OnDeck

Later this year, the peer-to-peer student loan startup Social Finance (SoFi), will likely go public. If it does, the company – whose marketplace enables college alumni to provide student loans at better rates – will join a line of online lenders in the portfolio of Institutional Venture Partners with similar plans. (IVP’s other investments include OnDeck, the small business lender, which went public in December, and Prosper Marketplace, a peer-to-peer lending platform that appears to be laying the foundation for an IPO later this year.)

Last week, we caught up with Sandy Miller, a longtime general partner at IVP who once managed 3i’s late-stage technology business, as well as cofounded the investment bank Thomas Weisel Partners. We talked about just how many online lending bets the firm might make – and whether those companies could wind up competing head-on in the not-too-distant future.

SoFi just raised $200 million. It’s reportedly valued at $1.3 billion and poised to go public. But student loans are just the beginning for the firm. Is IVP at all concerned that its portfolio companies will start knocking into each other?

All of our investments are completely different businesses. OnDeck is lending to small businesses, a market that the banks have really abandoned. Meanwhile, SoFi lends primarily to relatively recent, well-educated college graduates, refinancing their student loans as a next step in these young professionals’ careers. We don’t know what the businesses will do [going forward], but online lending is an enormous category; there’s plenty of room [for everyone].

Everyone is so confident that big banks like Wells Fargo will completely cede this territory. Why?

Regulation and litigation from the financial crisis is part of it. It’s also a matter of technology. Most of the big banks have been built up through a series of acquisitions, and all are dealing with legacy architectures and cumbersome bureaucracies. Because their cost structure is so high, they can’t compete. They reflexively look at small loans as not profitable, whereas small loans can be very profitable for younger, nimble companies using advanced technology.

IVP has placed numerous bets on online lending companies. Are you actively looking for more?

We have four online lending companies: OnDeck, Prosper, SoFi, and Opportune, which focuses on the underbanked Hispanic community. There’s nothing imminent [in terms of new investments], but we’re really happy with the four companies we’ve backed and we think that finance overall is one of the most attractive areas of new investment because of several factors. First, it’s an absolutely massive category. Also, it’s all digital, compared with some companies that have to ship stuff that’s delivered to your door. Third, the big banks are ideal companies to have as competitors for the reasons we’ve just discussed.

You say it’s all digital, but people still need to go to the bank on occasion. Do you think we’ll see more of these lenders lease space for marketing and other business purposes, as we’re seeing happen with online retailers?

A lot of businesses do benefit from both an offline and online presence. Opportune has locations in targeted geographies. The others [of our portfolio companies] don’t have any plans [to create storefronts] as far as I know, but the concept is a valid one and I do think more tech businesses will be marrying offline and online.

IVP has finance companies beyond online lending. How much of your time do you think you’ll spend looking at and potentially investing in new finance companies in 2015?

We don’t really know until the end of each year. We just look at the best companies. We’re roughly half consumer and half enterprise, and finance cuts across both. We have Personal Capital, for example, an online wealth management platform; and Klarna, for online payments in Europe; and the leading crowdfunding site Indiegogo. There’s quite a range.

Is IVP looking at international opportunities, or do your U.S.-based finance companies have you covered globally?

We generally focus here, but we do find companies in northern Europe that seem to meet our criteria. Regulations vary by country, even state by state in the U.S., so [for these U.S.-based companies to branch out globally] isn’t a trivial task. At the same time, it’s all digital, so these are all potentially global markets. I generally think they’ll move cautiously since regulations are different everywhere and there’s so much opportunity here.

Lighter Capital emerged on the scene nearly four years ago when money was tight and its business — offering revenue-based financing to nascent, cash-strapped tech startups — seemed perfectly timed. Startups that didn’t want to agree to onerous venture terms yet weren’t candidates for small business loans suddenly had a third choice.

Of course, times have changed. Not only are traditional VCs now looser with money and terms friendlier, but you can’t swing a cat without hitting an angel investor, a micro VC, or an accelerator program. To find out how the Seattle-based company — which last disclosed a $6 million Series A in 2010 — is faring, I called its CEO, B.J. Lackland, last week to learn more.

Lighter Capital is kind of like an OnDeck but focused more exclusively on small software-as-a-service startups. Why?

We really like things with recurring revenue. That’s what we see as the asset that we’re fundraising against.

Explain how your service works to startups unfamiliar with revenue-based loans.

We’ll [loan] a startup that has more than $200,000 in annual revenue and 50 percent in gross margins between $50,000 and $1 million. Say we give them $100,000. They’ll pay us a set percentage of monthly cash receipts — maybe it’s 5 percent — until they’ve paid us a multiple of the $100,000 that we loaned them [depending on the business, its team, and its revenue]. Our interest rates vary from 1 to 10 percent, and we cap the [final payout] at 2.5x.

How long do you give companies to pay you in full?

As long as it takes, though if we can help accelerate [the time it takes to get paid in full], we get a better IRR out of it, so we’re happy to help them if we can. The way we interact [with our customers] is halfway between a bank and a VC.

What’s your pacing like, and what types of entrepreneurs are turning to you?

We’re doing three deals a month, though we’re staring to accelerate the volume. We’re targeting 8 to 10 deals a month now that we’ve really nailed down the instrument and the target. Our entire shtick is that can we use technology to make capital available faster; we can go from loan application to deal in one month.

There’s a lot of interest in the gap we’re filling between banks, VCs and angels. VC are shooting for 10x to 100x. Banks are just looking to not lose their money [so won’t always lend to our targets]. And angels want to own more of a startup, while a lot of our entrepreneurs own their entire businesses or else they’ve raised angel funding already but don’t want to become even more diluted [including as they work their way toward a Series A round].

Your product is money, which begs the question: Are you raising another round this year?

Actually, we just completed a financing — a larger, involved deal — that probably won’t be public for a while.

Will you expand beyond lending to software, Saas, and technology companies? OnDeck seems to be doing pretty well by lending to a range of businesses.

We’ll expand eventually, though we want to focus on our beachhead market and really refine the investing strategy and all that. We also intend to bring out new financial products. We think there’s still a huge gulf between us and banks, and that there’s an opportunity to create more lending offerings to companies — either more money or by lending money to slightly larger entities. There’s still very much a need for that.

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