http://www.wsj.com/articles/online-lender-social-finances-latest-fundraising-implies-4-billion-valuation-1440009125
Peter Rudegeair, Telis Demosand, Rolfe Winkler - August 19th, 2015
Fundraising makes SoFi among the most valuable fintech startups
Fast-growing online lender Social Finance Inc. has raised about $1 billion more from investors, giving the startup a roughly $4 billion valuation that would place it in the top-30 U.S. banks by market capitalization.
Based in San Francisco and typically called SoFi, the company raised the new round of equity in recent weeks, according to a document reviewed by The Wall Street Journal and a person familiar with the matter.
The fundraising round would make the four-year-old lender among the most highly valued “fintech” companies, as financial-technology firms with aspirations of stealing business from traditional banks are known. The valuation also shows that investors are ever more confident that the forces that upended retail and transportation will make their way to consumer finance.
SoftBank Group Corp. is leading the latest investment round of roughly $1 billion. The $4 billion valuation would more than double SoFi’s valuation over estimates based on a funding round announced in February. SoftBank, a Japanese telecommunications and Internet giant, was an early investor in Alibaba Group Holding Ltd., generating billions in profits.
A SoFi spokeswoman and a SoftBank spokesman declined to comment on the fundraising.
SoFi says it is profitable but doesn’t release revenues or other specific financial information.
Founded by former Wells Fargo & Co. trader Michael Cagney, SoFi is targeting an area where banks no longer tread—refinancing student loans. Student debt has grown 70% to $1.2 trillion since 2008, with interest payments taking up sizable portions of graduates’ paychecks and becoming a big focus of their financial lives.
Rather than building a bricks-and-mortar network of bank branches, SoFi has grown quickly by allowing customers to apply for loans over the Internet or through smartphone apps. Since it isn’t a bank, it doesn’t have to adhere to capital requirements that regulators tightened on the banking industry in the wake of the financial crisis. SoFi is overseen by the Consumer Financial Protection Bureau and state regulators but not the Federal Deposit Insurance Corp. or other agencies that monitor traditional banks.
SoFi’s approach largely focuses on different underwriting criteria than those reviewed by traditional banks, using the reputation of a borrower’s university as a major part of the lending decision. It began in 2011 by refinancing student loans of graduates of Stanford University—Mr. Cagney’s alma mater—and other elite colleges.
It has since expanded into offering personal loans of up to $100,000 to mostly high-earning professionals and providing mortgages requiring down payments of as little as 10%. SoFi said this week its loan volume is set to exceed $5 billion by the end of 2015.
Mr. Cagney has boasted that student loans will give him a critical foothold with consumers—and a launching point to sell them additional products and services—in the same way traditional banks have long viewed checking accounts.
The biggest four U.S. banks combined have a market capitalization of more than $1 trillion, “and I think all of that is vulnerable,” said Mr. Cagney in a recent interview. “I’m going to go and get as much of that as I can.”
Banks have heard such noises before from Silicon Valley. Over 20 years ago, Microsoft Corp. founder Bill Gates wrote off banks as “dinosaurs,” saying technology would inevitably replace them.
Since then, only one Silicon Valley company— PayPal Holdings Inc.—could convincingly say it changed the landscape of financial services. Retail lending and deposit-taking have proven especially resistant to change, largely because layers of regulation have scared off competitors.
Still, Mr. Cagney has persuaded blue-chip investors such as Silicon Valley veteran Peter Thiel, who is a PayPal co-founder, and hedge-fund manager Daniel Loeb to buy into his plan, in addition to SoftBank Chief Executive Masayoshi Son, one of Japan’s richest men. The stakes of earlier investors have appreciated in a short time. Last February, the company was valued at $1.3 billion.
While there are bigger unlisted finance firms, when compared with the market valuations of publicly traded banks, SoFi would rank 26th, behind Commerce Bancshares Inc. and ahead of Prosperity Bancshares Inc., according to FactSet.
At the end of June, Commerce Bancshares had $11.9 billion in loans on its books, while Prosperity had $9.1 billion—far more than the $3 billion-plus in loans that SoFi says it has originated in its lifespan.
The discrepancy highlights how investors are valuing the company more like a tech startup with long-term growth potential than an established bank.
Venture capitalists are betting that a number of fintech companies specializing in areas ranging from payments to wealth management are poised to steal customers away from banks. Overall, investments in U.S.-based fintech startups by venture-capital firms totaled $6.1 billion in the second quarter of 2015, the most in any quarter since 2001, according to Dow Jones VentureSource.
“We are witnessing a period of profound disruption in the financial-services sector,” said Jonathan Korngold, managing director and global head of financial services for private-investment firm General Atlantic LLC. “Many traditional financial institutions have struggled to adapt and evolve their legacy approaches” to the way consumers and businesses want to use their services, he said.
In late 2014, two fintech companies— Lending Club Corp. and OnDeck Capital Inc.—went public. Lending Club and OnDeck rose to prominence by targeting a more narrow set of customers than most banks do. In Lending Club’s case, it is mainly consumers looking to pay off credit-card debt, while OnDeck Capital focuses more on short-term small-business loans.
SoFi had discussed following in their footsteps by listing on a public stock exchange this year, but the latest round of fundraising puts off those plans, said people familiar with SoFi executives’ thinking.
Both Lending Club and OnDeck shares have fallen lately and are now trading below the price at which they went public.
Analysts and investors have expressed concerns including whether growth can keep up amid competition from even newer upstarts and whether regulators may create new rules to rein them in.
The U.S. Treasury is seeking comments from lenders and borrowers as it studies the nascent sector.