Lending Club IPO

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Last week, the biggest news in FinTech was Lending Club (NASDAQ: LC) went public in an IPO that was significant for 3 reasons:

  • First, it’s now one of the best-known public names in FinTech, and more specifically is new proof point that traditional financial services, such as credit, can be disrupted by a technology-focused startup.
  • Second, the size of the offering and the amount raised – which was over $1B, since the underwriters exercised their full option for 8.7 million shares – put it among the largest US technology IPO’s in recent memory. This is significant since the scale both generated headlines and calls attention to category.
  • Third, the business model: peer-to-peer (P2) or marketplace lending, is a key category for a range of players in FinTech, such as Prosper, OnDeck and SoFi.

The business model has been explained sufficiently elsewhere, but the essence is that the Internet enables customers to borrow more cheaply than they might have using traditional sources. On the other side of the balance sheet, lenders (‘investors’) can receive a higher return for a fairly transparent amount of risk than they would otherwise. A win-win.

And what growth….

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Source: Company Filing

On a personal note, as a San Francisco area resident, I was also glad to see the success of Lending Club as a validation of this new emerging category of business to be based here.

Its HQ is right in heart of South of Market (SoMa) alongside Twitter, New Relic, Google, GitHub, DropBox, Quid and Hired.com

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Note:  Lending Club was once based in Sunnyvale and Redwood City, moving to SF in 2011, so also constitutes an example of recent migration from Silicon Valley to SF.

As a former Morgan Stanley executive, Cynthia Gaylor, who worked at the office I did at Sand Hill Road in Menlo Park, tweeted in 2013 when she left the bank to head up Twitter’s corporate development team, “Let the migration north begin!”

 

While one could certainly argue – and analyst coverage would definitely support this view – that Lending Club is a financial services company, to me the company is also very much a tech company for 3 reasons: origins, culture and vision.

First, remember… this was literally one of the first apps you could use on Facebook! Further, the founders were not bankers, but rather included CEO Renaud Laplanche as a former the entrepreneur who had a successful exit, and then worked at Oracle).

The culture is also typical of that at most technology companies, in terms of what’s seen as positive about working in tech, i.e. open and collaborative culture, non-hierarchial, focus on engineering, importance of product, and “quirkiness” (e.g. offices to encourage a sense of play and collaboration).

In terms of culture, Glassdoor gives Lending Club gets a 4.6 / 5 star rating. Just compare that to traditional banks like Morgan Stanley, where it’s about 3.5: Lending Club gets ratings more like a well-run tech company or startup.

More importantly, the vision. As John Battelle said this fall at NewCo Silicon Valley’s kick off event at Survey Monkey’s HQ, the latest crop of tech firms based are looking more than just to make money – they want to change the world, or at least improve something that is broken. Lending Club definitely has that vision.

In fact, it was born of the founder’s frustration that typical credit card rates were 18%, which seemed altogether too high to him, so he envisioned a way to match borrowers and lenders directly. There’s obviously much more to it, but the best business idea also has a simple “story” to it, and clearly this is true for Lending Club.

 

This blog does not provide investment advice, so I’m not going to provide a view of their valuation, but I applaud their success. CEO Renaud Laplanche is not someone I know, but connected with when I when I moved to San Francisco, as a fellow graduate of London Business School.

It’s good to see a fellow graduate succeed, especially when these days an MBA carries less weight than being a full stack engineer. The world needs both!

From my experience in launching new products at established banks and startups, Lending Club provides a compelling example of how to embrace the value of technology in a really smart way, and deliver value to several market participants.

And the timing couldn’t be better. The IPO market is back on track in 2014, with recent successful IPO of Alibaba earlier this fall. Just today, another, albeit smaller marketplace lender, OnDeck focused on small business lending, went public.

 

Well done, Lending Club – here’s hoping many other FinTech firms will find similar success, rewarding entrepreneurship and risk-taking, and hopefully providing a push towards innovation among the larger financial services companies, as well as a shift in the corporate cultures of banks – both here in the US and around the world – towards a more inclusive, collaborative culture.

Not all banks will fully embrace user-centric design or Scrum, but I hope some do, along with view that making things better is more than just delivering a slightly better loan or APY…

 “We want to transform the banking system into a marketplace that is more competitive, more consumer-friendly, more transparent.” CEO Renaud Laplanche

Welcome news, and a model to emulate….. it takes more than just ping pong tables and pet-friendly environment!

Happy Holidays!

The Future of Money

Unlike Money 20/20 in Las Vegas last month, this week’s Future of Money and Technology in San Francisco was more of a true Silicon Valley event with generally more technical attendees and venture-backed start up’s, and fewer speakers and sponsors from traditional/online retailers or the card industry.

There was more discussion, as one might expect, on startup’s, bitcoin and where things are going in next five to ten years.

Personally I was struck that group of panelists drew a complete blank when asked which startup or relative newcomer would transform financial services in the next ten year (excluding Stripe and Square).  The field seems wide open to the experts.

Key Takeaways

  • Look for the Cloud to drive up adoption of long-standing tools like account aggregation and data integration, with leaders like Yodlee continuing their evolution into platforms for other banks and partners.
  • While getting less buzz, especially given the chatter about Apple Pay, expect a shift from mobile payments to wealth management and big data solutions, in terms of what’s important in the FinTech landscape in 2015 and beyond.
  • In next 12 months, look for the big banks to embrace Bitcoin, initially just as investors as they will wait for clearer direction from regulators before the use of any form of cryptocurrency within their core businesses.
  • The Silicon Valley (vs. NY and London-centric) FinTech ecosystem is far more focused on disruption within FS (vs. incremental improvements) or enabling better services from big players, through selling to them.

 

Intuit and Personal Capital 

Starting the day off was a fireside chat with Bill Harris, CEO of Personal Capital and former CEO of Intuit, and Barry Saik, SVP of Intuit, who’s runs their consumer ecosystem including its Mint.com product.

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Harris remarked on the power of information to drive behavior, noting that people who see their actual spending and how it fits with their goals through online or mobile apps actually spend about 15% less to achieve their goals.

He also sees opportunity in FinTech for start up’s and established players to better serve the needs of consumers, at all levels of income, much as Personal Capital meets the needs of the so-called “mass affluent” by providing better returns through lower costs and more efficient use of technology.

Intuit

Saik pointed out that Millennials in particular, and young people in general, are less taken with banks and traditional provides of financial services – comparing their online and mobile experiences with other activities; they ask, “why is it so complex/slow/confusing” and seek FS providers who are as easy to use as Uber.

In other remarks, both panelists commented on the problem of good information and advice on financial services, and cited that as an opportunity. I’ve often wondered why Motley Fool, a company that I negotiated with earlier in my career when launching an online bank, didn’t capture more of this opportunity and go after other segments than their core market of self-directed investors. Perhaps there’s an opportunity out there, where Ed Tech meets FinTech?

The session concluded with Harris noting that Big Banks, in the US, vs. FinTech startups are examples of East Coast (hierarchical, annual planning focus) vs. West Coast (whiteboards, collegial atmosphere) business culture.

 

The API Ecosystem 

Next up was an informative session on the API Ecosystem in Financial Services. Certainly from my experience working at Morgan Stanley and earlier with likes of Barclays, MBNA and CheckFree, I see the promise of greater integration and more innovation by means of the somewhat wonky (to the non-technical) API.

Although XML and web services fell short of their promises to transform, Restful API’s and the Cloud are enablers of new, consumer friendly services from established players, like Wells Fargo and Chase, plus start up’s like Simple (now part of BBVA) and Addepar.

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The API Ecosystem demo started off with probably the highest energy moment of the whole day, with Justin Woo, a Developer Evangelist at PayPal. With great excitement, he showed how easy it to enable a site or app to accept cards, through adding a few simple lines of code calling the PayPal API.

Affirm

Jeff Kaditz, CTO of Affirm, Max Levchin’s latest FinTech start up, spoke about the role of API’s in allowing people to break free from the traditional bank solutions that people increasing do not trust, he says.

Kaditz got a few laughs for making fun of Wells Fargo’s logo, which include the horse and stagecoach as an example of how rooted big banks are caught up in the past. Ironically, as I’ve tweeted on Nov. 19th, Wells Fargo’s Digital Channels is ranked among highest in the US, so I would disagree with him on that front.

stagecoach

But Affirm, like Simple or WealthFront, is a great example of a FinTech startup, with enormous ambition, strong backers, and a vision to “fix problems” using technology and a fresh approach, e.g. API centric solutions.

John Beatty, cofounder of Clover cited how Information Security approvals take months if not years at big banks. With an open API (unlike most banks), its platform for Android devices enabled POS solutions to reach the market quicker.

Christine Laredo of Yodlee, who moderated the API panel, also marked how FinTech start up investment was $3B for the last year — 3x the level in 2008.

 

Bitcoin, Stripe and Stellar

Although I couldn’t attend the entire panel, Sean Percival of 500 Startups joined moderator Mark Rogowsky of Forbes, and several other Bitcoin executives, including Sonny Singh of BitPay, and Jackson Palmer of Dogecoin.

The Bitcoin conversation continued with a panel on Stellar: Building a Common Financial Platform. Moderator Dan Rosen of Commerce Ventures and Joyce Kim of Stellar noted 30% of the session’s audience said they hold bitcoin, yet across the US and around the world, the percentage of much smaller.

stellar

Stellar, as a non-profit, was also represented by Jed McCaleb, who created Mt. Gox, the first bitcoin exchange, and Ripple, prior to founding Stellar.

Greg Brockman, CTO of Stripe, spoke about the relationship between Stripe and Stellar, noting that they invested $3M for 2M Stellars, a virtual currency, and work with Stellar since they share the vision of greater “inter-operability” between currencies, virtual and real currencies, and passion for the future of commerce. Brockman also noted that while Stripe is in beta with their bitcoin offering, he expected it to go live shortly.

Brockman talked about the frustrations with inter-operability, and the details that inhibit payment innovation, while Kim of Stellar highlighted innovations like the 1% inflation rate, the focus on a “freemium” model to encourage adoption.

Everyone on the panel agreed that the future of bitcoin and other crypocurrencies is just beginning. McCaleb noted he founded Stellar to address what he saw as issues with bitcoin, including mining that negatively impact the environment.

Although below the radar, just three months after their launch, I was impressed with Stellar’s vision, how clear Kim was about Stellar’s vision and mission, and the alignment of the panel on relatively “uncool” issues like protocols and messaging.

The panelists seemed unconcerned whether Stellars would be the next bitcoin – and came across as far more motivated to reduce payment complexity and inefficiency, and create a smarter, more transparent network for payments.

But with demand outstripping their forecast – and 4M wallets in use today (47% of whom did not hold another virtual currency like bitcoin), Stellar is worth watching both for its initial product as well as their long-term vision and set of partners in the FinTech space.

 

Angel & Corporate Venture Investments in FinTech

David Rose of NYC-based Gust, a rival to AngelList, and expert on Angel Investing gave a fact-filled talk on what it takes to be a good Angel investor, citing the need to have a long-term vision, people skills, self discipline, willingness to learn, self control, and desire to be at forefront of innovation (without the drawbacks of being an entrepreneur).

gust

Rose cited statistics, such as the fact that 5 of 10 Angel-backed startups will fail and you will lose all of your money. Also, if you have the ability to back in 10 startups as an Angel, on average 2 of the 10 will return your money (by being acquired or bought for their IP). If you’re lucky or choose right, you will make money on 1-2 of the 10, but to achieve the 25% IRR goal for its investment class, you’ll need that 1 of 10 in your portfolio to achieve a 30x return.

Rose noted that angels are in it more for just the money – it’s also about keeping up with changes in the world, and making a difference. But he cautioned about being naïve about investing in startups, noting that the “J” curve where you invest in a money-losing venture, as most are, is not for the faint of heart.

Mike Sigal, CEO and founder of Cashflower, a FinTech startup based in S.F., led a similarly clear-eyed assessment of what corporate venture investment teams look for in FinTech. He noted that corporate VC is now 20% of FinTech investing.

Pete Casella spoke about how his team at JPMorgan Chase looks to make strategic investments of $5m+ in startups that can positively impact the Chase business, and the Bank requires a desk or P&L center sponsor the investment. While he said Chase seeks to “build its own” in key areas like mobile, UX and core business areas, Jaidev Shergill of Capital One ventures spoke about how the Bank seeks to learn, and learn where to invest in its infrastructure, by investing in non-strategic areas as well.

Casella also made a pointed comment that while he’s seen maybe 50 mobile wallet seeking financing in the last year, he sees the market for these services as maybe two or three providers at most.

Shergill cited the case of working with SnapLogic, a company founded by Gaurav Dhillon and backed by A16Z, as such a company, while Citi Ventures Ramneek Gupta gave example of Silvertail. He noted they helped foster a pilot, guide them to a commercial relationship, and how the firm was later acquired by RSA.

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Overall the corporate VC’s came across as helpful, but cautious, not looking for a big return on their money, so probably easier to negotiate terms with vs. some other venture firms, but probably less motivated to help you win in the market, since they don’t need a 3-4x (let alone a 30X) return on their investment.

But all the VC’s mentioned, at least to some extent, how they brought value to the portfolio companies by providing startups with connectivity into the large financial services enterprise.

At Morgan Stanley, one role I held was precisely this kind of “navigation” role, helping to connect the Firm innovation (whether in the form of new business models, like Hired.com or approaches to data center virtualization, like Bracket Computing) so I can say first-hand that these kinds of assistance do matter.

What are key lessons for FinTech entrepreneurs? I would call out the panelists advice to “Do your due diligence” with any corporate VC. Avoid term sheets with ROFA’s. Ask good questions about what they will do for you, and be clear about what type of help you need in growing your business.

One comment from Casella was to stay away from mobile payments, saying he’s looked at 50 companies targeting this space, and sees the need for at most two that will be successful – although I think on a global basis, this will be a higher number.

And, as one VC said, stay clear of anyone who makes a lot of demands of your time, especially for PowerPoint presentations 😉

 

2014 Future of Money Startup Competition

Powered by the startup competition platform, younoodle, The Future of Money & Technology event announced  several winners of its startup competition.

The winners were:

  • Linqto Personal Banker: a software development company specializing in Enterprise solutions for banking and educational verticals.
  • CrowdCurity: a marketplace for web security solutions
  • TrustingSocial: an innovator in credit scoring with social, web and telco data, to make lending faster, cheaper and friendlier.
  • Xignite: a provider of market data cloud solutions.
  • CUneXus: specialized sales & marketing systems to help lenders maximize the value of customer relationships.
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Welcome!

Welcome to the FinTech blog.

I’ve worked in FinTech for most of my career. I’d worked on the launch of first online bank in UK, spent several years working at a company called Scient, known today as Razorfish, mainly in financial services and worked at a bank for the last few years.

With a front row seat to the current venture-backed technology boom, given the role Morgan Stanley has in the technology space, I’ve seen the wave of new FinTech companies formed in and around San Francisco, where I’ve worked for the last couple of years.

SFOBBnight

I’m launching this blog since I couldn’t find a single place to find out what’s interesting in FinTech. Although I won’t be covering all aspects, in the sense of enabling technologies used by all players in the financial services ecosystem around the world, I’ll try to make sense of what’s going on and tell the story.

Inspired by the amazing and succinct commentary by A16Z’s Benedict Evans, and encouraged by John Battelle, who agreed there doesn’t seem to be a single place to find out what’s going on in FinTech, I hope to cover this space as best as I can — and welcome reader’s comments to make it better.

I’ll begin my coverage with live reports from 20/20 Money, the premier FinTech event in Las Vegas, Nov. 2-5.