P2P money lending service Lending Club has closed a $12 million Series B round with Morgenthaler Ventures as the lead and joined by existing investors Norwest Venture Partners and Canaan Partners. The total capital invested in the company is now $30 million. (It raised $12 million in angel and Series A funding in 2007, and then another $6 million in a Series A extension in September, 2008).
The company, which started out as a Facebook application for social money lending, hasn’t had it easy so far. In April 2008, it put a hold on lending activities because of regulatory issues, and ultimately filed for SEC registration during the summer of that year. Then the economy collapsed and Lending Club along with other P2P lenders were heavily affected. The SEC suspended loan activities one of Lending Club’s main competitors, Prosper, at the end of last year, citing obvious reasons that these companies should be regulated by the SEC as a securities seller. Another P2P lender, Zopa, hightailed it out of the U.S. market at about the same time.
With some of its main competitors out of the battlefield (but others remaining), the company will no doubt use the new capital to push for dominance in the space. Lending Club says it’s growing quickly, doubling its user base over the past 5 months and handing out returns to users of over 9% net. It also announced a new chief marketing officer, Pamela Kramer, who joins from Etrade, where she held the same position.
If the company manages to weather the storm without too much damage, it will be very interesting to see how social lending evolves in the future – now that banks and other ways of loaning money have lost a lot of credibility across the board – and how vital the role of Lending Club in that story will be.
The VC community is doing its part to get lending going again. I seriously hope that startups like these have tightened up whatever credit models they use.
It indeed is a very bad time for small businesses and start-ups specially if its directly related to money from individuals…
but again if they manage to stay afloat as the article says, they will probably have far less competition in that field.
Looks like Lending Club will be the winner in this space. Now they need to show if the space can grow beyond the “cool startup” phase.
All I can say is … wow. $12 million in this climate is impressive.
Wow. There is plenty of money to invest out there… you dumb spammer!
Not From India
Ditto. All this idiot wants to do with comments is advertise her lame blod – plus lecture everybody with her “knowledge”
Spammer!
“… $12 million in this climate …” ? Maybe in the poor Indian “climate” not in Silicon Valley, the US and certainly not in Europe.
Again, you show that you are a clueless spammer…
Is Lending Club the only SEC approved p2p lender in the US?
It sure is. The SEC sent a cease-and-desist letter to all the other social lending marketplaces right after registering Lending Club. All the others now have to complete the lengthy registration process before being allowed to re-open.
Lending Club is the first and largest registered p2p lender. Pertuity Direct launched a couple of weeks ago with the SEC’s blessing.
Lending Club has emerged as the clear category leader in the social lending industry after building a very efficient platform and proving its ability to price/manage risk successfully. While most financial institutions have trouble navigating the dramatic restructuration of their sector worldwide, Lending Club appears to present quality borrowers and savvy lenders with a unique opportunity to overcome the credit crunch and generate double-digit returns.
I have been a very happy investor and lender from the launch. One only needs to review their openly communicated statistics to recognize the early signs of a winner now regulated by the SEC.
I’ve had good success with them so far as a lender (no defaults). Glad to see them raise another round.
They will fad away soon if they don’t tighten up their business models.
http://health.okguru.com
The peer to peer lending space has lots of room to grow, but some of LendingClub’s practices concern me – like using $2.4 million of their own money to fund loans, and pulling down their public statistics.
Lack of transparency is what brought down the big boys – let’s not let this happen among valley startups, too.
@P2P Lending News
There is nothing fundamentally wrong with LC funding their own loans; in fact, your argument that you link to doesn’t even make a case for that. The only thing you identified is if you were one of their VC’s, you “would be pretty scared” by this practice. I suppose you couldn’t be more wrong about that as evidenced by the headline of this article we are commenting on.
With regards to their lack of transparency, you’re wrong again. Firstly, as a requirement of the LC SEC filing, they are required to publicly disclose matters of this nature, so there in fact is all the transparency in the world. If on the other hand you are talking about transparency vis-a-vis Prosper, well then maybe you don’t fully understand the nuances between the two models. Prosper is attempting to create a true marketplace, and in order for it to function as a marketplace according to its textbook definition, it *must* disclose all data and information in a timely manner in order for that market to perform efficiently. LC makes absolutely no claims about being a marketplace in the way Prosper desires, and thus has no obligation to publish its borrowing/lending statistics in the same manner as Prosper. Is it a nice to have? Sure? Is it a must have? Definitely not.
I think you are trying to make something out of nothing with your comment, and are probably losing credibility as some sort of “authority” on the space with shallow, unqualified statements like these.
I say kudos to LC for being the first to provide borrowers and lenders with a safe, secure, and regulated alternative to the “big boys” who are largely responsible for where we are today.
I think it’s actually a good thing that LC funds some of their own loans. They have a classic chicken and egg problem – how do they get borrowers without lenders and how do they get lenders without borrowers. This helps them get to the point where the p2p market can operate by itself.
In addition, with their own skin in the game to the tune of millions of dollars they are much more likely to take collections seriously. Their interests are closely aligned to the success of the borrower.
Congrats to Lending Club. In this economic climate raising 12 million VC funding is an achievement
Congrats Lending Club. I hope you around for awhile and do not run like Zopa.
@ P2P Lending News: I just saw your post. I’d be more than happy to do an interview for your blog to address the self-funding and the stats page if you’re interested. I think Lending Club is a model of transparency and I’d love to discuss it with you.
Thanks, that would be great. I’ll try to reach you through your PR group.
I think it’s important to recognize that 9% pre-tax returns are not that incredible when one factors in the risk involved.
Most LendingClub portfolios are not well diversified nor is the profile of those being lent to usually that great. Their collection procedures are decent but nothing to go ga-ga about.
I’m sorry but from a purely financial standpoint, I’ll stick with a 3% CD than a 9% social lending porftfolio that carries massive volatility due to a lack of diversification, lack of collateral (these are unsecured loans), and inherent bias in who turns to a site like this to obtain capital. The reason that things like Microfinance work (and that too barely, the margins are tiny) is that there is massive social capital involved. That’s not the case online unless your loan is being backed up by 5 friends or something like that.
To those of you who don’t understand this, please use a site like Investopedia to learn it. Your understanding of personal finance is important to the health of our country.
This is where the issue about business models comes in. LC’s model is actually pretty facilitative of diversification in that it does let investors put small amounts of money into a wide range of loans. That’s totally different than other models out there, like ones where lenders have to bid against each other on individual loans and then if you’re the winning lender, woo-hoo but you’re stuck being the only one funding that loan (assuming all the risk).
As for that 9.05%, that’s where the annual average return now stands across all the site’s current lenders, but any individual lender can set their own preferences. With my account for instance, I’ve set up a few different portfolios, different risk levels from low to high, have monitored their varied performance levels with respective expectations etc. … as for how much my portfolio matches “most” or not, no idea. Just what works for me.
I am somewhat surprised to see that someone with a name of “understanding risk” does not have a grasp on what is a very simple risk model. The secret to P2P lending is the same as any unsecured lending, which is based on the predictability of default rates. Banks and credit card companies understand this, which is the only way they make money. There is over 30 years of default data by FICO score that can accurately predict defaults within a half of a percent. This is the basis for which Lending Club prices its loans – all this information is on the site. With this knowledge, one only needs to apply the simplest statistical principles to virtually eliminate risk. By investing in 100 or more notes, you use the historical trends in your favor as no single default can cause you any harm. For example, if you fund a lot of notes at 16%, and they are expected to default at 5%, you end up with a 11% return. The actual calculation is entirely that simple, but after people make partial payments, it works out to be close. This works for as little as 50 notes, although you take on more statistical risk, and you minimize risk by going to several hundred notes. I personally have over 1000 notes, carefully selected by borrower profile, and I am earning over 12%. The greatest argument is that the current economy is worse than history, however I would submit that prior recessions have seen very similar unemployment levels, and unemployment is the main reason why somebody with good credit rating would default. To further minimize risk, like all lenders Lending Club has increased the interest rates they charge borrowers to compensate for the relatively weak job market. Credit card companies are losing money now for one simple reason – they overcharged interest to the highest credit quality borrowers, so they could give easy credit to millions of sub prime borrowers. They did this so they could increase their transaction revenue. If they had stuck to the high credit rated people, like Amex states it is returning to, they would not be in any trouble today. Since Lending Club only deals with prime or better borrowers, they are cutting out the profit the banks make and giving it to the lenders.
Scott – your assumptions about how to apply FICO data (which are much the same assumptions used by many of the lenders on LC and other sites) are problematic.
FICO is based on repayment rates for things such as auto loans (secured), homes (secured), student loans (unsecred but can go into forebearance, cannot be wiped out in bankruptcy), AND credit cards (unsecured).
Credit card companies spend millions of dollars analyzing FICO scores. The score alone is not sufficient to make strong risk-adjusted decisions.
I’m thrilled that you’re doing well but from a broader world view, you’re doing better than the median and mean lender on LC or other sites like it.
Your simplistic model is something that on a macro level would not provide positive risk-adjusted returns.
The rates on LC are not significantly better than other forms of unsecred debt for those with really high abilities to pay back. I’m not saying the credit markets are perfect but at the same time, I don’t think credit card companies are dumb. They are some of the most data-driven, well managed types of financial firms out there.
They’ve sat down and made the decision that at a macro level, credit limits need to be decreased and have far more data including geographic patterns of default, likelihood to default based on where the consumer is shopping (AMEX does this, if it sees you shopping at Dollar stores, ALDI, etc., it cuts your credit), and cross-data from other credit suppliers and utility companies.
At an individual level, you may make money, but the point of risk-adjusting returns is to ask yourself, “Am I lucky or am I actually utilizing my capital more efficiently because of some market inefficiency.” It’s a little of both in your case but more luck than the latter.
Good luck to you but caveat emptor to everyone.
Besides that, this article and your investment analysis doesn’t take into account the Origination/Closing Fees that LC charges.
That rate varies from 0.75% (for the highest FICO score borrowers) to 3.50% for most. That means on a blended basis, you’re paying approximately 3% in origination fees on top of the 1% service fee being charged by Lending Club.
The real rate of return therefore isn’t 9.05% but 6.05%. That’s about 2x the best short-term CD out there for a lot more work and a lot more risk. It might be worth it if we were talking about being able to invest millions into LC, but the volume isn’t there so the time isn’t really worth it.
Run after chump change if you wish.
What is obvious in your calculation below is that:
1. You do not know how to add and subtract. As the rates are net of fees, it means they are net to the borrowers and the lenders. Subtracting the fees twice to prove your point will hardly fool anybody.
2. You do not understand how the banking and the credit card industries do work. LendingClub disintermediates the banks and the credit card companies, i.e. their efficient platform does not have to absorb the huge cost infrastucture of a Bank of America or a Capital One. The savings are passed on to borrowers and lenders.
3. If banks and credit card companies had done such a good job managing risk, their default rates would not be approaching 10% currently compared to less than 3% for Lending Club.
In brief, your “understanding risk” handle is the joke of the day as you do not understand risk and you are just acting in bad faith under a cowardly anonymous cover. Do you have any credentials in the field, or are you just thrashing companies to compensate for your own failures?
How much money have they made? Seems like they have had a lot of time to produce such tiny results.
Wow, I gotta be honest and say that there seem to be some negative commenters here who know very little about what they are talking about (”P2P lending news” and “Understanding Risk”) and are already trashing a company that seems to be making some great progress bringing the most interesting innovation in the financial world in prob’ly the last 5-10 years. Seriously, Hurray! for Lending Club and their attempt to take the middle man out of the, well, “middle”, and booo to the nay sayers who seem to be trashing a space that is showing some great promise. The fact that this small company was funded in such tough times speaks volumes of the future of this space.