In my previous interview, Laplanche spoke at length about how Lending Club’s cost-advantage, empowered by their lean internet-driven infrastructure, has the potential to cut out the American banking establishment. This time, the focus was less on their inherent efficiency and more on Lending Club’s need to simply catalyze national awareness.
Interview with Lending Club’s CEO
In a sentence, how would you define an IPO?
An IPO is an initial public offering, so it is an opportunity for the general public to become shareholders of the company.
What steps does an IPO require of Lending Club?
The first step is really just a readiness assessment. Once you are public, you need to release financial information every quarter in a way that is very reliable. So you need internal controls, accounting systems, and financial models that allow you to do that. Lending Club has completed this phase.
The second step is when you push the button and go. This phase involves selecting bankers and underwriters that will help the company through the process. Once the bankers have been selected, there is a drafting of the offering prospectus that will be filed with the SEC. The SEC then generally takes two to four months to review and comment on the prospectus, which can often have several iterations.
Then there is a roadshow for a week or two, which is just a presentation to the wider investor community. Finally, the deal prices and the stock trades.
That’s quite an involved process. Why does Lending Club desire to become a publicly traded company?
There are typically three reasons why a company goes public, though interestingly only one really applies to Lending Club.
The first reason companies have an IPO is to raise capital, especially if they are not yet profitable. Many internet companies go public for this reason. Perhaps companies have a lot of operating costs and want to grow in a faster, cash-flow negative way. But this reason does not apply to us since Lending Club’s operations are already cash-flow positive.
The second reason companies go public is to provide liquidity for existing shareholders. Often, venture capital firms invested early on with a seven or eight-year time frame. Going public can be a way to let the earliest investors sell off their shares to the public. However, shareholder liquidity is less of a driver for us because we already organized several secondary rounds. New investors bought shares from our earliest investors along the way, so there is less urgency to take the company public from that standpoint.
A successful IPO can be a significant awareness-creation event.
Really, the last reason is why we are considering an IPO, which is to use it as an opportunity to raise awareness for the company and better establish the brand. A successful IPO can be a significant awareness-creation event. Millions of people who haven’t heard of us before could discover Lending Club if we would go public, both on the borrower and investor side of things. There’s particularly more synergy on the investor side, with a lot of our existing retail investors being interested in also owning a piece of equity of Lending Club. They want to become shareholders and participate in the growth of the company and industry. It’s also a way for us to reward our customers on both sides (borrowers and investors) by offering them the opportunity to own a piece of the company and benefit from the success they are contributing to.
Are there any companies who have gone public like this, who have had such little need to raise capital or create shareholder liquidity, but simply want more brand-awareness?
We are certainly on one end of that spectrum. I think it is rare to see a company going public as a brand-building exercise, where those first two reasons are not really concerns at all.
It could be helpful since the smaller-dollar investor accounts largely spread through word-of-mouth.
That’s right. It is a lot of free advertising.
Let’s talk about the composition of your investor dollars. At LendIt a year ago, you broke it into 30% retail, 30% high net worth, and 35% institutional. Has that breakdown changed in the past twelve months?
We don’t break it down that granularly – we can share that about 70% of investors on the platform are individual investors, and about 30% institutional.
What is your ideal breakdown of individual versus institutional investors at Lending Club?
I would like direct retail investors to continue to be 25-30% of the platform, with individual investors (whether direct retail or through a fund) to be more than 50% of the platform. The reason for this is that the retail and individual investor base will be more loyal to us, more predictable and more likely to maintain their investments in an economic downturn.
We have a collection of very stable institutions funding our loans.
It is important to state that our institutional investors are not hedge funds, nor are they highly leveraged, which is different from other platforms. We have a collection of very stable institutions funding our loans. However, they are still not as stable as tens of thousands of individual investors making their own individual decisions, the aggregate being very predictable and sticky, which is an incredible asset to us a company.
The public often focuses on the amazing growth of Lending Club’s issued loans, but I’m more interested in the monthly expansion of your retail registrations. How many are active on your platform? How does this number grow period by period?
In 2013 approximately $1.7 billion of the platform’s total originated from individual investors, compared to approximately $713 million in 2012. In 2013, we added about 3,000 individual accounts per month.
How would an online company like Lending Club enter into the more-offline verticals of secured credit, like home mortgages or car loans?
One of our strengths is our ability to operate at a lower cost than the traditional banks. There are many different manifestations of that. First, there is the fact that we do not have a network of branches. This lowers our cost because we operate completely online. Another is our ability to use technology to automate a number of processes that have historically been done manually at the banks, an example being income or employment verification. Banks do register a security like a mortgage using some technology, but it’s mostly manual right now.
We believe Lending Club can create the technology to help automate this and thus do it at a lower cost. That, in turn, will help reinforce the two benefits of Lending Club, the first being a low-cost platform that drives down the cost of credit, and the other being the convenience attached to being an online service.
For example, our income and employment verification not only lowers the cost for us, but it is a better service to consumers. If we verify income through ADP, the payroll processor, it saves our customers the hassle of going through W2s and pay stubs, scanning them, and sending them to us. So I think that is going to be another way that technology lowers cost for us, and also delivers a better experience.
But as an online company, holding a house or car as collateral seems a physical act that requires you to cross from the internet into the real world.
It is partially a physical thing, but you can also register a lien in a more automated fashion. Our ability to automate processes and use technology to lower cost and improve user experience is really going to be the most helpful and transformative in areas that are precisely hard to automate and involve physical documents or goods, like the 4506T process that now allows us to request a copy of tax returns electronically from the IRS, with the borrower’s consent of course.
I filled out a 4506T to get approval for one of your loans.
Right. I think we have been pretty good at transposing offline processes online and automating them. There are a number of touch-points that allow this. For example, some of our requests are generated by direct mail. A customer might receive a physical piece of mail from us that contains a code they can use. They can then type in that code online for a loan. The latest acquisition of Springstone is another example where the initial touch point is the school or the medical care provider.
If, at some point, you need to repossess the house, what does Lending Club have to do? Have employees throughout the country to do this? There seems to be an offline challenge there.
The back end does indeed have challenges. But a repossession, if a loan got to that point, could simply be handled by a service provider. Within the auto industry there is an entire chain of service providers that specialize in repossessing cars, selling them at auction, and then paying off the lenders with the auction proceeds. The banks stay removed from the entire process.
So these industries already exist. We might be able to make them more efficient and consumer-friendly, but in any case, there are already there.
LendingMemo is interested in Lending Club’s ability to simplify and popularize investing, helping more people become their own retirement account managers. Regarding today’s retail investor experience, what do you see average Americans able to do at Lending Club in ten years time?
I think we will continue along the same trend of diversifying the type of credit products that investors have new access to that they did not have access to before, continuing to give them more information and control over their accounts. The future will give them even more transparency and reporting, even more data that allows them to be better managers of their investment.
At some point it’s not crazy to think that we could branch out of credit.
At some point it’s not crazy to think that we could branch out of credit. There are other industries that could be disintermediated, where we could provide a more direct access to investors for an investment opportunity. There are currently some projects we have discovered outside of Lending Club that are trying to apply the same principles of peer to peer lending to the insurance industry. So that is another possible area of expansion.
Overall, I think we are simply going to see further and further expansion into new products and asset classes that give investors the ability to further diversify, finding the right mix of return and risk for their particular situation.