Online lender Earnest sells to Navient, in a disappointing deal for investors

Earnest, a well-funded fintech startup with bold ambitions to create a modern financial institution, is selling to the student-loan company Navient for $155 million in cash.

The WSJ was first to report the news.

The exit isn’t so great for Earnest’s investors. They’d plugged roughly $320 million in cash and debt into the company, which was initially centered around providing small loans to people based on their earning potential and evolved over time to provide personal loans to a broader base of customers, as well as lend money to coding academies, as it told TechCrunch in late 2015.

Earnest was valued at around $375 million by venture-capital firms in 2015, according to the WSJ — or more than double the price for which it just agreed to sell.

The WSJ reported that the company had been looking to raise additional capital or find a buyer for much of this year.

Earnest was hardly alone in its struggles to turn the business of lending to a younger, more educated demographic, into a sustainable business.

Before its now-infamous cultural “issues” burst into plain view, SoFi — which once focused on refinancing student loans — had applied in summer for a bank charter that would allow it to add banking services like deposits, checking and savings accounts to its existing loan and wealth management products.

SoFi may get its charter, too, though as TC noted at the time — and this was before SoFi’s CEO, Mike Cagney, was elbowed out the door last month — the company is facing an uphill battle. The problem: there haven’t been any new industrial loan company (ILC) charters approved in about a decade.

In total, SoFi has raised $1.9 billion from investors including SoftBank, Discovery Capital and Baseline Ventures. Its last valuation was pegged at $4 billion.

Upstart, another online lender that has raised big bucks from investors — $85 million and counting — and that initially focused on students, decided earlier this year to begin licensing its technology to banks, credit unions and even retailers that are eager to make (ostensibly) low-risk and profitable loans to their own customers.

Others online lenders continue to struggle. Prosper, a pioneer in peer-to-peer loans, saw its valuation shaved by 70 percent recently, falling from $1.9 billion to $550 million in a funding round last month.

Publicly traded online lending companies like On Deck Capital and Lending Club haven’t fared much better. On Deck’s shares once traded for $24; now they trade at $5. Meanwhile, LendingClub — whose founder and former CEO, Renaud Laplanche, resigned last year in the midst of a damaging internal investigation — hasn’t been able to recover its earlier momentum. Its shares, which traded early on for roughly $25 apiece, are today trading at roughly $6.

Navient is the country’s largest loan servicer. It was long a part of student lender Sallie Mae, but it split off in 2014, with Sallie Mae continuing to make new loans to students, while Navient specializes in collecting payment on student debt.

According to the WSJ, the company plans to maintain the Earnest brand as a separate unit led by Earnest’s cofounders, Louis Beryl and Ben Hutchinson.

Online lending still makes up a small fraction of the $12 trillion in consumer loans outstanding. But many related startups began taking capital from larger institutions in recent years to grow quickly. And the banks, hedge funds, and other institutions on which they’ve relied have at times pulled back, with disastrous ripple effects for these online lenders.

Indeed, Steve Eisman, a money manager who’d publicly predicted the collapse of subprime mortgage securities, told Bloomberg recently that online lending firms have been careless, and that Silicon Valley is “clueless” about the work involved in making loans to consumers.