Not all small businesses and startups are lucky enough to raise venture capital. When Main Street business owners, like your local tailor, barber or florist find themselves in need of capital to help grow their businesses, after exhausting their own resources, they typically are forced to turn to banks for a loan. Applying for these loan packages is often time consuming and expensive, and banks tend to rely on personal credit scores to evaluate the health of the business and avoid the costs of underwriting small (sub-$250K) loans.
Launched in 2007, On Deck Capital set out on a mission to simplify the borrowing process for Main Street businesses. Leveraging data aggregation and electronic payment technology, the startup gives banks an alternative method for evaluating the creditworthiness of local businesses, in turn making it easier for mom-and-pop shops to secure a loan.
Over the last two years, On Deck’s alternative approach to lending and evaluating the health of small businesses has begun to catch on: Today, the startup has deployed $400 million in loans to small businesses and in 2012, raised $100 million in credit facility commitments from Goldman Sachs and Fortress Investment Group, tripled its distribution partners to 1,500 nationwide and grown to 160 employees. From 2008 to 2011, the company saw 1,233 percent revenue growth, increasing annual revenue from $1.5 million to just under $20 million in 2011.
On the heels of this growth, the company announced today that it has raised $42 million in series D financing led by Institutional Venture Partners. On Deck’s existing investors, RRE Ventures, SAP Ventures and First Round Capital also contributed to the round, which brings its total capital to $96 million. As a result of the round, IVP General Partner Sandy Miller, who has invested in companies like Ngmoco, One Kings Lane, Zynga and AddThis, will be joining On Deck’s board of directors.
Going forward, On Deck CEO said that the funding will allow the company to provide more capital to small businesses in 2013 than it did “during the previous five years combined,” and will allow it to bring better online lending tools to small business owners in the U.S.
The addition of Miller to its board of directors could also be a sign that On Deck’s leadership thinks it’s on track for an IPO in the next couple years, as Miller has been personally involved in over 100 technology IPOs, Breslow said. A notion that’s supported by reports from Bloomberg and others that On Deck recently ended acquisition discussions with U.K. online lender Wonga (offers were reportedly as high as $250 million) in favor of remaining independent.
In light of this, the next phase of growth for On Deck will be critical. Online lending, in all its varied forms, has grown exponentially in the last few years, as both individuals and businesses look to find easier ways to secure capital to grow their ventures or ease the pressure of credit card debt. On Deck’s raise puts it on par (at least in capital raised) with another fast-emerging lending leader, Lending Club, which also appears to be on track to IPO in the next few years.
However, whereas On Deck is focused exclusively on providing businesses with small, short-term loans (typically between $5K and $15K), Lending Club is focused on P2P, individual online lending, so the two really don’t overlap.
Of course, that doesn’t mean On Deck’s road forward will be a cake walk, as startups like Kabbage have been raising big money to provide online merchants with easy access to loans and even Amazon has been getting into the lending game. Yet, while both are focused on providing small business owners with quicker access to short-term loans, the focus is online businesses and merchants — and Amazon is really just doing this for its own merchants. There’s also Capital Access, too, but it’s more focused on real estate lending.
So, while the road ahead won’t necessarily be smooth, On Deck may have found a sweet spot by targeting the millions of underserved, offline small businesses in the U.S., which at some point, will likely look to secure a loan.
Offering the tech infrastructure to evaluate electronic performance data rather than force SMBs and banks to rely on personal credit scores and suffer through lengthy negotiations can mean value-add for both sides of the table. On Deck claims that its loan application process can be completed in about 15 minutes, part of the reason that its repeat customer base grew by 34 percent in 2012, Breslow says.
“Small and medium sized businesses are the lifeblood of the U.S. economy,” says IVP Principal Eric Liaw. “We are in an environment where 84 percent of SMBs looking for financing report unmet financing needs.” There’s plenty of opportunity on Main Street for On Deck, but that also means there’s a lot of work left to be done.