Two years ago peer-to-peer lender Funding Circle did something pretty rare for a British tech company — it took on America.
The company merged with San Francisco’s Endurance Lending Network in October 2013 to enter the US, Funding Circle’s first excursion outside of the UK.
Since then, the company has grown its US business to become one of the leading peer-to-peer platforms in America and has reportedly become one of London’s few “unicorns” — a startup worth more than $US1 billion (£660 million).
Business Insider sat down with global CEO Samir Desai and spoke to US managing director Sam Hodges over the phone about cracking the US and what’s next for the company.
“We can pick our growth rate”
“It’s been a lot better than we expected to be honest,” Desai tells Business Insider of the US expansion.
“If you look at it 2 years ago, when Funding Circle came together with Endurance, the old Endurance business was probably doing about $US300,000 (£196,200) a month in new lending. If you look at it now, we’re doing around $US30 million (£19.6 million) a month in the US. It’s 100 times as big in 2 years. And that’s 30% of our business now, the US.”
Funding Circle is lending $US100 million (£65.4 million) a month over its platform globally. The company operates an online marketplace that lets people lend out their savings directly to small businesses at a better interest rate than that offered by banks.
People can buy small chunks of loans from as little as £20 ($US30) (although in the US it’s slightly different), while businesses can borrow up to £1 million ($US1.5 million).
This year we’re on track to do $US250 million. Last year we did about $US60 million.
In creating this marketplace, Funding Circle tapped a huge market of both savers looking for better returns and businesses looking for a quick loan.
Sam Hodges, the co-founder of what was Endurance and now managing director of Funding Circle US, tells Business Insider: “This year we’re on track to we think do $US250 million (£163 million) in origination. Last year we did about $US60 million (£39.2 million) in origination.
“Into this year that’s roughly about a 300% growth rate and we anticipate growing well over 100% for the next several years. The nice thing is we’re neither demand nor supply constrained in the market. We can pick our growth rate.”
Peter Renton, founder of global peer-to-peer conference LendIt, tells Business Insider: “I talk to people around the industry and Funding Circle is just doing very well. They will be one of the major players very soon.”
“Faster, better, cheaper”
Before it took on the US, Funding Circle conquered Britain. The 5-year-old company is one of the UK’s biggest financial technology successes and, more broadly, one of Britain’s biggest technology successes.
Funding Circle was founded by: Desai, a former private equity investor and management consultant; James Meekings, a former management consultant; and Andrew Mullinger, a former risk manager at Nomura and Citigroup.
It’s creation in 2010 coincided with a drying up of funding for small businesses in the UK as banks struggled to get to grips with the fall-out from the financial crisis. That provided an early spur for the business, creating demand among borrowers.
As the banks have recovered conditions have improved slightly, and these days Funding Circle’s big advantage is its speed.
Most loan requests are now turned around within 24 hours, against weeks at a traditional bank, and Desai says it takes just 7 minutes to fill out a loan application on its mobile app.
“We talk about faster, better, cheaper,” says Desai. “You should be able to get a loan faster through us versus the banks. It’s better because we have a team now that calls borrowers and talks to them and they’re completed focused on the loan and not selling them all these other products.
“And eventually [it will be] cheaper because we’ve got such a low cost base relative to the banks and we should be able to pass on those savings to the borrower. As we get more predictable, investors demand lower risk premiums for lending through us.”
“We will always be able to lend to more businesses than the banks”
Funding Circle’s secret sauce is in the way it handles data, which is what allows it to be so fast. The company has a custom-built risk calculation platform it uses to price loans for investors.
“The beauty of the marketplace model is we’re just trying to get good at predicting the risk of these different businesses and put them in the different buckets,” explains Desai.
Funding Circle uses traditional data sources such as credit histories of business owners and data on company borrowing, but its tailored platform, high reliance on technology compared to traditional lenders, and its constant refining of its models gives it an edge.
Desai says: “As we get better and better at our data we can accept more and more businesses. It’s a virtuous funding circle if you want. We have more data, which means we can accept more businesses, which means we can spend more money on marketing, which means we can get more businesses, which means we have more data. It’s a very powerful mechanism versus the banks.”
He adds: “We will always be able to lend to more businesses than the banks because banks have very high capital requirements when lending to small businesses, especially riskier small businesses. Also banks are managing portfolios. There may be good businesses they should lend to but they just don’t because maybe they have tapped out on lending to that particular sector.
“With Funding Circle we’re managing to the risk of the individual business. If a business has a risk and we can predict that risk, we can put them on to our marketplace and they can get funded.”
The UK government has recognised the ability of companies like Funding Circle to lend to businesses the banks can’t or won’t and is introducing a law requiring banks to refer turned down businesses to peer-to-peer providers.
Funding Circle already has referral deals like this with Santander and Royal Bank of Scotland and Desai says the arrangements are working well.
The reliance on data has also helped Funding Circle minimise loss rates. Annual losses on loans are around 2% per annum, against average interest rates of 10% for loans on the platform. Desai says: “People are getting very good returns even after fees.”
In an era of record low interest rates, Funding Circle hasn’t had trouble selling its offering to investors. 43,000 people have lent money over the platform across the UK and US.
“We invested a lot up front in getting the framework right”
Funding Circle operates a little differently in the US due to stricter and more complex regulation. Up until recently only institutional investors could buy whole loans over the platform — meaning banks, hedge funds, and pension funds had to put up the entire amount businesses wanted to borrow, rather than take a chunk of a loan.
That’s down to US laws. Hodges says: “We have a more complex regulatory milieu than we face in the UK. In the US there’s really no consolidated regulatory framework. It’s an overlapping paradigm where you have a bunch of federal rules and those overlap with state level laws.
“We invested a lot up front in getting the regulatory framework right. But I think we can comfortably say now we’ve figured it out.”
Just like in the UK, its Funding Circle’s speed and ease that makes it popular with businesses, and its rate of return that interests investors.
Funding Circle US lends in every state bar Nevada and Hodges says lending is evenly spread both geographically and across industries. The typical loan is around $US140,000 (£91,500) for a little over 3 years and the average business doing the borrowing has a turnover of between $US1 million (£650,000) and $US2 million (£1.3 million).
Funding Circle is striving to open up its US loans to ordinary investors in the same way the UK platform operates. Desai says: “We’ve always felt we wanted to allow anyone to be able to lend on these loans. That’s the real DNA that the UK business started with.”
Earlier this year Funding Circle US made some progress, launching the first fractional marketplace that allows people to buy chunks of loans, rather than the whole thing.
But the platform is still not open to everyday investors in the same way it is in the UK. Desai says: “If we did [open up to retail investors], every small business would have to write a prospectus as if they were listing on the stock exchange in order to get a loan, which they’re obviously not going to do.”
The platform does cater for “accredited investors” though — individuals who meet income standards. Hodges says: “The good news is there are actually 9 million accredited investors in the US so there’s a broad pool of capital we can tap into their.”
“Funding Circle are doing amazing,” says Jan Hammer, a partner at Index Ventures, which was an early investor in the company. “They obviously started in the UK but the US is growing even stronger. And of course the US is an even bigger market than the UK.”
Funding Circle has partnerships with US banks in the works, although none have been announced yet.
Desai says: “In the US what you’ve got to remember is there’s about 4,500 banks where as in the UK there’s pretty much the big 5 and that’s it. There’s a lot more scope to work with smaller banks to help them help their customers better. Rather than them do all their credit assessments they can rely on our expertise.”
“This opportunity is global”
As well as teaching Funding Circle about dealing with complex foreign regulations, expansion to the US has spurred the company to set itself up as a global business.
Hodges says: “We have two functions that we run globally. The first is technology and product, the second is risk and specifically credit risk. Those provide a common platform and that’s where we’re building out centres of excellence that can support each country.
“We see this opportunity as something that’s global. In virtually every other market we’ve looked at we see small business lending as pretty broken.”
Funding Circle is planning expansion into new European markets, with Germany tipped to be a likely possible market.
Desai recently took on the role of Global CEO, delegating day-to-day responsibility for the UK operation to co-founder James Meekings. He says: “If we’re going to expand to more geographies, which is what we’re doing and this is a precursor to that, we really need to create a more consistent structure.”
He adds: “In 10 years we’ve said we want to be facilitating lending of $US100 billion (£65.4 billion) a year, which is about 70 times where we are today — not that much bigger.
“Even then we wouldn’t be a huge part of the market. You’ve got banks like JPMorgan at $US2.6 trillion (£1.7 trillion) of balance sheet. BlackRock, the biggest asset manager in the world, has $US5 trillion (£3.2 trillion). We would still, even at that level of scale, have a long way to go to be the majority of small business lending globally.”
“If we do a good job, who knows where the valuation will end up”
What could derail this rising juggernaut then?
When interest rates rise, I ask, does a peer-to-peer loan look so attractive? And would businesses find it easier to get more traditional loans?
“When interest rates have risen historically banks have pretty much perfectly increased the cost of borrowing for small businesses,” Desai says. “We would expect to increase the cost of small business lending by a similar amount. Investors want more return because they can get better rates elsewhere.”
We’re spending a lot of money on technology, that’s investment for the future
Industry heavyweights clearly believe the company will keep growing. The company raised $US150 million (£98 million) in April from blue-chip investors including Russian billionaire Yuri Milner’s DST Global, Baillie Gifford, BlackRock, Sands Capital, and Temasek. Desai told Business Insider earlier this year Funding Circle has yet to touch the money.
It’s not profitable, but Desai says the underlying loans in the UK are and the business is only loss-making because it is investing in growth.
“We’re spending a lot of money on technology, that’s investment for the future,” he says. “We have over 300 employees, nearly half of them are in our technology team developing software for the future — integration with our partners, mobile apps, making it faster. All things like that which other finance companies just aren’t.”
Funding Circle was reportedly valued at over $US1 billion (£660 million) in its latest funding round — is it true?
“We’ve never publicly disclosed that and we don’t think that’s important to be honest,” says Desai. “The billion that is important is we’ve lent over $US1.5 billion, nearly £1 billion, to small businesses and virtually none of that has been our own money. That’s been pretty incredible.
“43,000 investors across the UK and US, the UK government, local councils have all put their hands in their pockets and lent money to businesses. We estimate there’s been 50,000 jobs created as a result of the lending we’ve done.
“The valuation stuff, obviously it matters to our shareholders. I think what’s important is more what we do as a business. If we do a good job, who knows where the valuation will end up.”