Lending Club’s IPO and the Next Phase of Crowdfunding

By Steve Cinelli, CrowdFunding Beat  Sr.Contributing Editor,


The crowdfundingindustry has entered a new, and possibly more legitimate space, in the framework of financial services. I refer to the recent S-1 filing of Lending Club (LC), which elevates the profile of both the company as also the distributed finance industry overall. Lending Club’s claim to an expected $5 billion market capitalization can be viewed as a major success in terms of value creation, market opportunity and the growth of new shadow banking methodologies. We have seen crowd platforms, whether in peer-to-peer lending (P2P) (Prosper and LC), real estate crowdfunding (Fundrise, Realty Mogul), SME loan funding (Funding Circle), raise growth capital at phenomenal valuations, as the marriage of capital formation and technology seems to have delivered a piece de resistance.

But as a banker, who greatly appreciates the application of technology in financial services in terms of creating better efficiencies, improved data and analytics, and overall accessibility, I wonder as to what is the appropriate and responsible assessment of value for these platforms. Technology is simply an enabler. The root business is one of finance. Providing risk capital for a price. Does technology improve the risk assessment, possibly with reams of historical data where actuarial analysis can be applied? But that too is fundamental risk assessment done more swiftly.

Lending Club’s IPO Pricing Will Set Precedent for Crowdfunding

LC is being valued as a technology company, not as a financial services company. Let’s think about it. The platform intermediates providers of capital with users of capital, like a bank, possibly more efficiently, but then again maybe not. Simply, LC is providing consumer loans as an alternative to credit cards, with better pricing and structured on an amortized basis rather than as a revolving line of credit. The P2P space has targeted the top 10% tier of the $900 billion credit card user space, hoping to offer lower interest rates than the proverbial mid-teen-plus rates of bank cards. Might a challenge to them be a Chase (JPM) coming out with a 3% bank card? But allow us to go a bit further. Should LC be valued like a LinkedIn (LNKD) or a Facebook (FB) or other social media darlings, or as a fundamental financial intermediary, like a Wells Fargo (WFC) or a Visa (V)?

Wells enjoys the highest market capitalization of banks in the US and the world at approximately $270 billion. For metric purposes, this is about 10% of asset levels, 13 times earnings of $21 billion, and about 1.7 times equity book value. As the margins in the banking business are small, leveraging the balance sheet creates an attractive ROE, but an analyst recognizes the risk of the leverage, all of which enters the assessment. Visa, one of the companies that is a target for the P2P players, carries a market cap of $135 billion, generating $11 billion of annual revenue and $7 billion of operating income, and a book value multiple of under six times. Its model is different, a bit more risk averse, and carries solid margins. These seem to be thriving financial services companies that have certainly engaged in applied technology and are playing in the same space, catering to the same customer, offering a variant of the same product as our crowd platforms.

At a $5 billion valuation, LC is being valued at 200% of asset levels, which are largely loans that it doesn’t own, compared to 10% with Wells, and a book value multiple of 40 times versus Wells at 1.7 times. When contrasted with Visa, which enjoys a book value of $27 billion and an earnings level to support its market cap, one might question the logic of a financial intermediary with projected revenues of $140 million and generating a loss, with footings of $2 billion to achieve the acclaimed value. The rationale can only be a technology spin, as the fundamental business of lending money remains constant. If we were to value LC on the basis of financial services compatriots, maybe placing a two times multiple on its book value of $135 million, or a footings multiple of 10% on $2 billion, we would arrive at a value that may not approach 10% of what the underwriters are placing upon it.

Disruptive Technology for an Age-Old Industry

So in the grander view, what creates value? And in particular, within these platforms? Are these highly scalable technology franchises, with incredible margins, earnings capabilities, and fundamentally unique methodologies? Do they own a proprietary clientele, magic sauce risk algorithm, or offering a product heretofore not available? Or are they simply dressed up financing businesses, where industry metrics do not/should not/(or why not) apply, typical of the analysts that valued Groupon (GRPN) or Facebook in their respective S-1s with non-GAAP measures of financial performance?

The crowd space is still nascent, maybe in its pubescent years. There is a lot of jockeying for position, and with nearly 8,000 platforms live in the US alone, we must ask what are the business models to both create value and be sustainable from internal cash flow generation. Do these businesses work in the long run and is there something totally disruptive, potentially egregiously profitable that will ensue? My fear is that there is much hype about the space, which is dismissing what the underlying businesses are. These are finance businesses with a different twist. Unfortunately, I see a similarity with 15 years ago, with the “dot com” phenomena, where companies were valued off “eyeballs” not revenues or earnings. Back then, just the fact you had a “dot com” added to your name, you created value. In the end, those that understood their basic businesses, like Amazon (AMZN) in distribution, or eBay (EBAY) in auctions, or Priceline (PCLN) in travel, they succeeded. For those, like Webvan, which misunderstood the grocery business, the dot com moniker did little to create a win. But it still raised over $800 million from the “best and the brightest.”

So, one must ask, do crowdfunding platforms truly accept the industry they operate in? Are they positioned to create value like their “non-tech-spun” brethren? Yet further, do those that are investing in such platforms comprehend where the value truly lies?


From Cinelli’s LinkedIn profile:

Founder, CEO of PRIMARQ Inc., a paradigm shift in the world of housing finance. Our goal is to bring prudence and opportunity into a fundamentally crucial segment of the US and world economies, namely homeownership.



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