StrictlyVC: May 18, 2016

Hi, all, happy Wednesday!


Top News in the A.M.

It’s Google I/O Keynote day, the day when Google takes the wraps off everything it’s been working on in secret for the past few months, and you can view it right here starting at 10 PST. As you may already know, part of the plan is to introduce Google’s much-anticipated entry into the voice-activated home device market.

Eek. LinkedIn announced this morning that another data set from a 2012 hack — which contains more than 100 million LinkedIn members’ emails and passwords — has now been released. More here.


For Online Lenders, It’s Suddenly Touch and Go

A year ago, privately held online lenders like Prosper, SoFi and Avant looked all but certain to go public at the same unicorn valuations their venture investors had assigned them — if not higher. They were seemingly reshaping the student, consumer and small business lending business. The market they’re chasing is enormous: The U.S. consumer lending market is a $3.5 trillion industry, and 22 of  the largest online marketplace platforms originated just more than $5 billion of unsecured consumer credit in 2014 and more than $10 billion in 2015.

They also talked a big game. When SoFi raised a whopping $1 billion from Softbank last year, CEO Michael Cagney told Bloomberg: “I’m looking at over $1 trillion of market cap from the banks, and I think it’s all vulnerable.”

Fast forward to today, and it’s online lenders that suddenly look like sitting ducks.

In an SEC filing Monday, Lending Club, which announced the surprise departure of its founder and CEO last Monday, revealed that investors who “contributed a significant amount of funding” for loans are now examining that performance “or are otherwise reluctant to invest.”

That’s a huge problem. Lending Club can’t originate a loan until it has sold it to another party.

It’s not just Lending Club that’s grown overly reliant on institutional sources of capital to keep its business afloat, though the problem is just becoming widely understood now.

For many casual observers in Silicon Valley, the first signs of trouble in the online lending category emerged in late April, when the WSJ reported that Avant made $514 million worth of new loans in the U.S. in the first quarter, a 27 percent drop from the fourth quarter of 2015. Then, two weeks ago, Prosper confirmed that it planned to cut roughly 28 percent of its staff in response to falling loan volume. And Prosper’s news came just a day after OnDeck Capital said its own first-quarter losses had more than doubled as demand for its loans began to nosedive.

Of course, the kicker came last week, when Lending Club CEO Renaud LaPlanche resigned following an internal audit that turned up $22 million in loans that were sold to Jefferies yet didn’t meet the investment bank’s criteria.

Fast growth, big risks

If the shift in the companies’ fortunes seemed abrupt to Silicon Valley, it wasn’t a surprise to many in the financial industry. They’ll tell you they’ve seen this movie before.

Online lending “grew incredibly quickly from loan volumes of almost nothing eight years ago to many billions of dollars a year,” says Max Wolff, chief economist at Manhattan Venture Partners, a merchant banking firm in New York. “But what started out as a disruptive movement known as peer-to-peer was far more novel than what it became, which, in many cases, is a front for whoever is providing [some of these startups with] capital to lend.”

Think banks like Goldman Sachs and Jefferies. Think hedge funds and insurance companies.

The obvious benefit of taking capital from larger institutions is that they allow online lending companies to grow, and quickly. While companies operating in this space come with inherent advantages — they use automated loan applications; they have no retail branches; they use electronic data sources and tech-enabled underwriting models that help them to quickly identify a borrower’s credit risk — having deep-pocketed friends has made other things easier. Among them is being able to provide funding decisions within 48 to 72 hours, and to offer small loans with short-term maturities.

Until recently, Wall Street has happily obliged. And why wouldn’t it? With interest rates so low for so long, these new lending products have been an attractive place to generate revenue. Some online lenders — whose customers include small businesses, consumers, and students — have charged more than 60 percent in annual interest on their loans, including origination fees.

More here.


New Fundings

Dedrone, a two-year-old, San Francisco-based multi-sensor system designed to detect when drones enter into a client’s airspace, has raised $10 million in Series A funding led by Menlo Ventures. The company has now raised $12.9 million to date. TechCrunch has more here.

Goodlord, a two-year-old, London-based rental platform that brings together tenants, landlords, and real estate agents, has raised £2 million ($2.9 million) in seed funding from LocalGlobe Capital and Global Founders Capital. More here.

KEEP, a year-old, China-based workout mobile app, has raised up to $32 million in Series C funding co-led by Morningside Ventures and GGV Capital. DealStreetAsia has more here.

RedPoint Global, a 10-year-old, Wellesley, Ma.-based company that develops marketing software for business-to-consumer companies, has raised $12 million in Series C funding from Grotech Ventures and WP Global Partners. More here.

Stayzilla, a 10-year-old, Chennai, India-based online booking platform for accommodations from hostels to hotels, has raised $16 million in Series C funding from earlier backers Matrix Partners and Nexus Ventures. More here.

Tantan, a two-year-old, China-based social networking mobile app, has reportedly raised $32 million in Series C funding led by DST Global, with participation from Vision Plus Capital and LB Investment. China Money Network has more here.


New Funds

Apple is increasing its focus on India after announcing plans to open its first developer center in the country. Its new iOS App Design and Development Accelerator will be located in Bangalore and is scheduled to open early next year. TechCrunch has more here.

Geodesic Capital, a new, growth-stage venture capital firm investing in U.S.-based consumer and enterprise tech companies, has closed its first fund with $335 million. Geodesic Capital was founded by former U.S. Ambassador to Japan John Roos (who was also previously CEO of Wilson Sonsini Goodrich & Rosati), and Ashvin Bachireddy, previously a growth stage partner at Andreessen Horowitz. More here.



Fitbit, the maker of wearable fitness trackers that went public a year ago, has just acquired the assets from mobile payment solution Coin. TechCrunch has more here.

Microsoft is selling the feature phone business it acquired from Nokia back in 2013 to a subsidiary of Chinese manufacturer Foxconn for $350 million, it announced. TechCrunch has more here.



John Lindfors, managing partner at DST Global, discusses the growing concern of a bubble in China‘s venture capital market with Bloomberg.

Tesla CEO Elon Musk has apologized for those workers who were paid just $5 an hour by a subcontractor.

Republican presidential candidate Donald Trump yesterday warned that a dangerous financial bubble has formed in the technology industry – and Silicon Valley responded with a collective eye roll.



Romulus Capital is looking to bring aboard a venture capital associate. The job is in Boston.


Essential Reads

More Amazon retail stores are coming.

Uber just announced a new tool that will allow family members and others totrack each others’ trips using its service.

Corvex Management, a hedge fund run by a protégé of billionaire activist investor Carl Icahn, has disclosed it owns 9.9 percent of Pandora and it’s urging the streaming company to explore a sale instead of pursuing a “costly and uncertain business plan.”

This is pretty amazing.



Is gut science biased?

The distinctive power of Diane Arbus.

Vintage photos of classic film sets.


Essential Reads

An earpiece that promises to translate between users speaking different languages. Available for pre-order beginning May 25. (This seems awfully advanced compared with what’s out there now, but if it works . . !)

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