The $1bn series E round closed by US-based credit marketplace SoFi last week, the largest ever raised by a fintech company, displayed the growing prominence of the online lending sector and perhaps its future as a viable alternative to traditional banks.
Japan-based telecommunications and internet company SoftBank led the round, which reportedly valued SoFi at $4bn, and was joined by China-based social media company Renren, as well as Wellington Management Company, Institutional Venture Partners, Baseline Ventures, DCM Ventures and Third Point, which also invested through its Third Point Ventures subsidiary.
The round took SoFi’s overall funding to $1.42bn since its formation in 2011. Renren initially invested as part of a $77m series B round in 2012 that also included DCM and Baseline, while Wicklow Capital and Peter Thiel, a co-founder of online payment service PayPal, are also backers.
SoFi’s core business is its student loan refinancing, though it also provides mortgages, mortgage refinancing and personal loans. It selects its borrowers using a system that takes into account employment history and other relevant factors in order to offer a lower rate to a potentially more reliable customer base.
The company has so far issued more than $4bn in loans and claims it is on track to break the $6bn mark by the end of this year. In contrast to many of the online companies raising cash at unicorn valuations, it is also reportedly already operating at a profit.
SoFi has big plans for the series E capital, which will support the expansion of its range of financial products, to the point where it could hypothetically serve customers’ financial requirements throughout their lives.
Part of the round will also go to simplifying the service, particularly in mobile where SoFi intends to expand its presence, and increasing its member service programmes, which will eventually encompass a range of career and entrepreneur-focused initiatives. To this end, SoFi aims to increase its 400-strong team to 500 by the end of 2015, doubling its office presence in California and expanding offices in Montana, Texas and Washington DC.
SoftBank’s participation in the round forms part of an ongoing strategy to concentrate its investments in market-leading online services providers. It has already put substantial sums into ride sharing, classified listings and e-commerce marketplace companies, and an expansion into financial services further indicates an eventual plan to offer a complete ecosystem of online services.
Renren on the other hand is an old hand at fintech. In addition to reportedly holding a 25% stake in SoFi as of May this year, it led a $70m round the same month for mortgage lending platform LendingHome and invested $40m in stock trading platform Motif in January. Other portfolio companies include consumer lending service Credit Shop and online financial data provider Snowball Finance.
The company’s increased interest in the sector is said to be part of a pivot from social media, where its revenues from games and advertising have declined of late, to more of a venture capital-focused firm, with fintech a particularly strong element.
What is interesting about Renren’s investments in the sector is that, with the exception of Snowball and automotive trading platform Cheyipai, they have tended to be in US-based companies, as opposed to credit marketplaces in its home country, where the sector has been growing at an extremely rapid rate.
Renren’s reluctance to fund Chinese lending marketplaces could perhaps stem from fears that the country’s comparatively unregulated sector, which has experienced staggering growth over the past two years, is inherently risky to the point where a crash is inevitable.
In that context, SoFi’s technology base and selection process makes it a safer bet, though it is worth mentioning that the first large financial services provider to enter the space, Standard Chartered, did so through an investment in China-based Dianrong in August.
What is unarguable is that the sector is booming, and with banks still perceived as reluctant to lend in the wake of the 2008 crash, there is a ready customer base for these companies and a potential ceiling that is huge. SoFi may have raised the sector’s first billion-dollar round but it is unlikely to be the last.