Video Of The Week: Why Marketplace Lending Is Better

Samir Desai, founder and CEO of our portfolio company Funding Circle, which is the global leader in small business lending marketplaces, gave a great talk at Lendit this past week. It starts with a bit of an advertisement for Funding Circle, but Samir quickly gets into an explanation of why marketplace lending is a better way to do the loan business. If you want to understand why marketplace lending is growing massively around the world and why it is the future of the lending business, watch this video. It’s about 25mins long.

#hacking finance

Comments (Archived):

  1. jason wright

    didn’t FC recently buy a competitor? edit. now i’ve watched the video (it helps).there’s a consumer lender in the UK, Wonga. it specialises in ‘pay day’ loans, and it’s APR is 1,509%! WTF? that’s legalised criminality.

    1. Richard

      APRs for loans with a payback period of one month or less are a little misleading. They are what they are but borrowing 85 and paying back 100 over 2 weeks is still a good deal for a lot of folks

      1. James Ferguson @kWIQly

        It is not a good deal !- it only confirms there are people who are happy to exploit misery .It argues eloquently for better support and education, and where needed [in extreme cases where someone cannot act in their own interests] social supervision.There is no better example of kicking someone when they are down.

        1. LE

          it only confirms there are people who are happy to exploit misery .Vehemently disagree. Am open to your retort as always. To wit:Misery? Misery is trying to collect debt from someone who refuses to pay you and jerks you around. Question. Have you ever done that? I have. And it is misery and causes sleepless nights.I refuse to see how lending someone $85 and having them pay you back $15 more (in 2 weeks or even in a day) is exploitation simply because of whatever the APR or interest would be computed at. What about overhead costs and risks of not getting an unsecured loan back?Even in secured loans there is the risk of having to actually take legal action (which costs time, money and aggravation) to get your money back.And what about “late charges”? Are those exploitation as well? Perhaps if you are preying on known stupid people (sure we are all equal and all of that so there are no stupid people) and burying the charges in a document that you know that they will not read. (Both factors need to be present)Let’s do this test. I will give you $1000 and you can go into some poor community and lend out $100 to 10 people and tell them “you need to pay me back $115 in 2 weeks”. See what happens. See how much effort you need to put into getting the money back. See if you only charge $5 vig if you want. Better yet I will give you $1000 and you can decide to lend it out at all or not lend it out. Let’s see what you will do. [1]It argues eloquently for better support and education, and where needed [in extreme cases where someone cannot act in their own interests] social supervision.Education? Sure tack that onto the education that they should have to tell them not to blow their fucking money on vices while you are at it.[1] Hypothetical to prove a point obviously.

          1. James Ferguson @kWIQly

            I have no sympathy for your troubles in debt collection.Just as you have none for your investments.I rest my case.

  2. awaldstein

    Thanks for this Fred.More and more I’m realizing that borrowing is an important way to finance startups, (Not just convertible notes.)This and the massive amount of local/city/municipal support of startups especially with large capital needs is something that needs more attention. Still a black box honestly.

    1. fredwilson

      Banks have completey left the small business lending market. They can’t make smallish loans cost effectivelyI have a friend who owns six popular and successful restaurants. he wanted to expand one of his best places he went to chase for a loan. They said they could not do itSo he went to a small business marketplace (not Funding Circle sadly) and got a $200k loan in a day

      1. Richard

        Banks need a secondary market to lend under CAMEL standards, And the loans they do make are either collateralized (car, home) or backed by the tax payers (sba)

      2. awaldstein

        Just brought on an old school advisor for Luli who is totally steeped in building food and community based businesses within NYC. His breadth of knowledge and connections is an eye opener.When he thinks capital he thinks loans not equity.

        1. Richard

          SBA loans along with a line of credit can make alot of sense for food startups

        2. Eric Satz

          i know you know what you are doing but don’t sign that loan guarantee!

      3. PhilipSugar

        And to pointsnfigures point, there were no “little” banks that he could talk to. I remember being in New York in the late 1980’s and there were still some scrappy banks that would advertise. I forget their names, but I remember one whose logo was all red. Long gone.

      4. LE

        So he went to a small business marketplace (not Funding Circle sadly) and got a $200k loan in a dayWell did you ask him why he choose the company that he did over Funding Circle? I would.

    2. Eric Satz

      convertible notes and loans are not the same type of liability. the notes are meant to be permanent capital upon conversion whereas the loans are meant to be temporary and repaid.

  3. pointsnfigures

    Dodd-Frank killed community banking. Regulatory hurdles are just too high. I was on a panel at the Urban League in Chicago. Post panel, I had more than ten people come to me with businesses that needed capital. They couldn’t get it from banks, and they couldn’t get it from angels because they were cash flow small businesses. But, those businesses are terribly needed because they provide stability to neighborhoods. These businesses need capital at business loan rates, not pay day loan rates.

    1. awaldstein

      This is so so true.And a huge issue outside the tech world. In the food world this is the number cause of failure.

      1. Greg Kieser

        This is very interesting to me – eg.the food bit. Can you tell me more? You mean like small food enterprises? Restaurants and supermarkets?

        1. awaldstein

          Kinda an aside that I”m glad to talk about but yes.On one level its all about float–terms on what you buy and terms on how you get paid and the gross margin and cogs of the product. Think 30% of wholesale is a 30-45 day float of capital.On the other with distribution (not Green Market or DTC ) it’s a margin squeeze that is tough–30 pt to the store, 20-30 to disty, 1.5 to marketing and another 30 points ever quarter to sales.It can be done but in tech the #1 cause of failure is definately not finding the market. In food its finding capital to manage the float and build out.No harder than anything else just harder to disrupt.I’m not the expert here but this is my thinking.

          1. Greg Kieser

            Thank you. Actually right on target.I imagine there would be appetite for higher risk to invest in loans that target more vulnerable portions of our economy, such as that which you describe. I certainly would take part.

          2. awaldstein

            I’m a tech guy by trade but I like building brands and infrastructures that touch us where we live, shop, play and eat a great deal.I also like that is hard to disrupt as they are tied into traditional channels but it can be done.

          3. pointsnfigures

            Rule of thumb in the food business: Get to $30M of top line revenue and you will get acquired at 2x top line revenue. Game is to get to $30M in revenue and that is incredibly hard to do.

          4. awaldstein

            How about investors and entrepreneurs get over themselves a bit and realize that how you act when you are building a company every day has damn little to do with your exit strategy.Our jobs are to understand our markets, understand the fundamentals of our business and build value and brand.How to build solid brands that can scale with the market.Whenever I get asked What’s the exit strategy I’m pretty certain I”m dealing with either a beginner or someone who no operating experience.Build value on good fundamental that can scale and you are doing something that can always be sold.How you as an investor decide whether this is a multiple that matters for your portfolio is another thing of course.And to answer your specific and very good point–every business is hard.

          5. pointsnfigures

            I don’t disagree about building a company. Do the little things that matter and the big things will take care of themselves. From a seed investor perspective, it’s important to recognize where you have to go-and that it doesn’t happen overnight. Some seed investors don’t care about exits. Most do. Exits are the cold reality-or how the company will be monetized. What Bryce is doing out in Utah with VC for companies that could become big dividend paying companies is interesting.

          6. awaldstein

            I’m all about making money trust me but I have 1.5 of my feet in the operational side and know the drill on the ground well.Hard for me not to take that point of view.I need to understand what Bryce is doing more so thanks for that nudge.

          7. LE

            For one thing if done right running a business is fun!Anyone who isn’t on that line of thinking isn’t about the game but only about winning the game (my attempt to try and use a sports analogy).In college I interviewed a Harry Caplen who owned a really large restaurant supply house (National Products Co. in Old City Philly). He was the founder of the company (1929). He showed me a drawer full of acquisition offers and read some of them to me “we know you don’t want to sell but if you ever do please contact us first!”.At the time he was probably in his 80’s [1] and enjoyed going to work every day and the business although his children and nephews and grandchildren ran the business for him. Not the same passion though that was pretty clear. He had a lot of pride as he walked me around the warehouse (which by that time had a union which really bothered him to no end he thought they were lazy) and showed me the quality in everything that they did. The shelves, the setup, the systems and so on. He said “we have 20 trucks BIG Trucks” (think of General Patton esq character saying that to a college student).At the time they didn’t computerize because they were to busy.Anyway to shorten the story this guy was a market leader in the Philly metro area. This was late 70’s prior to the restaurant boom but right when Casinos were taking off. The guy died and his kids ran the business into the ground. [2] A few years ago the site was developed into condos. To his children and relatives it was just a way to make money. They didn’t live the business like he did. Can’t imagine how upset he would be if he saw what had happened.Article from 20 years ago:…* Harry Caplen was only 16 years old in 1929 when he started selling corks and bottle caps from a storefront at 109 N. Second St., around the corner from where he grew up in Old City.[1] Hillarious. I just did the math and he was about 67 when I interviewed him. To a college student he looked like 80!! I would have sworn he was in this 80’s[2] Another reason that happened (there are always millions of angles to a story) is that Harry owned a great deal of valuable real estate. The rent from that real estate gave a certain amount of cushion to the operating business. So they didn’t have to be as on the ball and hungry because of those cash cow rents that were coming in. That made them lazy and took away the hunger of keeping the business relevant. In addition to the market expanding like it did…

          8. LE

            Build value on good fundamental that can scale and you are doing something that can always be sold.Unfortunately the logic, common sense and attention to details that matter that is needed to run a business the traditional old school way is not what is talked about and celebrated in the startup world. Most of the talk appears to be of the financial ilk (even on this blog). It’s almost never about building a better mousetrap. It’s not 80’s Inc. Magazine articles (don’t know what Inc. does now at all.) Or it’s about pie in the sky disruption as a goal in itself which is always thought to be good.Maybe an analogy is comparing “This Old House” with Bob Vila where they concentrated on the quality aspects (for someone who was going to stay in the house) vs. some home shows now which are “house flipper” and more financial in nature “buy, spend this much, sell for this much”. Never about quality just about “builders grade” shit work. Doesn’t matter what happens once the house is flipped.What is the saying “God is in the details”? Almost never about that.

    2. Tom Labus

      Banks always swing from lending to everybody to the other extreme. post crisis.

      1. pointsnfigures

        Community banks aren’t swinging anymore. They are out of business. Could also be an opportunity for Bitcoin.

    3. PhilipSugar

      Could not agree more. I think all of the consolidation started the death spiral, and Dodd-Frank was the death blow.I might have too small of a sample set but in the 1990’s when you started a company you had all sorts of banks to choose from: Artisans, Bank of Delaware, Delaware Trust, Wilmington Trust, Commerce (they were small then), Great Valley, Delaware Valley, etc.By 2000 that was pretty much gone there were one or two super-regional banks.Today it is dead.

      1. pointsnfigures

        Yup. Began in the 90’s. Citibank wanted to be a one size fits all bank and got Glass-Steagall repealed. That’s when banks aggressively began consolidating. Dodd-Frank raised the regulatory costs so high they couldn’t survive. I was in a meeting with Senator Phil Gramm (who favored repeal along with Sec of Treasury Rubin and Pres. Clinton). We asked, “Are you consolidating too much risk in too few hands?” He didn’t think so. The rest is history.

        1. PhilipSugar

          Yes you are right, you know your regulatory history better than me, I just see the downstream effects, and it has been stark.

        2. PhilipSugar

          You know I thought about this. One piece of regulation that was repealed started it and one that was enacted finished it. I guess as JLM says it’s like spice, and pinch really adds to the sauce a handful ruins it.

      2. LE

        What has always been interesting to me about that bank consolidation is how easily they threw out the well established brands that they had developed over so many years. [1]Interesting about Commerce:The company was founded in 1973 by fast-food restaurant franchise owner Vernon Hill, a graduate of the Wharton School of the University of Pennsylvania. Hill sought to bring fast food convenience to banking and expanded Commerce from one location to over 435 in thirty-three years. With growth of over sixty-five new stores opening annually, the company had planned to reach at least 800 stores by 2010. During the early-mid 2000s, television advertisements for Commerce Bank featured Kelly Ripa and Regis PhilbinThat banks were able to build expensive free standing locations (made of all glass practically) just to take grandmom’s deposits always amazed me. I guess if you amortize something over enough years and have access to low priced capital you can do that with reckless abandon.[1] Which was a big bonus to people in the sign, marketing and advertising business.

  4. William Mougayar

    People lending money to each other has been going on for thousands of years, BC for sure.It’s probably the world’s 2nd oldest profession.

    1. awaldstein

      And one that tech VCs now that it is fashionable to hate convertible notes has abandoned.

    2. Eric Satz

      probably used to finance the first 😉

  5. LaVonne Reimer

    I am in transit to a week of meetings loosely connected to the topic of big data surveillance and data ethics. Some of this work emanates from a think tank in NYC, Data & Society. Your partner is an adviser. Because I’m in transit I have only been able to skim the main post and comments. I regret not being able to view the video. It is important to celebrate your portfolio company and the movement it represents but this is to simply note that there is another side to the marketplace lending/alternative financing story. Research, much of it coming out of the NE, is beginning to tease out important details behind the pitches and messaging. Here’s a link to just one article on the subject.

  6. LE

    With Funding Circle what is causing me to abandon the shopping cart is that I can’t easily get a handle on the returns that I could make. I just found this:https://static.fundingcircl…However that info (potential returns) should appear under the “invest” link. I am guessing it’s not on the home page simply because the range is so vast as to act as a turn off to those that are looking for loans (just a guess). Should be a way to solve that paradox though I would think.

  7. LE

    This looked good until lost me at the pdf where it says:Credit information of a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness. Any such inaccuracies may be manifested in payment defaults on the borrower loans. Credit and FICO scores may be based on outdated, incomplete or inaccurate credit reporting datahttps://static.fundingcircl…So in no way does that make me feel that the proper amount of due diligence can and is being done. I am also not seeing that they require personal income tax returns for review. Which would be a bit harder to fake. Or any contact with a CPA. Relying on customer supplied credit info is ripe for disaster. [1] In theory and with full transparency (on the part of fundingcircle) this may not be as big of an issue as it appears to be. However having a great deal of experience with small business and how they fly I can’t assume that FC investing has the proper risk profile and makes sense, other than as a fun gamble. Sure I understand the idea is to spread investments around many companies, however something about this doesn’t feel right to me. And I want it to be something that I can do, I really do.Would be interesting to see data on FC defaults if it is available.[1] And if my take is wrong then their marketing has failed.

  8. Kirsten Lambertsen

    FICO and the three credit bureaus and all the fake credit score peddlers need to burn to the ground in a great blaze of hell fire. Creating an honest alternative to that B.S. system would be a true disruption to lending (not to say that marketplace lending isn’t, but it still appears to rely on FICO).

    1. LE

      Creating an honest alternative to that B.S. system Agree. Fico is a total cartel. Amazing. They must have great lobbyists and lawyers and PACs to protect that mafia.The entire system is opaque and in many cases bears little to no relationship to someones actual creditworthiness or ability to pay. [1] It’s literally a black hole. Anyone with assets (and little need to borrow) can attest to that.Also incredible that your score can get dinged just on certain credit inquiries. You lose points on something like that.Even in the case where the score doesn’t matter because someone typically doesn’t borrow it’s upsetting.An alternative system developed and adopted (that doesn’t end up being another FICO) would be something that I am sure many people would pay for.This is one of these legacy things we have in this country. SAT scores and the College Board is another. Defacto “kings” that students have to bow down to.Colleges have their “king” the US News and that ilk ranking systems.Business have google to suck up to.[1] So for example someone who pays off any charges made to a credit card at the end of the month and has no mortgage and holds significant cash to boot can be ranked lower than someone with debt.

      1. Kirsten Lambertsen

        I agree with all of this.Having to *pay* to see my *own* credit score (and still then with restricted access) is enough to shoot smoke out of my ears. Mafia is the exact right word.

  9. John Pepper

    I love how the RBS logo is looking over Samir’s shoulder throughout his presentation. The video and this commentary were a terrific use of 30 minutes. Thx everyone.

  10. Tyson Krah

    samer is a great fonder

  11. Eric Satz

    debt is cheap if the business works. it is expensive if it doesn’t. i’ve experienced both.