Now that lending marketplaces are a proven financial business model, startups are beginning to push it out to serve very specific lending niches, in what is expected to be a trillion-dollar marketplace lending industry, TechCrunch reported.
The spark for the expansion appears to be the billion-dollar IPOs in December for Lending Club, with a $9 billion valuation, and OnDeck, valued at $1.3 billion. But lending entrepreneurs also see opportunity in an economy that’s slow to pick up steam and banks that are overly cautious and dealing with increased capital requirements.
As a result, January and February have seen venture-capital investors commit $340 million for lending tech startups in 17 deals, data from CrunchBase shows. The average deal size was $23 million, up from $14 million for similar deals in 2014.
And the focus has been on vertical lending opportunities. For example, student loan marketplace SoFi’s announced on Jan. 30 that it closed a $200 million Series D round, bringing SoFi’s total funding to $766 million and marking the largest of the 17 alt-lending rounds this year. Meanwhile, automotive financing platform DriverUp closed a $50 million Series A round on Feb. 23.
DriverUp is reportedly the first marketplace for the $400 billion automotive lending market. SoFi’s target includes student loan refinancing, which represents a $1.3 trillion potential market, according to the Federal Reserve. Meanwhile, RealtyMogul, which aims at the $2 trillion real estate industry, and Noesis, which is in the $18 billion commercial energy equipment market, have seen rapid growth despite a narrow focus, according to CrunchBase.
Part of the appeal for lending investors is the ability to make more fine-grained decisions about the levels of risk they prefer.
“Lenders have the ability to do their diligence, see the risk and the interest rates, and make the loans they want to on an a la carte basis,” Stuart Ellman, managing partner at RRE Ventures, which invested in DriverUp, told TechCrunch.
But that poses a challenge for large institutional investors who want to participate as lenders.
“As soon as you start talking to operations or accounting teams, you realize that the thought of trying to track $100 million worth of $8,000 loans is just terrifying — none of their systems are set up to deal with loans that small,” Matt Burton, founder of Orchard, which develops technology to handle large numbers of small loans, told TechCrunch.