Every Saturday, I include links to the most interesting blog posts and news articles of the week. And most Saturdays for the past few months have included an article from Orchard. They are becoming an important part of the p2p lending industry, so here is a profile of this young company.
Recently, I chatted with Matt Burton, the CEO and co-founder of Orchard. They announced in December a $2.7 million funding round from the likes of Spark Capital and Canaan Partners (an early investor in Lending Club) as well as Vikram Pandit, the former CEO of Citigroup, and Tom Glocer, the former CEO of Reuters.
So what does Orchard do exactly?
Before we get to that, let’s provide some background. Matt Burton was an early employee at Admeld, an online ad exchange that was bought by Google in 2011. After a friend introduced him to Lending Club, he noticed similarities between the online ad market and p2p lending. Both had marketplaces, limited inventory, the potential for advanced data analysis, were growing exponentially, and disrupting an established industry.
Burton started investing as a retail investor in 2010. Then in 2011, he met Angela Ceresnie, who had just left Citi as a VP of Risk Management. She had done in-depth credit risk modeling and was investing her own money in Lending Club. Not only that, but many of her friends in the industry were personally investing as well.
A Change in Direction
Together they started to develop some tools to help their own investing. Then Burton started to think that maybe there was a business to be made in selling these tools to retail investors. Burton and Ceresnie presented a workshop at LendIt 2013 where they were approached by institutional investors and asked to do some consulting. They soon realized that large investors had their own unique set of challenges.
Today, the vision is clear. Orchard is focused on simplifying the back-office for institutional investors in this space – this includes order execution, reporting, and the hosting of investment strategies. They do not want to be a fund or origination platform – they will be the technology company providing infrastructure to institutional investors.
From $4 Billion to $100 Billion
Last year, the online lending industry originated around $4 billion globally (excluding China). We all know it is growing fast, and Burton envisions the day when the industry does $100 billion annually. But he says that in order to get to that volume, we are going to need an infrastructure that is radically different from what we have today. Burton believes that p2p lending needs to be at this $100 billion range before it can be truly considered a major asset class.
The Establishment of a Secondary Market for Institutional Investors
One of the key areas of focus that will allow even more rapid growth in the industry is the establishment of a secondary market. Right now, retail investors have Foliofn, but there is no equivalent for institutional investors who are focused on whole loans. Today, all these loans need to be held to maturity, because there is no easy way for them to be sold.
Burton says that a secondary market is the number one request that they hear from clients, so it is a top priority. Orchard has a pretty audacious goal here – they want to have a secondary market in place by the end of this year. They are in conversations today with all the necessary partners, and everyone agrees that a secondary market will help the industry scale.
Moving out of Beta
This month, Orchard has moved out of beta, is processing a significant volume of institutional investments, and is now taking on new clients. They are connected to Lending Club and Prosper today and are actively working on making connections with many other platforms. They eventually want to connect to all consumer, small business, and real estate lending platforms both in this country and overseas.
Institutional investors want to be able to deploy their capital quickly and easily. They want to invest across platforms seamlessly, and they want liquidity for their investments. Orchard is focused on providing these capabilities.
Like all other asset classes as they evolve, a technology infrastructure becomes an important piece for investors, large and small. Orchard is well-funded, well-connected and could very likely become the go-to technology provider in this space. They are certainly a company to watch.
Absolutely fascinating that the number one request from Institutional investors is a secondary marketplace! Lending Club tells me that the “Vast Majority” of individual investors participating through their IRA accounts have little interest in a secondary market place. I must be in that “Tiny Minority” that feels liquidity is a much valued and even essential component of any investment no matter in what account it is held. Even more so when liquidity via FolioFn was advertised to be available when I invested the “Vast Majority” of my money, but later repealed by Lending Club fiat (notices posted after the fact and so on). Just little old me, but something is plainly not right about that.
Hi Rob, I believe Lending Club when they say the majority of their IRA investors do not want to bother with the secondary market. But obviously there are plenty of people who disagree and clearly many institutional investors disagree as well.
I am well aware of your position on this subject based on your forum comments. I am still trying to get an official word from Lending Club and Foliofn about the reasons that IRA investors are now excluded from selling loans on Folio. Hope to have something to publish soon.
They may consider to allow IRA accounts to sell notes but mark them IRA and only allow IRA accounts to purchase these notes. It avoids money flowing between IRAs and non-IRA accounts that bring all the problems.