From Unicorn to Unicorpse: OnDeck Crashes as Online Lending Sector Struggles

According to Morgan Stanley analysts, within the US, the volume of loans extended by marketplace lenders have doubled every year since 2010 and grew to $14 billion in 2014. The growth is estimated to continue at 47% annually through 2020. But the fast growth of the industry is coming at a cost. Stricter regulations on the industry have caused investors to be cautious and several players are seeing a transition from the Unicorn to the unicorpse* status. Earlier this year, online lender Social Finance pulled the plug on its IPO plans. Other companies that had already listed like Lending Club and OnDeck (NYSE: ONDK) have seen their valuations fall by as much as 50% since their IPO.

OnDeck Capital’s Financials

New York-based OnDeck’s platform aggregates and analyzes data points from dynamic, disparate data sources to assess creditworthiness of small businesses more accurately to help them get financing. Businesses can apply for loans through the platform, which analyzes credit ratings and processes business loans immediately. Loans processed through OnDeck undergo its proprietary automated underwriting process.

The company earns revenues by charging a loan origination fee of 2.5% and an interest rate that ranges from $0.17 per dollar for a 6-month loan to $0.33 per dollar for an 18-month loan. Larger businesses have to pay a higher rate which ranges from an APR of 19.99%-39.99%.

OnDeck has seen strong revenue growth with revenues growing 142% over the year to $158.1 million. However, it continues to report losses, and ended last year with a loss of $18.7 million compared with a loss of $24.4 million reported a year ago.

For the recently reported third quarter, OnDeck’s revenues increased 55% over the year to $67.4 million. The market had forecast revenues of $61.9 million for the quarter. The company finally reported a profit and ended the quarter with an EPS of $0.05 compared with a loss of $0.51 per share reported a year ago. The Street had estimated a loss of $0.01 per share for the quarter.

For the current quarter, OnDeck forecast revenues of $64 million-$66 million and an adjusted EBITDA between negative $1 million and breakeven. It expects to end the current year with revenues of $251 million-$253 million and an adjusted EBITDA of $15 million-$16 million.

Till December 2014, OnDeck was venture funded with $180 million in funding from investors including Tiger Global Management, Institutional Venture Partners (IVP), Industry Ventures, Peter Thiel, Google Ventures, Keybank, Deutsche Bank, Square 1 Bank, RRE Ventures, First Round, Sapphire Ventures, Fortress Investment Group, Goldman Sachs, SF Capital, Village Ventures, Khosla Ventures, and Contour Venture Partners. Last year, the company went public and raised $200 million at a valuation of $1.3 billion.

OnDeck Capital’s Expansion

During the last quarter, OnDeck broadened its partnership with Intuit and released the Quickbooks Financing Line of Credit. The new service will provide more efficient access for lower-rate financing to smaller businesses. The company also announced an expansion of its product suite that now offers a wider range of financing solutions for small businesses. Businesses will now be able to apply for term loan amounts as high as $500,000 and loan terms as long as 36 months. Prior to this, businesses could apply for term loans as high as $250,000 with duration as long as 24 months.

Online Lending Sector’s Woes

The online lending sector has come under much scrutiny recently. The recent San Bernardino shooting attacks also raised concerns since the shooter had received a $28,500 loan from online lender Prosper. Though no irregularities in the application for the loan were found, the news did raise concerns about the industry.

Earlier this year, the US Treasury Department initiated a study of the online marketplace lending industry. The industry has been largely kept out of reach of government regulations and companies do not have to follow the strict lending standards that are applicable to traditional financial institutions. The industry, therefore, faces a severe lack of regulatory clarity. Additionally, since online lenders don’t hold deposits, they are not covered by the regulations of the Federal Deposit Insurance Corporation (FDIC) coverage. Similarly, since they aren’t traditional banks, they are not governed by the capital requirements that banks must follow to cover for loan losses.

These concerns have led to several legal issues as well. For instance, companies like Lending Club are dealing with cases questioning their norms of following Utah’s laws on interest rate ceilings, but not those in other states like New York, which can be stricter. In another case in August this year, OnDeck was pulled up by a North Carolina judge as “particularly wilful and malicious” as it continued to debit payments from a new bank account set up by a company that had filed for bankruptcy even though the judge had not given OnDeck permission to do so.

Investors appear to be following a wait-and-watch mode for these companies. OnDeck’s stock is trading at $11.13 with a market capitalization of $778.8 million. It has recovered from the 52-week low of $8.55 it had reached in August this year, translating to a valuation of $598 million. The company had listed on the NYSE in December last year by selling shares at $20 each, valuing them at $1.32 billion. Soon after listing, the stock had touched its 52-week high of $24.52, translating to a market capitalization of $1.7 billion.

* The term Unicorpse was first coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : From Unicorn to Unicorpse