At the start of this year, we raised a fund we call The Opportunity Fund. I blogged about it when we announced it in early January. The idea behind The Opportunity Fund is twofold; to allow us to invest in our existing portfolio companies after they've moved beyond the early stage where we are focused, and to allow us to invest in a few companies that we have been following closely over the years but were unable to invest in at the early stage.
One such company in the latter category is Lending Club. We've been interested in peer to peer lending marketplaces for about five years now. We've studied the category closely but have never found the right entry point. We have watched Lending Club innovate by delivering better risk assesment and mitigation which has led to better returns for lenders and in turn has made Lending Club the leader in this important emerging market.
Last week we closed on an investment in Lending Club which was reported today in the Wall Street Journal. Our partner John Buttrick wrote a short blog post outlining why we made this investment today on the USV blog.
We love marketplaces at USV. They are a special category of large networks of engaged users that monetize extremely well and take advantage of the web natively and powerfully. We are thrilled to be invested in the peer to peer lending marketplace and we are particularly excited to be able to do that through Lending Club.
Can’t wait to try it out!
lending club kicks ass — that should be a standard perk for working in the valley — you get (at least) 5 or 10% of your cut put into lendingclub every check
In my 3rd year of lending.
how’s it going? do you like Lending Club? how does it compare to the other peer to peer lending markets?
Great investment. I’ve lent a few times. Like the amount of data available to quantitatively and qualitatively assess credit risk. Given the large data sets and essentially crowd sourced underwriting, feels like there could be an analytics opp’y here given how much FICO ignores/mis-weights.
Very important stat here:Funded Loans (32,025) $326,416,575 Declined Loan Requests (317,190) $3,539,489,429I like that….it means you’re probably not loaning money to poor people, which is best reserved for charity. I learned that the hard way on Prosper.So….how much will the Opportunity Fund be LENDING through Lending Club? 🙂
we won’t be lending anything, as you probably well knowbut i do plan to put some of our personal capital to work.i have a material investment in a few covestor models and i will have a material investment in lending clubdogs got to eat the dog food
I’ve been up and down on Lending Club. I’ve blogged a bunch about them as well, but I’m currently down. I’ve dogfooded quite a bit, being both an investor and taken out a loan just for due diligence to see both sides of the coin (and put some of the business school tuition off at a low interest rate.)I love the idea of peer to peer lending, I think it has the potential to be the best of both worlds / win-win for lenders and lendees, but right now I am concerned that lenders in the situation are too vulnerable. I don’t want to make too much out of one antecdote, but I had a loan get defaulted on because the person when into chapter 7 bankruptcy. The total loan was for only 5 grand. Obviously this person must have had much more debt on their plate to go into bankruptcy just 2 months after getting their Lending Club loan. I think that with some improvements to the system it can really be the future, but right now I’ve been withdrawing my money in drips as I can, and just can’t risk any more defaults.
That’s why banks charge 18% on loans with no collateral. It’s not all greed…
And even with the 18% rate, traditional banks are not exactly generating world beating margins on traditional loans / credit cards. There is much less profit in the loan / credit card rates than the average consumer thinks.
“JPMorgan’s credit-card division, which lost money for all of 2009, generated $911 million in profit, or 17 percent of the bank’s net income for the quarter. The investment bank’s $2.06 billion of earnings accounted for 38 percent of the total.”http://bloom.bg/qGd7Rg
i agree with you that providing the tools to protect the lenders is the key to a healthy peer to peer lending market
Love it. Signing up now. Tough to get a decent, relatively stable return anywhere right now – this seems like a nice alternative
This kind of business works well when rates are artificially stable and low via FED printing of money into the bond market….I have a bad feeling of what happens in a rising rate environment. A lot of people with high CC balances are 200-250 basis points on a HELOC or ARM from bankruptcy. Bernanke and his printing press seem to know this…..Just be careful diving head-first into any “investment opportunity” that has short-track record, “stable” returns well above other benchmarks. You always pay for risk, and you always risk to get paid.
4-week t-bills being auctioned off at 0.000% ten-year bond rate under 2.6%.you will take away the boogie mans guns over his cold, dead body!
all true, but the spread between what banks are paying and what consumers are paying on card balances is huge
Yes but even banks aren’t making much on that spread. Otherwise someone would be going for market share by cutting margins. Loaning money to poor people with no collateral is a tough businessDefault is the killer.Will be watching closely….lending club has the smartest approach I’ve seen and I hope they can keep it rolling through a rising rates environment.
From a macro level I think this is the one greatest idea that could have the biggest impact on our nations economic system that I have ever seen. Being in the consumer goods industry I have been tracking consumer spending/consumer debt since the early 90’s and I realized very early on that debt was going to strangle our economy. I realized that we were constantly being forced to lower our prices every year from 1996 onward and we were doing so because of the cost of credit; the 2 to 3% that we should have raised our prices every year was not possible because the consumer was paying 18% interest on the goods they were purchasing via credit cards.According to Andy’s stats they are only funding 10% of the loan requests they receive; its a really small dent in a very big problem….but it is technology bringing solutions to obvious problems!Great idea and I hope it grows dramatically!
Started using lending club about 24 months ago. Put in a few thousand that I want to use for heading to Brazil for 2014 World Cup. I’ve had a great experience, the UX could definitely use some improvements, but I’ve got a system down for picking loans that a) I’m helping people get their life back on track and b) I would imagine have a low default rate. I’ve invested in 77 loans, have one that is past due and 11 paid back early.It’s been a good experience and I’ve earned a 10.10% NET interest rate.
I’m wondering about the incredibly low web traffic numbers for both Lending Club and Prosper. http://siteanalytics.compet…How did they manage to be so unpopular after (1) over 5 years online, (2) over $70M funding each(!), and (3) such strong backers – see http://www.crunchbase.com.
Interesting point! When thinking about businesses like this I never really think about traffic but rather deals closed and income made as a business metric; its a site where people come to, do their business and move on. Would more traffic actually lead to more lenders? Better risk applicants? Should their goal be increased traffic? Should they focus on quality rather than quantity of traffic?
It is just not very probable that both companies have chosen a strategy of very selective traffic acquisition driven by quality considerations.Also, when competing against the 18% rates of bank consumer credit (as stated in John Buttrick’s post), you’re not competing for “quality” borrowers exactly.And, what’s the point of competing against traditional banks with a web based socially-driven service if not aiming at large scale and disruptively low margins.
Awesome company, great people. So excited to see them hit this milestone on the way to their ultimate goal.
There is more risk for smaller investors compared to those investing in the LC funds (100k+). The smaller investors not in the LC funds have default risk with the borrowers and default risk with Lending Club–you don’t own the notes. If your not in the LC funds and something happens to Lending Club, your investment is toast. If you invest in their LC funds, you own the notes. Of course it is highly unlikely something would happen to Lending Club, but the risk should be more clearly noted. Just thought I would add this 2cents.
They have written in their faq how they are insured, and what happens in the case that they go under. I’m cautiously investing a small amount, if someone could verify how solid their plans are, that would help a lot.
Why is the Lending Club not more common considering the fees/interest rates for those who are using things like payday loans?
I think the entry barrier to this industry is very high. At the very least you have to apply for a license from the SEC, which I’m told takes a LOT of money and time. Not to mention you have to be very selective to who you lend.
Yeah, but couldn’t we create a way to bring up overall most people’s ability to handle their finances(and please don’t get me started about regulations in this area, I’m stressed about that right now)
The “get a free credit score” links on Lending Club lead to this statement: “The advertisement that led you to us was not compliant and potentially misleading. It is not approved by our company.”Sorry – the whole site is a little smelly. Not just this link – it just seems so…. amateur. Doesn’t make me want to trust it, really.
There are no advertisements on the Lending Club website. Are you sure you are at the correct location? http://www.lendingclub.com
Very interesting investment! But this has the look of more than a single first (i.e.USV not being an original investor). Here’s what jumps to me- and just looking for clarifications, as I’m sure you’ve thought about these.1) USV typically invests in companies that are forging a new territory and/or have clear/early leadership potential. This seems to be a fragmented marketplace with several players in it. Is Lending Club the market leader today? 2) The frequency of user engagement is different than other definitions of engagements in your other investments (i.e. whereas we tweet, tumble and check-in several times per day, we don’t borrow or loan money at that same frequency). Are you relaxing the “engagement” part a bit? 3) Where is the innovative technology? It seems that the strength of Lending Club is probably in their risk management processes (with some degree of technology behind it of course), but their success will come from operational execution and how they scale the business (it’s a people factor). So it doesn’t “appear” as sexy as the other investments you have made, right? I’m sure you’ve thought of these elements and there are probably other factors that we are not privvy to, but I’m just saying what I’m thinking.
yes, they are the leader in their market.
Maybe I’ll fund the next stage of my projects with Lending Club.Edit: Oh, $35k limit. Worse case scenario I will do this. I don’t expect worse case scenario though. 🙂
This is an exciting update @fredwilson:disqus , it’s good to see that you guys are is interested in market places. The question I have is would USV be interested in investing in such peer to peer services with a niche?
How does Lending Club deal w/ statutory usury issues such as the 18% limitation in Texas?What does LC do w/ its defaulted debt? Does it try to collect?Interesting concept. Just being open when the banks are frozen is an advantage.
If it’s like Prosper (and I get the feeling it’s better)….They abide by governmental price-fixing schemes.They turn defaulted debt to collection agencies after fairly standard warnings,etc.
Hi JLM,Here is a screenshot of what I see as a lender when someone doesn’t pay.http://cl.ly/92tland here is bankruptcy:http://cl.ly/91Bw
Highly local financial regulation makes these businesses difficult to internationalize. As an Irish resident, I can’t invest via Lending Club, Prosper or Zopa. I guess I’d be more pissed off as a resident of Texas or Kansas that I’m likewise excluded from Lending Club. This of course creates a Samwer-brothers style opportunity for local talent in multiple countries to go through the SEC-esque certification headache and create something spin-in-able to Lending Club or whoever turns out to be the gorilla here. A side note on how regulations also struggle to keep abreast of these kinds of innovative lending: Wonga.com, a UK-regulated short-term lender (online payday loan stuff) have a long-running and amusing dispute with the FSA in the UK over the fact that they’re forced to prominently quote a ludicrous APR (4212%) for loans with a one-week maturity. They liken this to taxicabs being forced to display a sign saying that it would cost a million bucks to rent them for a year!
I’ve used Prosper for two years now. – 118 loans out- 8 paid back in full- 2 defaulted- 3 in possible default position- 20.3% avg ROI on open loans- +7.8% ROI so far (gain/loss to-date / total investment)I’m also looking into converting my account to be my IRA as well so that taxes aren’t as bad which one needs to account for when calculating total gains.
I used Prosper, too. I put in $100,000 to 1,000 loans, starting in about 2007-2008 time frame. Not the best timing.My total ROI was -1%. I guess better than putting it in the stock market but still short of the returns they (and Lending Club) are/were advertising at the time. Perhaps they have improved their algorithms to assess risk better now. But I had many A and B rated people default on loans…
I evaluted Prosper and LendingClub back in 2008 and have been investing with LendingClub since early 2009. Back in 2008 Prosper used an auction model to set the interest rate – which is crazy and the returns reflected it. Prosper now uses a model more similar to LendingClub.While I’m very pleased with the returns I’m receiving, my experience has been that the single biggest mistake I made is not picking the “wrong” loan, but not diversifying enough. There is a correlation between interest rate and default rate, but it is in general pretty difficult to predict whether a particular loan will default.Given that loan defaults among the ones I’m invested in may as well be random (until I figure out a better way to divine good loans from bad), I think putting even 0.1% into a single loan is too much. With the rapidly increasing loan volume, one can afford to be picky and still have lots of loans to pick from to stay super diversified.
it sucks i cannot lend on it, being foreign
Congrats on the investment. I’ve been doing some work for Prosper.com for the last several months. Person-to-person lending is an interesting category. I’m particularly optimistic about how the marketplaces can be applied to alternative borrowing types like wedding or adoption loans. If consumers knew they could fund those types of big ticket “life event” purchases through P2P lending, they might avoid some of their credit card debt in the first place.
In my 3rd year of lending with Lending Club. I’ve been very happy. Out of 1344 loans, 5 have defaulted, 68 have paid back early. Average net return is 9.66% Although it has been over 10.5% for the last 10 months. (I double check their math… and it is correct) Some advise for those who want to invest: 1. Invest in more loans at smaller amounts. There is a $25 minimum. 2. Be picky. Choose loans that you are comfortable with. For example, I don’t loan to people with late payments. 3. Take your time. 4. Don’t be afraid to sell a loan that you are worried about.
this is fantastic advice
LendingClub’s loans on average have earned a negative rate of return. LC is only able to claim 9% average returns because they are growing quickly, so they have vastly more young loans than aged loans. But so far, they have not produced a crop of loans that you could hold for 3 years and earn a non-negative return by the end.Of course, you could think you’re better than the average bear at selecting loans to fund. But it’s very, very hard. I spent Hurricane Irene weekend plowing through their data, and I think only ~3% of the loans will yield >7% for 3 years.Unless they’ve gotten better at judiciously selecting applicants & setting rates–and as yet it is just too soon to know–unfortunately your money will earn a higher return in its zero-interest checking account.