Lending Club IPO Shows The Profit Potential For Financial Technology Investments

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TechCrunch |  | Dec 11, 2014

LendingClub IPOLending Club’s $5.4 billion initial public offering on the New York Stock Exchange is more than just the largest IPO for a U.S.-based tech company this year, it’s also planting the flag for an entire ecosystem of startup companies engaged in overturning the ways in which the world deals with money.

“This is not some narrow addressable market, it’s trillions of dollars and represent billions of dollars of opportunity,” says Matt Harris, a managing director with Bain Capital Ventures who specializes in backing financial services technology companies.

The most immediate winners are Lending Club’s investors, among them Norwest Venture Partners,  Canaan Partners, Morgenthaler Ventures, Foundation Capital, Union Square Ventures, and Kleiner Perkins Caufield & Byers.

Norwest Venture Partners is the largest holder with 50.8 million shares, and a roughly 14% stake in the company. EquityZen has a breakdown of how much investors from each round stand to gain on their participation in each of the rounds here.

Numbers like that typically cause other firms that may not have been paying attention to the once-sleepy financial technology sector to stand up and take notice.

Related:  Lending Club is really only Crowdfunding Lite

“This is just a a catalyzing event to a very large wealth-creating phenomenon,” says Foundation Capital’s Charles Moldow, an investor in several financial technology companies including Lending Club, the soon-to-list OnDeck Capital, Motif Investing, and LendingHome. Moldow, whose lengthy white paper mapped the potential of marketplace lending, says that these companies are the vanguard of a larger host of companies that will remake finance.

“There are equity fundraising and investment banking underwriting services that eventually will be transformed, but are still the old boy club,” says Moldow.

Waiting In The Wings

Beyond OnDeck a slew of online credit businesses are waiting in the wings with aspirations to take their own bow on the IPO stage and their own twist on the lending business that was pioneered in the U.S. by Lending Club and its earliest direct competitor, Prosper.

Companies like Social Finance are pitching student lending services; Funding Circle, OnDeck, Swift Capital, CAN Capital, and others are appealing to small business borrowers; and AvantCredit, LendUp, Earnest all want to lend to different types of consumers. Some startups are pursuing even more specialized types of loans, with LendingHome and AssetAvenue targeting home buyers with mortgage loans, and ApplePie Capital looking to lend to would-be restaurant franchisors.

“We see the lending club IPO as a bellwether for a major structural shift in the way that consumers and small businesses get access to credit,” says Funding Circle co-founder Sam Hodges. “It’s one step in what will be a multiple step shift in companies like ours coming to scale and changing the ways that parts of the market work.”

Shaky Beginnings

The success of the lending business wasn’t always so certain. As the financial crisis loomed, in 2008 the U.S. Securities and Exchange Commission took a hard look at both Lending Club and Prosper and both businesses were forced to shut down while regulators assessed how they’d be overseen and by which watchdog.

Some investors point to the different approaches Prosper and Lending Club took to addressing regulators’ concerns as one reason why Lending Club was able to take the pole position against its rival, which had actually been the first peer-to-peer lender to launch in the U.S. market.

The two companies have always approached peer-to-peer lending somewhat differently. Lending Club curated its borrowers and lenders from the outset, while Prosper had a much more free-wheeling, pure marketplace approach to its business, investors said.

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