Venture Activity in Lending Startups Boils in the Third Quarter

In the first three quarters of this year U.S.-based startup lenders raised $2.37 billion in venture capital, well more than double the entire haul by the sector in 2014, according to industry tracker Dow Jones VentureSource. In the third quarter alone, 15 startups took in $1.34 billion, versus $1 billion in all of last year in 39 deals.

“It feels like the Internet in 2000. Everyone is chasing it, but they aren’t sure what ‘it’ is,” said Frank Rotman, founding partner at QED Investors, a firm with numerous financial technology portfolio companies. There is, he added, an opportunity to build very large businesses that challenge banks.

The largest deal this quarter, by far, was the $1 billion investment from SoftBank Group Corp., into Social Finance Inc., or SoFi, a provider of student, personal and home loans.

As online lenders grow, they require more capital, a portion of equity usually goes to backstop loans they issue. Some startups use their balance sheets to hold some loans, as is the case with Avant Inc., for example. In addition, as competition heats up, so do expenses related to customer acquisition, in many cases, Mr. Rotman said. Startups are also spending money to expand from the niches in which they started to offer other types of loans.

The large sums in the data may also mask that not all of the capital totals are in the form of venture capital. Some companies obscure how much they raise in debt and how much in equity, providing a total figure only in news
releases, as did small-business lender Behalf Inc.

As the private market heats up, some of the companies that were early to unlock the online lending space, including LendingClub Corp., and On Deck Capital Inc., are struggling to fulfill public-market expectations, as both are trading below their IPO prices set last year.

Read the full article about the funding for the lending sector at Dow Jones VentureWire.

Write to Yuliya Chernova at Follow her on Twitter at @ychernova