First Analysis of the OnDeck Capital IPO

And we’re off to the races!

As the Wall Street Journal reported today, OnDeck Capital is working with Morgan Stanley, JP Morgan Chase and Deutsche Bank on a planned Initial Public Offering. The unnamed spokesperson revealed they plan to raise $200 million through a $1.5 billion valuation. The report suggested the deal could happen before the year is out, which means it’s time for industry players to prepare for another cataclysmic shift.

Now is the perfect opportunity to re-read The Retail Investor, a prophetic piece that appeared in our May/June issue that explored this very scenario. A sample:

“Folks speculate that Kabbage, OnDeck Capital, and CAN Capital are on the short list to become public. When and if that does happen, the power to spur change or set best practices will be redistributed from funders, brokers, and syndicates, to millions of average joes nationwide. Commissions will rise and fall at the behest of shareholders. Conversations about stacking will be had at bars, family barbecues, and on stock forums.

Online communities like Investors Hub will breed new ideas about merchant cash advances and business lending in ways no one has even thought up yet. Stock analysts will want to know it all and rate companies based on every perceived opportunity and threat.”

$200 million
Some believe that an IPO is OnDeck’s last avenue for further fundraising after exhausting every other method. Crunchbase shows a laundry list of equity rounds that extend to Series E along with $230 million in debt financing. What’s not shown there is OnDeck’s penchant for selling off the loans they book and the landmark $175 million securitization deal that took place in April.

Tally all those numbers up and the $200 million sought is smaller than half of all previous fundraising.

DailyFunder suspects the OnDeck plan is not really about raising cash at all, but rather a move taken from the Renaud Laplanche playbook. In a June interview with LendingMemo, Laplanche, LendingClub’s CEO said, “the last reason is why we are considering an IPO, which is to use it as an opportunity to raise awareness for the company and better establish the brand. A successful IPO can be a significant awareness-creation event.”

LendingClub is also reportedly on track to go public though it’s unclear which company will do it first.

As rumored by loan brokers in the industry and confirmed in the securitization prospectus, OnDeck has been shifting the origination of loans away from broker referrals and towards direct sales. The publicity of a public offering would do well to spread awareness and boost direct originations.

$1.5 billion
Is this big or small? One has to wonder if they’re being undervalued in what’s been claimed to be a $300 billion market. On the other hand, there is little precedence for valuing companies of these types.

Industry insiders may recall last year’s acquisition of RapidAdvance by Rockbridge Growth Equity. In that deal, Rapid received an enterprise valuation in excess of $100 million. While it may not be appropriate to compare enterprise valuations to figures derived from other valuation formulas, OnDeck is potentially 15x more valuable than Rapid. By that measure, $1.5 billion seems generous.

To be fair, the two companies target slightly different markets with Rapid having its roots in merchant cash advance while OnDeck is strictly loans.

Showman
OnDeck Capital, or more particularly Noah Breslow, the company’s CEO, has been the industry’s showman. With frequent TV appearances on CNBC and a special feature on PBS, he’s become the unofficial spokesman for the alternative business lending crowd.

Breslow has used his press tour to try and dispel the myth that they approve applicants based upon on their yelp reviews and social media activity. It’s unclear as to when or how they got that label. In a recent interview with us, Breslow clarified the role social media plays in their underwriting:

“Most of our customers use social media because it can be a valuable tool for growing their customer base. Having a web presence is crucial for small businesses such as restaurants, florists, auto body shops and other service-based businesses. If a business has a strong website, I don’t think they need to be on every social media channel. However, we have found that it is important to be on social media channels read by their target audience. Facebook and Yelp are the two we see used by most of our customers. For some industries, such as doctors and dentists, having a social presence isn’t as important and relevant as say a restaurant. We don’t think that merchants should be judged for loans by how social media savvy they are — that can lead to false positives — the worst business could have a great website and Twitter account but no cash flow.”

Countdown
The circus hasn’t begun yet. News outlets and stock analysts interested in learning all the angles of OnDeck and the business lending industry will turn up the heat as we get much closer to IPO day. For now, we expect OnDeck to turn down the volume on public communications to tightly control the messaging and valuation expectations. Though if you want to know what the latest word on the street is, you’ll likely learn a lot on our trademark forum.