Because there are so many small businesses out there on Main Street that don’t have access to the same juicy venture capital rounds that seem pervade today’s tech industry, On Deck set out in 2007 to provide mom-and-pop business owners with an easy way to secure the capital they need to grow their businesses. Using data aggregation and electronic payment technology, On Deck aims to simplify the borrowing process for small businesses by offering them a fast, online alternative to the traditional old bank loan.
The startup’s alternative approach to lending and evaluating the creditworthiness of SMBs has seen it deploy over $450 million in loans and allowed it to raise $100 million in credit facility from Goldman Sachs and others in 2012. After declining offers from British online lender Wonga that were reportedly as high as $250 million, On Deck raised $42 million in series D financing in February, led by IVP, with contributions from its existing investors, SAP Ventures, RRE Ventures and First Round Capital.
As a result of the round, IVP General Partner Sandy Miller joined the startup’s board. Miller has been involved in over 100 tech IPOs over his career, which we surmised at the time could well be a signal of On Deck’s future intentions. This, combined with its growing credit line and traction, appears to have investors lining up at the startup’s door.
Today, On Deck announced that it will be expanding its Series D financing with $17 million in new capital, raised from a lineup of familiar names. The round was led by Google Ventures, with participation from PayPal co-founder, education contrarian and prolific investor, Peter Thiel and Industry Ventures. This brings the startup’s total Series D to $59 million and brings its total capital raised to date to $100 million.
The company says that the new infusion of capital will be used to support its growth, particularly by allowing it to ramp up hiring and product development. In the big picture, says CEO Noah Breslow, On Deck wants to power every U.S. small business loan and help make on-demand capital a reality for the five million businesses with 25 employees or less in the U.S. — a segment of the economy relied on for 40 percent of its jobs.
However, as we wrote in February, On Deck’s road forward (to IPO) isn’t necessarily going to be a walk in the park, thanks to competition from startups like Kabbage, which are looking to make it easier for online merchants to raise loans, and big players like Amazon have been moving into the lending game as well.
Not to mention that companies like Capital Access Network have been bringing loans to small businesses since 1998 and have deployed nearly $3 billion to SMBs thus far. It also has raised big money, $30 million from Accel for example, and has secured even heftier credit lines from Goldman Sachs and Wells Fargo — nearly $300 million.
So, On Deck isn’t without competition in the SMB lending space; but, that being said, the market opportunity and the demand for capital is significant enough that there seems to be plenty of room for more than one sizable lender. As mentioned above, there are millions of small businesses in the U.S., most of which will look to borrow at some point in their development and, all told, are pretty underserved when it comes to access to secure, short-term lending.
Main Street businesses are used to turning to banks when looking for business loans, but traditionally, banks have relied on personal credit scores to evaluate the creditworthiness of their business. While business owners may have perfectly legitimate, high-growth businesses in the making, they don’t always have the kind of personal credit scores that make them attractive borrowers for banks.
By providing banks with infrastructure that allows them to evaluate electronic performance data and pull up a credit score for the businesses rather than the owner, On Deck’s model aims to streamline the application and negotiation processes, adding value to both sides of the equation. Or at least that’s the idea.
To add some credence to this proposition, Breslow tells us that it is this streamlining of the application process (which takes about 15 minutes, he says) is a large part of the reason that On Deck was able to increase its “repeat customer base” by 34 percent in 2012.
Making on-demand, short-term lending a reality for the millions of small businesses in the U.S. is a tall order, but having Google Ventures and Peter Thiel on board certainly doesn’t hurt.