LendingClub is setting out to transform the banking world. To get there, it's following a playbook popularized by some of the world's biggest tech companies.
Like Apple, Google and Facebook as well as Microsoft and Salesforce.com, LendingClub's mission is to not only be the biggest player in a massive market—in this case, online lending—but to create something with so much potential value that outside developers race to build services on top. It's the holy grail of technology: becoming a platform.
"This is the most efficient way to spur more innovation that will eventually benefit our customers," LendingClub founder and Chief Executive Officer Renaud Laplanche said in an email. The company's IPO prospectus uses the word platform 93 times.
Any true comparison between LendingClub and the world's most valuable tech companies is premature, of course.
The company, which over seven years ago started developing software to algorithmically underwrite consumer loans and match individual borrowers with lenders, is set to sell shares to the public Wednesday night. At the top end of its pricing range, $14 a share, LendingClub would be valued at close to $6.5 billion on a fully diluted basis, less than one-thirtieth the size of Apple, Google or Facebook.
Fostering a true platform takes a lot work, and requires serious investment, with no guarantee that it will succeed. Apple, for example, did it by coming up with a model for taking 30 percent of the revenue generated by developers, a concept emulated by Google and Facebook. Each company had to build a payment system to make it work.
Still, LendingClub provides obvious allure for outside developers. In the first three quarters of this year, LendingClub issued $3 billion in loans, more than double the amount from a year earlier. That's a big number, except when you consider the $3.3 trillion in U.S. consumer debt outstanding and that a bank like Wells Fargo had more than $825 billion of loans on the books at the end of 2013. In other words, there's plenty of potential upside for technology to displace brick-and-mortar banking.
It's not just LendingClub. Other Web-based lenders like Prosper, education loan provider SoFi and small-business lender Funding Circle are luring borrowers seeking lower rates than they can get from credit cards and banks. The capital is coming from individuals and institutions that are lending money on these sites because of the lofty returns, which on a percentage basis can reach into the high single and even low double digits annually.
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"One of the big reasons we exist is because we were able to build on top of the LendingClub stack," said Matt Burton, CEO of Orchard, which provides investors on LendingClub and other sites with strategy, trade execution, back-office reporting and analytics tools to track their portfolio. The ecosystem "allows people to start businesses and specialize in something in their part of the value chain and not necessarily have to do everything soup to nuts."
Start-ups like New York-based Orchard are betting that additional services will be needed by borrowers looking to find the most attractive loans and for investors buying the debt. Portfolio management, credit modeling, investing advice and trading tools are areas where entrepreneurs are building software and, in some cases, raising good chunks of venture capital.
It's the same reason developers create games, photo-sharing apps and meal delivery services for Apple- and Google-powered devices, and why emerging enterprise software businesses build on top of Salesforce.
Not all platforms end up spawning big companies. Twitter curtailed the development of third-party apps on its network by limiting their ability to make money. LendingClub got its start as one of the first apps on Facebook in 2007, but didn't turn into a big business until much later, when it was no longer counting on the social network for users.
Here's what former Google CEO Eric Schmidt wrote in the book he co-authored "How Google Works," published in September: "The most successful leaders in the Internet century will be the ones who understand how to create and quickly grow platforms."
(Coincidentally, or not, Google is an investor in LendingClub. And Burton was an early employee at AdMeld, which was acquired by Google.)
In October, New York-based Orchard raised $12 million in venture funding. Canaan Partners, an early LendingClub backer helped lead the round, and was joined by former Morgan Stanley CEO John Mack, a LendingClub board member.