In the short history of FinTech as reality and fad, this was a big day. But what does it tell us? Below some early thoughts:
· What we know (so far) does not suggest a business model flaw.
· It does suggest internal controls were weak. LC is an industry leader, so this could be an issue at many (most?) of the high-growth names in FinTech. Top up your sector risk premium.
· Providers of debt and equity capital to marketplace lenders are likely to take a ‘wait and see’ approach for a couple of quarters, triggering sharp growth slowdowns.
· The behavior of retail vs institutional funding will be especially interesting empirically.
· The jury is still out on whether there are problems on the credit side at LC (which would be a business model issue). Sceptics see a recent rise in defaults for lower grade credits as ongoing deterioration; the firm believes the defaults are under control, and that net returns remain strong in this segment. How this plays out has industry-wide consequences.
· Even before these events, US FinTech funding seemed to me to be unbalanced (overly-dependent on hedge funds, for one thing) and firms have struggled recently to attract the scale of funding required to grow at their preferred pace (see my recent post-Lendit post on funding). Attracting institutional funding, at least for a while, may be even harder now.
· Growth may also be harder to come by on the asset side if confidence in the sector fades; again, this is likely to be temporary.
· Clean up your presentation of the numbers, please. Hans Morris (appointed Executive Chairman) and Scott Sanborn (Acting CEO) made, in my view, a poor start with the 1q16 earnings release. The opening paragraph touts “adjusted” EBITDA of US$25.2mn. How can I put this appropriately? It’s a nonsense make-believe number. That US$25.2mn excludes a number of items expensed under GAAP. Why make the adjustments? Because GAAP earnings, being lower, seem not to be to the liking of LC management (and many tech firms). Items like US$15mn of stock-based compensation and tangible asset depreciation of more than US$5mn in 1q16 are all tucked away in the GAAP reconciliation at the end of the release. These have a real economic value — it is misleading to downplay them. While you’re sorting out the internal controls, perhaps you can sort out the earnings numbers you choose to headline? Other firms do it? It’s not an excuse.
Conclusion: Nothing revealed so far suggests the marketplace industry model is invalid. There are real challenges (funding, profitability) and a rough patch ahead. The enthusiasm for FinTech—much of it, soundly-based—has for a while been amplified by poor controls and absurd valuations which IPO investors—institutional and retail—chose to accept. The appropriate expression today must be—plus ça change.
