We first heard about Daric in the summer when they made a bit of a splash by filing an S-1 registration with the SEC. They were the first company outside of Lending Club and Prosper to file an S-1 in this industry. The significance of an S-1 is that it allows a company to sell their securities (in this case the p2p loans) to the general public and not just to accredited investors.
Fast-forward a few months and the S-1 registration is still in process. But Daric is moving forward anyway. Over this past weekend Techcrunch broke the story that Daric would be launching this week. So, I called their CEO and Co-founder, Greg Ryan, to get the scoop. He confirmed that Daric is launching today but it will be a small and conservative launch. Daric is already completely open to borrowers and will scale up for accredited investors soon. However, they will not be open for retail investors until some time next year. The significance of today, though, is that Daric will begin issuing loans to borrowers.
Open Today for Accredited Investors
While they plan on completing their S-1 next year they have decided to launch for accredited investors initially. This requires no S-1 registration and is a much easier process. While I would like to see another option for retail investors I actually think this is a good move. It simplifies their launch dramatically.
According to Ryan, they have more than $1 million in borrowers ready to go and will be slowly issuing these loans in the coming days and weeks. They also have 200-300 accredited and institutional investors who have expressed interest, more than enough to fund these initial borrowers. In fact, Ryan said they really don’t need any new investors at this stage and this is why there is no signup option on their Investor page.
When I asked him about the S-1 registration he said that Daric is still very committed to retail investors. But it made sense for them to start slowly and ensure all their systems are working well before they scale to take on retail investors. Just as Lending Club and Prosper have maintained support for retail investors long after they really needed them, Daric sees retail investors as important. Not only does it provide a diversified capital base but borrowers like the peer to peer aspect of the business – borrowing from individuals rather than a large hedge fund or insurance company.
An Automated Approach
While initially all processes will be manual Ryan said that they intend to have the first fully automated underwriting system of any p2p lender. At Prosper and Lending Club borrowers always need to communicate with a person during the loan application process – at Daric that will not be the case. They intend to use software and systems to handle all aspects of underwriting. Ryan says that they have been working with some of the smartest minds in consumer and small business lending – taking their knowledge and building automated systems that will make underwriting decisions.
This is a lofty goal and it remains to be seen whether Daric can pull this off. It will likely mean borrowers will get their cash more quickly which should result in less cash drag for investors. But how good will these systems be at identifying bad credit risks? And what about fraud? These questions are yet to be answered. But if they can make this happen it will mean Daric will have a much easier time achieving scale than Lending Club or Prosper.
Building a Technology Company
This was a theme that was often repeated during our conversation. Daric is not looking to the banking and credit card industries to build their team as Lending Club and Prosper have done. First and foremost they want a technology-focused team. Ryan considers Daric more of a technology company than a financial services company.
Right now their team consists of Ryan and two Stanford educated computer science engineers. Ryan says their next hires will be engineers as they see technology as the key to their success. And being based in the Bay Area, Stanford will provide a good source of leads for Daric.
Launching With Small Business and Consumer Loans
Daric is not content to just offer consumer loans. They are launching with consumer and small business loans for investors. The maximum loans size for consumers is $35,000 and for small business loans is $50,000. The minimum FICO score for consumers will be 660.
Ryan maintains that from a systems perspective underwriting consumer and small business loans is not that different. You need reliable data and then systems that can analyze this data and make a decision. They will be building a ratings system for both consumers and small businesses.
What About Investors?
As I said earlier Daric will be open only for accredited and institutional investors initially. Their loan marketplace is not ready for launch yet; loans are being funded in a manual way by the more than 200 investors that have signed up. The minimum investment per loan will be $25 and service fees will be 1% in keeping with the industry standard.
Ironically, even though Daric is a complete startup they have received strong interest from investors already. So much so that they not actively seeking new investors right now. You can send an email to their investor support email address (email@example.com) to express interest but they have enough investor dollars to fund their first wave of borrowers.
Daric’s Goals Are Very Ambitious
What I like about Daric is that they are taking a completely different approach, questioning everything that their predecessors have done. By doing this they have set themselves some very lofty goals. Many will scoff that what they are trying to do is simply impossible. That you cannot create a completely automated system to underwrite loans. That small business loans are so different to consumer loans that you should not launch with both kinds of loans.
The skeptics may well be proved right, I don’t know. I will be signing up as an investor so I can at least keep close tabs on what they are doing. And I will be following up with a more in depth post once they have some operating history. Whatever happens Daric is bound to create some waves in 2014.