In 2015, news outlets ran articles about the “gold mine” of venture capital investments in the alternative finance sector. The industry indeed proved to be lucrative for FinTechs, with alternative lending often landing at the top of venture capital investment reports with giants like Kabbage, OnDeck and LendingClub securing an early lead in the industry.
But there is evidence that investors’ appetite for alternative lending startups is on the wane, even as overall FinTech funding continues to climb — and as the success of the alternative lending market grows, too.
U.S. FinTech funding reached its highest level in five years in 2018, according to CB Insights data published last month, hitting $11.89 billion. Yet at a time when analysts say VCs are focusing more on late-stage investment, alternative lenders are having a tougher time securing funding, particularly market newcomers in a crowded market.
Remarks made in 2017 from BlueVine CEO Eyal Lifshitz hinted at this emerging trend. CNBC reports at the time said Lifshitz discussed how the process of securing financing has changed, with BlueVine having had to demonstrate to backers why the company is different from the competition. VCs are looking more closely at the “viability of the overall lending model,” he said, an unsurprising shift considering past challenges at companies like OnDeck and Lending Club when it comes to compliance, default rates, criticism over high costs to borrowers, and more.
More recently, data released from GLI Finance — an investor focused on the small business alternative finance market — reveals the difficulties of alternative lending investment in 2019.
The company posted Monday (March 25) a more than $3 million operating loss for the 2018 year, compared to a $133,630 profit in 2017. Further, GLI Finance revealed a $25.93 million write-off across eight of its portfolio platforms last year, which the firm attributed to challenges related to obtaining growth capital. But while the firm’s alt-lender investment unit, GLI Fintech Ventures, struggles, its own alternative lending operations via the Sancus BMS unit saw a 28 percent increase in revenues.
“It is clearly disappointing to take a further larger write-down and we continue to review our options to achieve the greatest potential return from the portfolio,” the company said in a statement, according to P2P Finance News reports. “Whilst we have made improvements on the cost side, we recognize that more needs to be done to improve profitability.”
Separate reports in Tearsheet last October explored what some online lending experts predict for the industry ahead, including increased market competition after a wave of heavy investment.
“Many lending tech businesses have received heavy investment over a long period of time, which has resulted in the build out of expensive tech platforms and systems,” said Trade Finance Global finance director Robin Abrams. “While these platforms are technologically advanced, some of them have failed to address a specific lending market need.”
That could make it exceedingly difficult for those businesses to differentiate themselves from the competition, as BlueVine’s Lifshitz said they must do to secure further funding.
At the same time, however, alternative lending FinTechs may find more lucrative opportunities collaborating with traditional banks willing to invest in their technology, and not with venture capitalists. Abrams pointed to Barclays’ move to take a minority stake in MarketInvoice last year is an example of this emerging trend.
And while venture capitalists may be more picky about which alternative lenders they back, the industry continues to see growth with more small businesses choosing alt-fin platforms as their first source of capital.
Credible data published in January revealed nearly two-thirds of small firms that sought financing from the alternative lender did not first turn to a traditional bank, with SMBs citing the lengthy process of obtaining a bank loan and more stringent qualifications at traditional lenders as key factors guiding them towards alternative lenders.