A big tech startup is planning to go public this week. Its IPO is expected to raise up to $1 billion for its investors and underwriters, and could value the company at close to $6.5 billion. That IPO is being watched with breathless anticipation by Silicon Valley, big banks, and venture capitalists alike.
But because Lending Club, the tech company in question, is also a financial startup, its IPO is also serving as a referendum on its origins: Can entrepreneurs succeed in disrupting the highly-regulated, highly-consolidated, highly-technical--and, let's admit it, often highly-boring--financial industry?
Lending Club seems to have succeeded for itself, at least. The San Francisco-based peer-to-peer lender, started by French former securities lawyer Renaud Laplanche in 2007, popularized the crowdsource-everything marketplace model before Uber and Airbnb even existed. It's got some serious A-listers--at least by financial industry standards--on its board in former Morgan Stanley CEO John Mack and Harvard president emeritus Larry Summers. And it's done more than any other startup since Square to make finance seem, well, cool.
So it's not very surprising that in the past six months, as Lending Club carefully circled an offering that is now expected to be the second-biggest IPO of 2014 and one of the 10 biggest tech IPOs in history, there's been an enormous amount of flat-out cheerleading for its success.
Some of that's coming from competitors, hoping that Lending Club's IPO will increase demand for their services instead of turning them all into the Lyfts of peer-to-peer finance. Pick your metaphor: Funding Circle cofounder Sam Hodges told Bloomberg that Lending Club's IPO would be “a bellwether of the sector’s growing importance,” while CircleUp’s Rory Eakin went with a “good turning point,” and Orchard Platform’s Matt Burton chose “a defining moment.” (Whatever it is, we’ll see another chance for validation next week, when small-business alternative lender OnDeck is also due to go public.)
Then there are all the other “fintech” startups, hoping that Lending Club proves to investors that they, too, can disrupt the staid old financial services industry.
Bill Clerico, cofounder and CEO of payments startups WePay, told me that’s he’s “excited” for Lending Club’s public debut: “Over the last few years, I've seen a big uptick in venture capital and private equity interest in financial services, but I think this IPO will increase public market investor interest as well, which is a great thing for startups in this space.”
That’s one of the more restrained assessments from Lending Club’s fans, who are legion. (“This is the week that it all changes,” Bernard Lunn wrote on the Bank Innovation blog.)
But it’s just not clear how much Lending Club’s success, whatever it is, or OnDeck’s success, or the success of any other one company can throw open the doors to other would-be disrupters.
The financial industry is a tough area for startups, especially for those trying to disrupt consumer finance or what passes for banking. It’s highly-regulated, especially in the wake of the financial crisis, and it’s heavily dominated by huge, traditional banks. Bloomberg points out that alternative lenders have issued $2.4 billion in loans in the U.S.--only 0.02 percent of all outstanding consumer debt, according to Fitch Ratings.
Nobody really likes the banks, but as those numbers indicate, it’s very hard to compete with them in the nuts and bolts of large-scale consumer lending. Lending Club, notably, isn’t even really trying to take them on head-to-head; banks are some of its partners. Despite its roots as a so-called peer-to-peer lender, meaning one in which individuals use the website to finance loans to other individuals, most of the investors financing Lending Club’s loans these days are hedge funds, pension funds, wealth managers, and other larger-scale financial interests.
So Lending Club isn’t fundamentally disrupting the traditional financial services industry, at least not yet. And no matter how successful its own IPO, I suspect it’s still going to be an uphill battle for all the financial disrupters coming behind it--even if Lending Club does make them slightly more Silicon Valley cool.