramount to the success of LendingClub and OnDeck, the failure of banks to lend to even the most credit worthy borrowers after the great recession has been even more crucial to the continued growth of the industry.

After being turned down by banks, these borrowers instead utilized platforms like LendingClub, Prosper and OnDeck where they could qualify for loans within minutes and be funded within days.  And then came the institutional investors like Eaglewood, Victory Park and even Union Bank. With risk adjusted returns ranging from 5-12%, these online platforms offered an attractive alternative to the low yields available elsewhere and these institutions came hungry and ready to capitalize on this new opportunity.

What the future will hold for LendingClub and OnDeck, which collectively reported a $38 million net loss on $251 million of revenue for the first 9 months of 2014, is still uncertain.  However, one thing is certain:  other online lending platforms will benefit from the national attention LendingClub’s and OnDeck’s IPOs are bringing to the fledgling sector.  SoFi is planning an IPO of its own in 2015 and Prosper, LendingClub’s largest competitor, is also eyeing an IPO.  And venture capital firms that bet early on LendingClub and OnDeck thereby positioning themselves to earn 130X+ returns have already started doubling down on the industry.   If these platforms continue to grow in terms of both originations and financial backing in the way we saw in 2014, then they have an opportunity to permanently transform the banking system as we know it.

Below is an infographic, courtesy of RealtyShares, that provides an in-depth snapshot of the Online lending industry in 2014: