What to Learn From Lending Club’s IPO

Lending Club debuted on the NYSE yesterday.  Although GGV was not a venture investor in the company, I’ve been looking forward to this event for some time.  I believe the company is well positioned for the future and has done a great job preparing to be a public company.  Here are few of the lessons I believe one can draw from the Lending Club IPO recipe:

  • Attack an enormous market with disadvantaged competition.  The total balance of outstanding consumer credit in the US is estimated at $3.3 trillion, including, $880 billion of outstanding revolving consumer credit card debt that can be consolidated at much lower prices on the Lending Club platform.  In other words, Lending Club focused on a market without boundaries.  Their competition are current banking and credit industry participants with old economy models and high expense structures.  This is a market ripe for disruption – where software will truly eat the world.
  • Exercise patience and invest to enhance model into the future.  Lending Club achieved scale adequate for tapping the public markets a few years ago, and the company was actually quite profitable as well.  Instead of rushing to an IPO, however, the company opted to stay private and focus on improving its model.  As a result, Lending Club hit the market at this time with much more liquidity in their marketplace – both in terms of funding sources and market participants.  Because marketplaces tend be winner-take-most markets, this extra time and extra liquidity has enabled Lending Club to establish clear market leadership, gaining market share relative to its competitors.  The additional time also enabled the company to expand its market by supporting more types of products and allowing loans originated on their platform to age to prove the credit-worthiness of their borrower pools.  These investments have taken the overall rate of profitability down somewhat, but the company now looks to be poised to re-accelerate earnings even faster than its already rapid top-line growth – a recipe public investors love to see.
  • Surround yourself with strong VCs and board members with conviction in this space.  Lending Club is not an overnight success.  The company raised its initial venture capital rounds in ’07.  Firms such as Norwest, Canaan, Foundation and Morgenthaler made long term bets and have stayed with the company through the inevitable ups and downs, supporting the company’s patience.  These firms are now being paid handsomely for this foresight.  Despite the fact that these firms are less often spotlighted by the frequently myopic tech press, Norwest, Canaan and Foundation each own stakes above $1B in total value at present pricing.  Additionally, Lending Club is not without regulatory risks going forward, and the company has smartly added Larry Summers and John Mack to its board to add visibility and experience in this area.
  • Don’t price your IPO for perfection.  There’s a lot of mis-information in the valley on this point.  Some argue that if a company’s stock jumps more than 20% on the first day of trading, then too much value was left on the table.  Taking the view that an IPO is simply a first step in a long journey of success as a public company leads you to a different place however.  IPOs that increase 20-50% in the first day of trading tend to outperform other IPOs over 1, 3 and 5 year periods.  Lending Club saw its price rise 56% on its first day of trading, so a bit above the desired window, but still a very good result in my judgment.  I advise all management teams I speak with about this point to view your IPO and first few quarters as a public company as a time to establish your reputation with public investors.  There is tremendous value gained by establishing yourself as a management team that delivers for investors with strong stock price and financial performance.  This pays dividends for years – LinkedIn, Splunk and ServiceNow are great examples of this in action.

So Lending Club’s IPO has them off to a great start.  It will be interesting to see if they’re able to deliver in the first few quarters to solidify their reputation with investors and further strengthen the business case that investors bought into at IPO.

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