NYLP: Welcome to the New York Launch Pod, a podcast highlighting new start-ups, businesses, and openings in the New York City area. I’m Hal Coopersmith, and this is our eighth episode, and we are going to be delving into the world of finance and particularly alternative finance. And I’m very excited to be joined with Angela Ceresnie and David Snitkof of Orchard Platform, an alternative finance platform. Alternative finance company? Platform? What are you guys?
David: Platform. Start-up.Company.
Angela: Yeah, all of the above.
NYLP: Welcome to the podcast Angela and David.
David: Thank you.
Angela: Thank you. Excited to be here.
David: Glad to be here.
NYLP: So what is Orchard Platform exactly?
David: Orchard is a technology platform that brings together large institutional investors as well as loan originators to transact an efficient and data-driven and scalable way.
NYLP: So what does that mean?
David: What that means is . . . Look. People have been lending for all of human history. Businesses need to be funded. People need capital to do various things, whether it’s to refinance debt, to finance their education, to buy a house, to buy a car. There have been all different ways of financing this throughout history, but there’s a new trend which is to go online to get a loan. And so over the past decade, various companies have gotten started that provide these loans online with a much more streamlined and data-driven experience, with better customer service, and with lower rates. What we do is we create the market for those loans to get funded more quickly and for investors to participate in that asset class, which is an attractive asset class for them.
NYLP: Just to take a step back. There is online lending going on right now. And what does that mean exactly?
Angela: Yeah. So the way I would think about it is, historically, if you wanted a loan you know, say in the last 20 years, for the most part to get any sizable loan you’d have to go to a bank, into a branch, fill out paper applications. That’s still how it works today for the majority of all small business lending, and for some consumer lending as well. And the trend we’re seeing in general is that people, whether they’re businesses or individuals, want to do their stuff online.
And so online lending is the ability to get a loan, either for yourself or for your business, on the Internet instead of in person. It doesn’t sound like that big of a deal, because almost everything that you do is on the Internet. Actually, David and I were commenting on the way over here, I just started using FlyCleaners, which is an app that allows you to get your dry cleaners picked up from your house, but you just do it on your phone. And I think most of what everyone does is online. Lending just happens to be one of the last industries to move that way.
David: We did retail banking at Citigroup, it’s a huge retail bank. And I used to say, “Filling out an application for a small business loan is one of the few things a business owner does on paper and in person all day.” And most of what you do, running a business, is now online. And why shouldn’t getting capital also be online?
NYLP: So where do people go online to get their loans?
Angela: We’ve seen a trend over the past couple of years of many different firms, being focused on small business lending. So CAN Capital has been around for 15 years. Funding Circle, Kabbage, OnDeck are all examples of firms where you can go online and get different types of loans for your small business. And in a recent report, research report that Morgan Stanley put together, they saw that on average it takes . . . a small business owner spends 30 hours, I think maybe more than 30 hours, getting a loan. So 30 hours working through the paper work and all of the other associated activities of getting a loan from a bank. You can get a loan from CAN Capital or from Kabbage or from Funding Circle in under a day. So if you think about the time and energy as a business owner, it makes a lot more sense.
Then on the flip side, banks can traditionally only fund their loans with their deposits, right? So when you go to a bank, if you’re a bank client, you put your money in the account, they use that money to fund their lending activities. There’s a lot of restrictions. There’s only certain types of loans they can make with that money. A company like CAN Capital or Funding Circle, who distribute their loans to various investors have a wider range of capital backing those loans. So a bank wants to lend to very established business, where the interest rates are going to be low but the expected default rate is very low. A hedge fund, who might buy a loan from CAN Capital, would be able to buy a riskier loan. There might have a higher interest rate, but that’s okay for them because that’s the business they’re in.
NYLP: What accounts for the difference in time to apply for a loan online versus in a bank?
David: A lot of it just has to do with operations and data analysis. So if you think about the decision to actually make a loan to a borrower, that decision is all about data. You have a sense for how you’re going to price your loan, meaning how much interest you’re going to charge to the borrower, and you also have a sense for . . . well you’re trying to figure out how risky is that borrower. And you hope that if you make loans to many customers, that you will make more money on the good ones than you’ll lose on the bad ones. So it’s really all about data. And in more old-fashioned types of lending, people are just submitting lots and lots of forms. So if you ever got a mortgage, I got a mortgage while I was working at the bank from which I got the mortgage and it still took three and a half months. And I was working there and had the ability to send an instant message to my mortgage underwriter.
Angela: That’s crazy.
David: So just because there is so much financial documentation that you have to send in. Someone needs to type that into a computer, some of it’s sent over fax, there are paper forms. There’s a lot of operational overhead in making a loan. And the reason for that is because a lot of the systems used in banks to underwrite and service and make loans in general were built over the past several decades. And also, a lot of the big banks were built by acquisition. So banks buying more and more layers of banks and layering these systems on top of each other.
If you’re building a lending company from scratch, the way that Funding Circle or OnDeck or any other marketplace funded lenders have done, you can actually build the technology using modern tools from the ground up. So you can say, well, “Let’s not have our customers not fax us a stack of a hundred pieces of paper, but let’s just programmatically connect to all of their bank accounts, get the information and make a data-driven decision in minutes.
Angela: Or, even what’s really interesting is the programmatic connections that some of these lenders have made to other data providers. So, as an example, if you apply for a loan from some of these online lenders, if you’re a small business, they have a programmatic connection say to your Amazon marketplace, or to your QuickBooks even online. So now they have insight into very specific financial data about your revenue and business operations that would be much more difficult for a bank who has legacy technology to have.
And another interesting trend that we’re seeing is that firms like, Square, who is a payment processor, credit card processor, Amazon, Intuit, these companies that are traditionally payments or data companies are now lending. And they’re lending, not because they want necessarily make money as a lender, the way a bank would, but because they want to have sticky products. So if you’re Square and you run all of the credit card processing for a coffee shop, and that coffee shop now wants to take out a loan to upgrade their Espresso machine you, as Square, have really great insight into how that business is doing. And if you give them a loan, you are now a stickier product to them. But Square doesn’t necessarily want to keep that loan on their balance sheet and make their revenue off of it. They’d prefer to sell that loan to an investor who does want to make interest revenue every month, get that cash back and be able to make another loan to another client of theirs.
NYLP: So how big is this online lending marketplace right now?
David: It depends on how you define online lending. So people call all kinds of things online lending. And if you think about it, it’s a bit of an interesting definition, because most of the time if you apply for a credit card with a big credit card issuer, that’s online. So is that online lending? Maybe. But typically when people in this ecosystem think about online lending, what they are talking about is this new wave of alternative lending start-ups. So whether you call it online lending, or direct lending or peer-to-peer lending or market-based lending.
Angela: I like calling it non-bank lending.
David: Yeah, even though banks are involved in it, in some way.
Angela: But the banks are . . . That’s true, the banks are . . .
David: They’re involved as a service provider, they’re not the lender.
Angela: Yeah. So if you think about it, it’s who is the borrower interfacing with, right? So you might be a borrower, get a loan from wherever, Lending Club. Lending Club goes and sells that loan to a bank. Do you call that bank lending? Maybe, maybe not. I wouldn’t.
David: Well, because your customer experience is with Lending Club.
Angela: And so the size of non-bank lending is enormous. I don’t even know, what is it?
David: It may be a trillion dollar business.
Angela: Trillion dollars.
David: Because you know, you think about all these start-ups, but there are non-bank equipment lenders, and non-bank credit unions, and non-bank specialty finance companies all over the country and all over the world. And that’s actually where a huge amount of lending happens in our economy.
NYLP: And I’ve heard that called shadow banking, but you guys, I understand, do not like that term.
David: We call it sunlight banking.
Angela: Yeah, sunlight banking.
David: Because it’s in fact . . .
Angela: That’s what you should call it.
David: Right. Hashtag sunlight banking.
Angela: Put the hashtag in front of it.
NYLP: I don’t call it anything at the moment, but I should call it sunlight banking.
Angela: You should.
NYLP: And why is that?
Angela: Because another hallmark of what’s happening in this ecosystem, and what we’ve seen, and I think what has been really exciting for David and I and the rest of Orchard, is the transparency that’s involved in the distribution of these loans. So as we talked about earlier, part of this is the fact that loans are being made online.
The other interesting phenomenon that’s happening is that those loans are being distributed to various investors. Instead of just being made by a bank on their own balance sheet, or being distributed to one specific investor. Marketplace lending, one of the big marks of that, is that the loans are being distributed in a marketplace to a diverse set of investors. And those investors, for the first time in history, can see the individual loans that they’re buying and all the data related to those. Historically, those same investors, if they wanted access, let’s say to consumer debt, they would buy a slice of the securitization. Right? So they would buy a mortgage-backed security. It might be a word you’re familiar with.
NYLP: I think a lot of people might be familiar with that now.
Angela: Right. Yeah, and so that’s what you did in that case was instead of buying a few mortgages, right, where you looked at the borrowers and said, “Yeah, I want to own that loan.” You bought a slice of a payment stream associated with a big book of mortgages. And the amount of information you had and understanding how that was structured was much more opaque. And so in this case, taking the mortgage example, if you’re an investor that wants exposure to real estate debt, instead of buying that securitization, that slice of payments, you actually buy the loans you want.
NYLP: So we’ve talked a lot about this alternative finance world or this sunlight banking, but we haven’t talked about exactly what you guys do. And what is Orchard’s role in all this environment?
David: So we’re a technology platform that actually brings all the participants in this ecosystem together. And what’s been very, very interesting over the past several years is that an entire industry, an entire world, has been created around marketplace lending. So there are the origination companies, who actually interface with the borrowers and make loans. There are the investors who put capital into those loans. There are the service providers who help these investors value their portfolio, administer and make reports to the investors. And the investors give them leverage, do all kinds of different functions. We’re a technology and analytics platform that actually ties all that together. So for the originators who are making the loans, we enable a marketplace where they can sell these loans in an efficient way to institutional investors, which as Angela was talking about, allows them to get these loans off their balance sheet, get the capital back, and then make new loans to new customers.
So it takes what was a very capital-intensive business and makes it a more capital-light business. And helps origination companies actually be more profitable and more efficient. And then for the investor, we have a set of technologies that helps them buy loans in a data-driven and programmatic fashion and also provides them a really extensive suite of reporting and analytical capabilities, so they can manage their portfolio as it grows and as it becomes more diverse.
NYLP: What information do you provide?
Angela: Lots and lots of data.
NYLP: More specifically.
Angela: Well, so one thing is data on the loans. So if you are an investor that is interested in buying loans from any of the different loan originators that we work with and support, we provide all of the data on the loans that they have made to date, and the loans that they have available for sale. And then we also provide a lot of data analytics around those loans. So there might be an investor who is interested in buying these loans, but they might not have a consumer underwriting team that understands how to take consumer data and quantify it. Or a small business analytics team that knows how to do that. We know how to do that. So that’s part of the service we provide for our clients.
And on the originators’ side – we sit in the middle, so we service both sides. On the originators’ side, we can provide them all sorts of information about what the investors are interested in buying. So I think we like to see ourselves as an enabler of the marketplace. Because we sit in the middle we have a really deep understanding of what’s going on both the loan origination side and on the investors’ side. And we leverage that to help both sides grow.
David: Yeah, that’s kind of a thing where as we were thinking about starting Orchard, we thought, “Where do we actually add the most value in this marketplace?” because we’re an interesting company in that we don’t make loans, and we don’t have a fund. We don’t invest capital. We build the technology that helps other companies to do that in scale. We thought about those business models.
Angela: Yes we did.
David: But then we thought, “Where could we – given our background and what we wanted to do, and our skill set – add the most value to the marketplace that someone wasn’t already doing?”
NYLP: If you do have all this information, why don’t you invest money yourselves?
Angela: Well, so we thought about that. And actually like some of our initial business models, operating plans had assumptions for starting a fund, but we would end up competing with our own clients. And we also don’t want to run a fund. That’s not the business that we want to do, you know? And I think part of what’s exciting and fun about starting a company is you get to do what you want to do. And starting a fund might have made us more money in the short run and might have made more sense at that time, but that’s not the business that we wanted to build. And David and I and other co-founders saw the opportunity in what existed to build an infrastructure company that helped all the different funds, instead of just being one ourselves. Right? And it felt that was the best use of our skill set, and also it happened to be the company we wanted to build.
NYLP: How do you make money?
Angela: Well, that’s a great question. So right now we primarily charge the buy side, so the investor side of the platform. And we charge them based on the amount of assets they have that we’re helping them manage. But as we grow and develop more and more products, we expect to be able to charge both sides of the market as we continue to add value.
NYLP: So you charge a percentage based off of the assets that are being invested?
David: Right. It’s the assets that the client is managing through our platform.
NYLP: What makes a good loan? What are some of the information that you’re providing to the investors?
Angela: A good loan depends on who is investing in that loan. And generally, the basics, are you want a nice balance between interest rate and expected default. Those are the two levers you have. Interest rate is something that’s just pretty straight forward. And expected default is something that’s a little fuzzier. And some people use the company whom they’re buying the loan from, their expected rate of default. Other people take other information and come up with their own expected rate of default, but that’s something that’s a little bit . . . Obviously, you’re predicting something so it’s not straightforward.
I think that in our time with Orchard in dealing with different types of investors and what they’re interested in, it absolutely depends on the capital that’s being invested and the appetite for risk. So, for one investor, a bank as an example, who has a very low cost of capital – so, again, we talked about the example. You put your money in the bank. They’re not paying you very much interest for that money you have in the bank. So their hurdle in order to make money by investing the money that you put in there is very low. So they don’t want to invest in a loan that has a 25% interest rate, because that 25% interest rate is likely associated with a higher default rate. They’d prefer to lend to a less risky borrower. But a hedge fund, who wants to make a much higher return in order to compensate for the fees that they charge, and their cost of capital, would love a 25% interest rate loan. So it depends.
NYLP: Do you predict default rates?
David: We help our clients predict default rates. So we have a flexible modeling platform, where most of our clients have their own credit risk models and investment strategies that they load onto Orchard. And when we started building a product, one of the things we really wanted to build was a technology that could execute any type of risk model and any type of investment strategy. So there are some investors that will say, “Okay, buy me every loan with a credit score above this number and years in business above this number.” Other clients have a complicated statistical model or a machine learning algorithm, or something much more complicated. Our system can do all of that. So it really depends how much risk tolerance a client wants to take on, and also the ability they have to model risk and how detailed they want to get in their analysis.
Angela: One thing that I would say on that same topic of the flexible system that we’ve built is that, I think part of the reason that Orchard has been successful and we’ve been able to have a large number of clients with a diverse set of investing strategies is because we build our technology in a really intelligent way. So David and I’s background is credit modeling. So that’s what we did for a long time, was build credit risk models, understand data, understand how a modeling platform can be built in a smart way and in a not so smart way. And then our CTO, Chief Technology Officer, John, who’s another co-founder, built some really complicated Adtech trading platform. And so between all of our kind of knowledge about how technology can work to make things more flexible and easier, I feel like the system we built is so world class. At any of the firms that we worked at, if we had the modeling infrastructure that David and I are able to use at Orchard, it would have been amazing.
We write our model code in a language called R that’s great. I didn’t want to learn it when we first started, but David made me and it’s really amazing. But then we can take the R code and that’s what our actual system ingests. Most trading systems like this or infrastructures like this would require you to take the R code and translate it into some other code and then implement that. And that’s a waste of time and energy and inefficient. And that’s how we always did it before.
David: Yeah.
Angela: When we work in the banks, you’d write your model and in that case we were using SAS, which is an equivalent to R but not as good. And you write your model in SAS, then you have to explain to somebody on the tech team how your model works and they would recode it in COBOL, which is this very old language. And that was always very frustrating and annoying.
NYLP: Right. And that’s what you needed to do to make it work on the mainframes.
Angela: Yeah, right. Mainframes.So no more mainframes for us.
NYLP: So what are the inputs exactly? What’s the data that’s being ingested?
Angela: It depends. I would say the consumer and small business side it’s all a lot of credit bureau data, just all very powerful. Just about all the alternative data that is cropping up. But it depends, first, on the originator of the loans and what data they make available. And then on the model that the client we’re working with has built.
NYLP: And you’re able to adjust the inputs based off of their model?
Angela: As long as the inputs are available from the originator of the loan, yeah, we can use them.
NYLP: What are each of your backgrounds?
David: So we have similar backgrounds, because we’ve worked together a really long time. But my background is in analytics in a variety of industries. So most notably consumer and small business credit risk, as we’ve talked about a bit. So, first out of college I did healthcare consulting for about a year. So management consulting to hospitals and insurance companies and medical schools and things like that.And then I started working at American Express, where Angela and I met and we both worked in consumer risk management there – building new consumer credit card products and managing the end-to-end credit risk life cycle for those products, and then also managing the underwriting criteria for who was allowed to get a new American Express credit card. Which was a very cool job to have in the height of the recession. So that was a lot of fun. Angela can tell her side of the story too, but . . .
Angela: Yeah, my background is similar. So I started my career at AMEX, and then moved over to Citi generally working on underwriting policies in analytics, modeling. But my focus, opposed to David’s, was always a little bit more on the operational side. And so since Orchard started . . . I guess when we started, we were basically doing all a lot of the same stuff, because when you start a company everyone does a little bit of everything. But I’ve migrated over to working more on the corporate operations side. So managing our legal and compliance programs, our Finance, HR, client services.While David has really kept his handle on the analytics.Although, sometimes I jump in here and help out with analytical stuff.Although I haven’t installed R in my new computer.
David: Yeah, I know. You need to do that.
Angela: I know. I used to do a lot of blogging, which I retired from about a year ago.
David: Yeah, Angela’s retirement from the blog was very difficult for me. We started the blog before we started the company, because we just became interested in all this online lending stuff. We thought, “Okay, let’s write a blog.” There was no good place online . . .
Angela: Nothing.
David: Nothing, to learn about analytical credit risk. And so there are blogs for everything. For every topic you could imagine, but you couldn’t learn about analytical credit risks. So we thought, “Okay, let’s take all these great transparent and open data sets that all these companies are making available and write a blog, where we talk about credit concepts.”
Angela: Our blog started as – it was called Credit Variables Explained.
David: Credit Variable of the Week.
Angela: Yeah, Credit Variable of the Week. And we would be like, “Here’s the predictiveness of occupation.”
David: Yeah.
Angela: Or, “The predictiveness of debt to income ratios.” But that we exhausted fairly quickly and then we started having to talk about other stuff.
NYLP: So you had Credit Variable of the Week.
Angela: Yeah.
NYLP: How did Orchard come into being?
Angela: Okay. Well, so we started Credit Variable of the Week. I think actually that was after London.
David: No, we started that before London, I think.
Angela: So there was David and I, and then our other co-founders started … We knew that there was something going on. And I wouldn’t say we had a good solid business plan about what we were going to do. And then we presented at, there was a conference called the LendIt Conference, which, the first one was in 2013 here in New York. And I think there were between 2 and 300 people there. The most recent one was in New York, and I think there was like 3,000 people there. And there’s actually, I think next week, one in China. So that’s pretty cool.
NYLP: It’s grown back tenfold in the past two years [inaudible [00:28:28].
Angela: Yes. It’s a large conference, and the one that had 2 to 300 people, we presented at that and when we were presenting there, we just presented on credit risk.
NYLP: The four of you, just as friends?
Angela: Yeah, it was just on how does FICO work? What’s going on? What are some things to consider if you’re going to get into consumer lending? And when we walked off from our presentation, we were approached by several institutional investors – money managers – who asked if they could pay us just to consult for them. Just consult, help them understand what’s going on, what’s going on with Lending Club, maybe help them build a credit risk model and . . .
NYLP: Just consumer lending though?
Angela: Yeah, that was just consumer at that time. And, essentially, what we realized was that while this Lending Club and Prosper, who are the two biggest consumer lenders in the States, while they started as having retail individual investors investing in their loans, that the market was shifting. And that the institutional capital had a lot of questions and needed a lot of help in order to scale and be able to make these investments. And so the first revenue we made was from consulting. But the first product that we launched was actually a back office reporting tool that our clients could use in their accounting departments. And their loan management departments, because they were doing something they’d never done before which is buying a bunch of little loans, as opposed to buying a securitized bond, or portfolio of loans that’s all being priced in one way.
NYLP: So you launched this first product and then what?
David: Then we started building more. So the great thing about having a few clients to start was you can learn a lot from them. You know, one of our core principles is you don’t build the products in a vacuum. So we talk to clients constantly and get their feedback. And that’s also a really cool thing about being a B2B focused company, where we have a smaller number of very large clients than let’s say a consumer web app would have. Where you have millions and millions of clients, but each one represents a smaller part of your business.
NYLP: So I can’t use Orchard as an individual?
David: You cannot.
Angela: No.
NYLP: Why?
David: We are institutionally focused. The set of technologies that we built are targeted towards a large institutional investor who’s deploying many millions of dollars or more in a variety of assets. So the types of things are things that an individual investor wouldn’t necessarily need. So you don’t need super extensive reporting in your portfolio. You don’t need fair market valuation. You don’t need leverage.
Angela: Also, the trend with the online originators who want to distribute their loans, is that they want to distribute them to institutions. And the reason for that is . . . there’s a couple of reasons. One is from a regulatory perspective it’s much easier. If you’re distributing your loans to retail investors, they probably don’t want to buy the whole loan. So Lending Club for instance, makes a $10,000 loan to a borrower. You, as a retail investor and individual, you don’t want to buy all $10,000, you want to buy a fraction. And that is a security, which needs to be registered with the SEC and that’s complicated. So a lot of the originators who want to distribute don’t want to do that.
The other thing is that if they work with the institutions, they can have a lot more capital with fewer clients. Right? If you think about it that way, right? So you could have . . .
NYLP: Fish where the fish are.
Angela: Exactly. But I would just echo what David said. So there’s a lot of really fun and exciting things about running a business, especially a start-up business where it’s growing and everything changes and like every week there’s new things and new challenges. But working with our clients is the best part of running a business, because you just see where you’re adding value and you talk to . . . It’s like real world, right. So you’re talking to these people who are relying on you for your services or to run their business, and who are paying you money to do it. Right? And that’s just so fun, you know?
I would say, between that and then just being able to walk into the office every day and see all these people who are just so laser-focused on how do we grow our business in the right way, make sure that we continue to add value for our clients and create the products that our future clients would want? And at the end of the tunnel is disrupt the way that lending is done today. You know everyone kind of sees that out there, that we have the ability to build the right tech. And work with the right partners. And if we do things the right way, we can really change the way that credit is distributed. Perhaps globally, you know? You mentioned China. So there’s one loan originator that we work with, they’re in China. So we work with them, but not as much as we work with the lenders in the U.S., but they have done like $15 billion worth of loans this year.
NYLP: How should credit be distributed?
David: Credit should be distributed with technology, transparency, and trust. So, look, credit is the life blood of the global economy. At some point in your life as a consumer, you need to borrow money. Yeah, every business needs capital in some way. Every single one.Right? So if credit can be distributed really efficiently, the economy could grow faster, businesses can get the capital they need, people can have higher levels of employment.
And so, what are the things that get in the way of that? A long application process, higher than necessary pricing on loans, all kinds of operational difficulty in actually making loans. So what’s our really, really long term goal? To make the entire process of distributing credit throughout the world just more efficient, more data-driven, more fair, more transparent.
Angela: It’s also about power distribution. So we’ve been, David and I will be in meetings with large, large banks, who make lots of loans. And part of their capital structure is that they distribute some of those loans to buyers. And because there’s no technology enabling it, they work with one or two buyers. And if one of those buyers decides, “Today I want to pay a lower price.” Or, “Today, I don’t want to buy any of these loans.” They’re totally screwed, right? Big companies get screwed because their capital base that’s buying their inventory is so narrow that all the power lies with those buyers.
But, if we were to make the entire thing enabled by technology, where there could be thousands of buyers and thousands of sellers on either side, then what happens is you distribute the power. And so one buyer can’t dictate the terms to the seller, and one seller can’t dictate the terms to the buyer. And that benefits the borrower.
NYLP: So how are you getting in front of the right people?
Angela: It’s becoming increasingly easier.
David: Yeah, the funny thing is that when you start a business you have nothing, right?
NYLP: You started with your few institutional investors that you were consulting with, and then what happened?
Angela: We literally started with nothing. But, yes. Then we got that.
David: Right. You start any business, you start with nothing, then hopefully you…
Angela: We started with a Chinese restaurant and MiFi.
David: Yeah. For a long time, for months, we were just meeting in, yeah, a Chinese restaurant called . . .
Angela: Congee Village on Allen and Delancey.
NYLP: With the variable of the week?
Angela: I don’t even know if we talked about that there. I don’t know. That was the place we could get that of hot and sour soup, and MiFi and they wouldn’t say anything for eight hours.
David: They let us stay for a really long time and we would plan our business.
Angela: But what I would say is that, in general, the idea of marketplace lending and of having companies who’s focus is making loans and then distributing those loans, that idea has absolutely taken off in the mainstream. So two years ago, if you went to a traditional finance conference which we go to all the time and they’re loads of fun, probably not as fun as your podcast conference. No, but we’d go to those and people would laugh at us. They’d be like, “Who’re you? Why are you here?” Now, we’re on like panels at those and people . . .
David: And the best attended panels.
Angela: Yeah, and we get meetings with names that you know. And it’s because, either people want to work with us, they want to learn from us, they’re interested, but people see it in the establishment. So that’s how we get meetings.
NYLP: But how did you start? Were you in the back of the room?
Angela: Well, connections.
David: Part of it is also just like thought-leadership. So when you don’t have . . .
Angela: The blog helped a lot.
David: Right. And so that’s what we were saying. Before we even really started business we started to write the blog, because in the age that we’re in now, anyone can get in front of an unlmited number of people if you have really compelling content and something valuable to say. So we started using what we knew how to do, which was to do any of the teams technical analysis . . .
Angela: Oh and the meetup.
David: Oh, the meetup too.
Angela: So there’s two things that we did really early on that were free and . . . Actually, I would say there was three things. Okay. So then one is the blog which we’ve talked about a lot. And David and I always talked about the blog a lot, because it was ours. Now it’s his. Second is we have a meetup. So it’s the marketplace lending meetup. We started it a few years ago, because we literally looked on Meetup.com and said, “Oh, there’s no peer-to-peer lending, marketplace lending.”
David: Yeah, someone has to do this.
Angela: So we did it. The first one was at . . .
David: Spitzers.
Angela: Spitzers, on the lower east side. Great bar.Six people there. I remember we were running to Staples . . .
NYLP: And you were two of them?
David: Yeah.
NYLP: You were two of the six?
Angela: I think there was six additional people.
David: We might have been like 2 of the 12. Something like that.
Angela: It was barely anyone. All I remember is they turned the music up and we’re like, “Can we turn the music down?” And they were like, “No.” So that was . . .
NYLP: But you have to start somewhere.
Angela: Right. Now there’s close to 2,000 members of the meet-up, and we had one last week that had . . . I think there might’ve been 2 or 300 people there. It was enormous. And it was people from banks, from law firms, from accounting firms. It was huge. And we controlled the volume of the music, so that was cool.
But then the third thing is the lendscape.
David: Yes.
Angela: So we created a visual diagram of the marketplace lending ecosystem. And we’ve published it a couple of years ago, and it’s evolved over time, but it’s a really useful tool that in general people reference all the time. I’ve been in meetings. I remember I went to a meeting with a bank in San Francisco and they were really skeptical and we were having this kind of difficult meeting, and at one point they said, “Well, I saw this really great diagram.” This is a couple of years ago. “I saw this really great diagram of the marketplace lending ecosystem and it had all the logos and it was really good.” And I said, “Oh, well, that’s ours.” And then the meeting got a little better.
David: Usually now I hear from all people who work from all different companies like people who work at big banks. And they use the lendscape, which is this diagram, in their presentations all the time.
Angela: All the time.
David: We see it everywhere.
Angela: It’s everywhere. It’s definitely the most . . .
NYLP: How’d you come up with it?
David: There are two interesting stories around this. So half of our team comes from the advertising/technology world, which over the past 15 years just grew into a really big ecosystem itself and so in Adtech there was this thing called the LUMAscape, which was a graphical representation of the entire Adtech ecosystem. The publishers, the advertisers, the data providers, the tech companies, all those things.
So we thought, “Okay, this is almost an analogous ecosystem.” So Matt, who is a co-founder and CEO thought let’s make the same exact thing for marketplace lending. And we had the idea of starting this idea together, but then there was a guy who just kept coming to our meetups; this guy named Vince. And one day, he showed up to one of our meetups and he said, “I made this thing for you. I think it was would be useful for you to use in meetings.” And we looked at it and we said, “Oh, this is the lendscape?” And it was 100 logos perfectly arranged with what everyone does in the ecosystem . . .
Angela: PowerPoint.
David: . . . in PowerPoint. We ended up hiring Vince and he worked in multiple roles in Orchard. And so, it’s also another cool thing about the star-up ecosystem, which is someone with a lot of personal drive and motivation and interest in the subject can go and demonstrate his value to an interesting company, and get a job.
Angela: And that lendscape is amazing.
David: Yeah.
Angela: It’s the most downloaded and accessed thing on our website.
NYLP: How big is your company now?
Angela: Forty-three employees.
NYLP: How did you get to that point?
Angela: Hiring lots of people. So we started with the founders. And at the beginning we were really slow to hiring, because we didn’t have a lot of money. And so we were 6, 9, 10. And one thing that I think . . .
NYLP: And you were growing organically?
Angela: Yeah, we grow organically. A lot of the people that work at Orchard are people that we know, or people that went through a very rigorous interview process.
NYLP: Or Vince.
Angela: Or Vince, right. So one thing I would say about Orchard that I have been really proud of – and maybe part of this is because the HR function reports up into me, so I’ll be proud of it for myself. But is that I think we’ve done a really good job of having a robust hiring process.
So almost anyone that gets hired by Orchard, gets interviewed by lots of people, does case studies. We have a really clear process for the different roles. Whether you’re coming in as the general counsel, you’re doing a case study having to do with the legal problems that we’re dealing or the legal issues that we’re dealing with. Our finance hire had to build some business models in Excel. Engineers go through crazy code interviews. And so we’re 43, but we’ve had thousands of people apply for jobs at Orchard.
NYLP: So I saw in October that you had a series A round of financing. It was about $12 million and you had some heavy hitters in the finance world invest in their company. Tell me a little bit more about that.
Angela: Yes. So we’ve had two funds of funding – a seed round about a year before that, and then the series A in October of last year. Really happy to have Spark Capital and Canaan Partners as our lead investors in both those rounds.
We’ve also had some really exciting angel investors in both those rounds. So VikramPandit who was the CEO of Citibank when David and I were both there. John Mack who is the CEO of Morgan Stanley, and Max Levchin who was one of the co-founders of PayPal. We also have QED and Nyca, which are our two other VCs who came on the series A.
And what’s a fun thing, again, about running a start-up and being around and seeing how your investors involvement and your reliance on them changes over time. So at the beginning, a lot of it was around setting up a company. Just basic – employment agreements.Talking to the other founders that are within the portfolio companies at Spark and Canaan about the right ways to do those sorts of things. And now, I find that our conversations with investors are really strategic and tend to be around, either really large business problems of the day or the strategic issues that we’re facing at that time.
Nyca are one of the investors that I mentioned. The founder of Nyca is Hans Morris who was a CFO of Visa.
David: He was president in the Visa.
Angela: President Visa.
David: He was CFO of a part of Citi.
Angela: A part of Citi. So this is his VC and I was on the phone with them yesterday, for about an hour talking about . . . I don’t even want to say this, but SOC 1 Compliance, which is this thing that we have to do in order to make sure that our business processes and systems are compliant to the level that our investors clients and originator clients would be comfortable. So they have a lot of expertise in that. So that’s very cool, because they invested in our company. They obviously have a vested interest in us being successful, but they also have a lot of knowledge and understanding of some of the things that we need to do in order to get there.
So, I’ll summarize that long-winded answer is that our investor and the way we work with our investors has really changed over time, but it’s always been really positive, and a really fun and exciting part of running our company.
David: One of the great things about the types of investors that we’re working with, is that they’re very long term oriented. So they’re all really experienced, they’ve invested in building companies before, they’ve all built companies; they’re in the long term. So they know what it’s like to go through all the ups and downs and all the challenges of starting a company. So it’s always been very, very positive.
NYLP: You can’t be too bashful because I saw this on your own website. Forbes has you on their list of potential billion dollar start-ups.
Angela: Okay.
David: That is accurate.
NYLP: How do you feel about that?
David: It’s exciting! I mean, look it’s all future oriented. So now, for us, when we see something like that we just think, “Okay, now the bar is really high. Now we have to prove it. We have to justify it.”
Angela: But that’s what we want to do anyway.
David: Exactly.
Angela: And we have a value at Orchard – well, we have a few values, but one of them is “Think to the future”. And one of the reasons why that’s a value that we all subscribe to is because the future is where Orchard is a really successful and valuable company. And so that’s where we all need to be thinking about and looking towards; not towards the past. And I think the Forbes list is just another example of that. Of, they see what we’ve done, they see the team, they understand the opportunity. And so they’re saying, “You have the opportunity to be a billion dollar company.” And since we’re all thinking into the future, I think we can make it happen.
NYLP: How are you going to achieve value?
Angela: By providing the technology, the data, the analytics, and the infrastructure, to grow both sides of this marketplace. So to enable more originators to be able to distribute their loans to diverse set of investors and distribute that power and be able to change the way that credit is distributed.
NYLP: What’s your competition?
David: I think our competition is not any given company, so much as a concept, right? We talked about values a little bit, but the idea of transparency. So sounds great on the radio or on the podcast, but transparency is actually a very radical idea in finance. The idea that investors should understand every detail of what they’re investing in. Borrowers should understand the process by which they’re getting a loan. The competition is the idea that that shouldn’t be the case. The competition is the idea that power has to be concentrated in a very small set of firms and not distributed in a marketplace.
There’s no company that is directly competing with us necessarily. It’s a concept and a mindset of how funding has been traditionally distributed throughout the world and the way we see that happening in the future.
NYLP: So banks have tons of resources. What’s to stop a bank or anyone else from just saying, “You know what? This is an environment that we want to jump into. We have the resources to do that. Let’s do this.”
Angela: So they are, but they’re doing it in a way that’s not competitive with us. It’s actually, I think, complimentary.
David: Yeah.
Angela: So banks are providing leverage to our clients, so that they can buy more loans through our platform. They are, in some cases, buying the loans themselves.
NYLP: So they’re lending money to buy loans?
Angela: Yeah, so they do that. So leverage would be that they would give a line of credit to a hedge fund or other kind of asset manager, and then that asset manager would be able to use that line of credit to buy loans. So that’s one example. Some banks that don’t have a consumer lending or small business lending platform or website or branch network will buy loans directly.
NYLP: Should banks be lending money?
David: Well, banks are lending money. And lending money, providing capital more generally is a very core part of the bank’s function in society. But what’s interesting is that banks are good at a lot of things. Banks are good at raising a lot of low cost capital on the capital markets, and in mass distribution. What large banks at least are not that, because . . .
NYLP: Because of their legacy?
David: Well, because of their place in the capital markets. That’s what a bank is really good at. Treasury management, capital markets, distribution. That is the core function of a bank. But then, banks are also not creative at certain things – especially really big banks. So being super nimble with modern technology, providing a really great customer experience and customer facing tools. But what’s great about this new ecosystem is you could actually divide those responsibilities. So companies like Lending Club who’ve created a great borrower experience and have modern technology all developed in the past several years can own that relationship with the borrower, and provide a great experience there. And then banks on the back end can still provide the capital to finance these loans.
And in fact on the entire history of economics is a specialization of roles in the economy and this is just another step in that evolution.
NYLP: No one likes their bank?
Angela: I don’t know if that’s true, but I think people just . . . they don’t care where they get their loan from, right? So if you’re a borrower, or prospective borrower, and your operating accounts in your small business, your operating account is with Citibank or Bank of America, and getting a loan from them means you have to go to the branch, you fill out paperwork that’s going to take a little while, or you could go online and get a loan from CAN Capital or Funding Circle, that’s what you’re going to do.
David: Right. It’s really more about the notion of customer loyalty and what it means in the age of apps and the Internet, where switching costs are nothing. So you’re not going to have customer loyalty to a bank in the sense that, “Oh, I have my checking account with this account, so I’ll also go there for my auto loan and my mortgage.” Because the switching cost is nothing. And you will go to wherever you get the best rate and the best customer service. And if that’s an online lender, all the more likely.
NYLP: How do people find out more about Orchard or learn more about the space?
Angela: Blog.
David: You can go to OrchardPlatform.com, read our blog, download the landscape and we’d love to have any of your listeners at one of our upcoming meetups.
NYLP: If you made it this far, you have a definitive interest in alternative finance and Orchard and the future of lending, so I congratulate you. Angela Ceresnie and David Snitkof, thanks for stepping onto the New York Launch Pod and sharing your time with us.
David: Thanks for having us, Hal, this was great.
Angela: Yeah, this was a lot of fun. Thanks for having us.
NYLP: And if you want to learn more about the New York Launch Pod you can visit NYLaunchPod.com or follow us on social media @NYLaunchPod.
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