Canaan Partners, one of the Sandhill Road posse in Silicon Valley, is a VC firm that has moved big into the alternative finance space. With over $4.2 billion under management they have the fire power, and the tool kit, to move quickly into promising, early stage companies. Canaan targets two sectors; Technology and Healthcare companies which are based mainly in the US, India and Israel. Canaan leans towards seed and early stage funding with about 80% of its investments targeting early rounds.
In 2014 they had 5 “unicorns” or VC home runs. But within the Tech vertical is the subcategory of FinTech – one of the hottest investment sectors over the past several years. The poster child for FinTech success is arguably LendingClub which stands as the 4th largest US internet IPO ever. Zero to multi-billions in about 6 years, the financial firm was started by Renaud Laplanche back in 2006 when he was comparing the disconnect between rates paid by credit card holders and interest earned by savers at banks. Canaan Partners led the Series A for $10.26 million back in 2007 – an investment that would qualify as knockout success. It has been estimated that Canaan partners got into Lending Club for around $0.27 per share. Sure they had to wait a few years to cash in but a 55X or so return was probably worth it.
Canaan continues to be engaged with Lending Club and General Partner Dan Ciporin is on the board. He has also taken board seats on several other FinTech startups in which Canaan has an interest. In a presentation at the LendIt conference held earlier this month Ciporin spoke about the success and ongoing opportunity of marketplace lending. While this sector is measured in mere billions today – most industry followers believe the numbers will soon be measured in trillions. But the main focus of his presentation was real estate and the emerging opportunity for crowdfunding platforms to disrupt the traditional financing structure. He closed by saying the old world [of finance] is gone.
Since the fortuitous investment in Lending Club, Canaan has participated in funding rounds of multiple, innovative online financial platforms including: Borro, CircleUp, EVEN Financial, Orchard,Realty Mogul and others. From crowdfunding to peer to peer to services – Canaan is spanning the spectrum of disruptive finance.
Recently Canaan invested in EVEN, another ecosystem or “pick & shovel” participant in the marketplace lending space. EVEN is a platform that helps lending platforms capture borrowers more efficiently. As institutional money has cascaded into the P2P lending space, platforms have had to hustle to find borrowers to soak it up and do so effectively. Brendan Dickinson, a Principle at Canaan, worked the EVEN investment and is now a member of their board of directors. Recently I had the chance to speak with Brendan to better understand Canaan’s vision for the future of finance since they have had a front row seat so far.
“We have a very, very strong point of view .. there is occurring right now a fundamental disruption in financial services that is being brought about via the internet at the most basic level”.
We discussed briefly Canaan’s timely investment in Lending Club and he explained that they maintain a elemental belief that because of the cost advantages, the peer to peer, or marketplace lending model approach will continue to make up more and more of the US financial system and will spread across asset classes. So banks beware.
For many individuals already engaged in new forms of finance it appears so obvious. And it is happening so fast. But for those individuals so engaged, it is easy to forget that we are still in the early innings of the game. This same disruption that is occurring across consumer finance will, over time, consume much of the traditional finance industry today.
“…we believe this same type of disruption is going to occur in other industries, or enable new types of investments,” stated Brendan.
Using the CircleUp platform as just one example out of many, Brendan explains that for tech investments the VC model can be pretty efficient. But this is not the case for consumer packaged goods. While approximately $60 billion flows into this industry every year – “it is a very painful process for entrepreneurs”. The power of the internet and crowdfunding can fix this challenge.
On the debt side you will see many more origination platforms. Other asset classes will be addressed and according to Brendan these will soon encompass the foundations of bank finance – and beyond. Brendan mentioned specifically auto loans and litigation funding but it really applies across the spectrum of loans because “this is a fundamentally better way to extend credit … it should go everywhere.”
Insurance is an industry that I have always believed was perfect marriage for online investors being paired with risk. I posed the question to Brendan if he thought insurance could be next and he shared that he has not yet seen anything that has gotten him super excited but he would really like to…
“We believe very positively on the opportunity of FinTech, particularly marketplace lending” This is a “long wave opportunity” to fund and build other platforms and ecosystems. Canaan is going to continue to invest heavily in the ecosystem.
Canaan has an office in Israel and also targets India for investment opportunities. I was curious to know if they were searching outside the US for FinTech investments. The US market is developing rapidly but markets around the world have not been immune to financial innovation. Brendan explained they have been speaking with companies in Europe but mentioned no names. They have looked at “a bunch of folks” in the UK and a few platforms on mainland Europe. As for China and the rest of Asia – this market is not on their radar even with the FinTech boom as they do not have a presence there; “we know what we don’t know”.
The UK is the where peer to peer lending got its start with Zopa but the market has evolved differently. Marketplace lending has embraced institutional funds in the US but this event has been slow to occur across the Atlantic. Brendan stated that the UK is heading in this direction where the investor can access a relatively low risk / high yield product. “Institutions are not interested in earning 4% on their money. There are lots of ways to do that”. Brendan sees institutional money finding a similar path in Europe soon enough;
“I think the market is evolving towards that type of demand. There are a bunch of folks that are making that shift. People are very aware about the US and they are going in that direction. There will always be a retail product. By no means is that going away. I think it it is great to have a real mix of investor base but there is a real evolution there where you are going to see.. I think the market is perfect for it.”
“The large financial institutions need to take a very hard look at their consumer happiness levels and look at ways the new, innovative firms are doing it and address it.”
“At the end of the day there will always be a place for ATMs but the branch network is probably becoming a very outdated way for providing service.”
The demographic shift that will inevitably occur means the always connected generation will avoid visiting bank branches like the plague. “I don’t know any 20 or 30 year olds that really who ever have to go to a branch for any reason,” says Brendan. The banking system is having their newspaper moment. The olds will continue to be tied to what they know best while the youth shift to what is better. As ink on paper has entered into its perilous death spiral delivered by the internet, so too will the branch banking system and much of the credit process utilized today.
“I think we are living in a fundamental shift.” says Brendan. “We are going to continue to invest heavily in the ecosystem.”