An Interview with Renaud Laplanche

Renaud Laplanche, CEO, Lending Club, speaks with

Growthink University’s Dave Lavinsky

Dave Lavinsky: Hello everyone. This is Dave Lavinsky from Growthink. Today I am really excited to be able to interview Renaud Laplanche. Renaud Laplanche is the founder and CEO of Lending Club which is a peer to peer or social lending marketplace. Prior to founding Lending Club, Renaud was the founder and CEO of Triple Hop Technologies which was a VC backed enterprise software company which was subsequently acquired by Oracle Foundation in June 2005. Prior to founding Triple Hop, Renaud was a senior associate at the New York law firm of Cleary Gottlieb Steen and Hamilton. Renaud was honored with HEC Entrepreneur of the Year award in 2002. He also won the French sailing championships twice in 1988 and 1990. Renaud has raised multiple rounds of venture capital and other capital for Lending Club and Triple Hop Technologies. Since Lending Club can be a great place for entrepreneurs like you listening to raise capital I knew that he could provide a ton of valuable information and insight to entrepreneurs seeking capital. So I’m really excited to interview Renaud and Renaud thank you again so much for taking the time to speak with me. Renaud Laplanche: Sure. My pleasure. Dave Lavinsky: Excellent Let’s start with how did you come up with the idea for Lending Club? Renaud Laplanche: The idea actually came from a personal experience. At the time I was starting my previous company, Triple Hop Technologies. That was probably the first time in my life I was charging expenses on my credit card and not paying the balance right away, just charging the first few expenses you can think of you, buying servers and IT furniture for the employees who were busy at their desks late at night. So I didn’t pay the balance immediately. I let it run for a couple of months before we got the initial financing. I found out something I never realized before which is that you pay a very high interest rate on credit cards. Your purchase APR goes to 18% sometimes 24%. I thought that was a very high interest rate to pay for someone who has good credit, actually perfect credit and never shorted on any debt application. I discussed with a group of friends and they as a joke said, “Hey if you want we can lend you the money and take 8%.”

That made me realize that this 18% interest rate that most people pay on their credit card, if you flip that around it would be a tremendous investment opportunity for individual investors. Even a discount with an 18% rate if an issuer were to take a loan at 12% or 13% if that loan was to be funded by individuals rather than a bank that carries high cost and has high cost of acquiring this capital. If direct investors were to invest their own money into a pool of loans at 12%, that could be a very good investment opportunity for those investors. That was essentially the basis of Lending Club right there. I did not immediately act on it. I went on and built the other company but after the acquisition by Oracle I started thinking of new business ideas again and Lending Club came back. Dave Lavinsky: Excellent. So how specifically does lending club work for the company or individual? And maybe if you can talk about is it for companies, individuals or both seeking capital? How does it work from that perspective? Renaud Laplanche: It is for individuals but what we’re seeing is a lot of individuals certainly take loans for their own personal purpose for consumer financing goals but we also have quite a few individuals who take a personal loan in order to finance their small business or their new startup. It is the debt of the individual but it can be used to finance businesses and startups. The process is very simple. You go on the website LendingClub.com. You can join and become a member. You can be an investor or a borrower. If you’re looking for financing you click on the borrower side and you fill in a loan application and once you’re done, you instantly are either approved or denied based on your credit characteristics and most people who have good credit get approved. The minimum FICO score is 660. Quite a few people are qualified. Once you’re approved you get an interest rate that’s typically much lower than what you would pay to a bank on a small business loan or credit card or any other unsecured loan. You post your loan request online at that interest rate. There’s a period of two weeks during which investors can review this loan application and can make their own decision to contribute to the loan or not. The maximum period is two weeks but actually most loans get funded after a few days.

Dave Lavinsky: Excellent. Now you said the FICO score is a minimum of 660. Is that the primary indicator of whether the entrepreneur will raise capital from Lending Club or do they have to submit a business plan or what they’re going to do with the funds? How does that work? Renaud Laplanche: There are really two levels of approvals. There’s Lending Club first and for that approval we really look at the credit quality of the person taking the loan because at the end of the day that’s the person being on the hook for the entire amount of the loan. FICO score is the main criteria. There are additional criteria like debt to income ratio which is calculated by us based on the application and the few additional criteria we get from the credit report. There are credit characteristics independent of the type of venture the person is contemplating. But then in the loan description and the loan application itself that goes up on the site, the borrower is invited to describe the purpose of the loan. So individual investors who would make that decision based on not just credit characteristics but also what they think the chances of success are for the venture if the loan’s sole purpose is to finance a new venture. Those loans that describe a business or venture that seems more appealing to investors will get funded a lot faster than others. There’s actually a mechanism for investors to ask questions directly to the borrower. It’s similar to the eBay feature where you can ask the seller a question. Here you ask the borrower a question. It’s anonymous but if the borrower decides to answer the question then both the question and the answer will be posted online so that other investors can review the set of questions and answers. Basically the more open you are about the business venture and the more details you provide and if you can link to a website for example, if you can give some indication that there have been some preliminary steps taken and can convincingly show to investors that this is an attractive opportunity for them and they have good chances of getting funded and getting their money back then obviously the loan will get funded a lot better. Dave Lavinsky: Excellent. Now what are some of the best practices? You mentioned linking to the website. Are there any loan descriptions that you found that are better than others? There’s always the concern about making it seem too risky to the investors. Are there any additional insights or best practices besides linking to your website?

Renaud Laplanche: We found openness and transparency are really the best practices. The more information borrowers provide upfront the more people contribute to that loan and the loan gets funded faster. We’ve seen very short applications, very short descriptions. It triggers more questions and some investors invest in tens or hundreds of loans at a time so they don’t necessarily have the time to ask detailed questions. Some will and some won’t so if the information is not readily available upfront as part of the initial application, many investors will not take the time to ask questions and will just move on to the next application because there really is no shortage of loan applications to review. I think giving more details, linking to a website, also showing that you thought through the business plan in terms of expenses and revenue, in terms of how long you’re going to take to get to profitability and backing that up with numbers is always appreciated by investors. Dave Lavinsky: Got it. Now how much space do you have in that loan description field and would you recommend hosting your business plan on a different website and linking to the full business plan? Renaud Laplanche: That’s a very good practice. I don’t think there’s any specific character limit on the loan application but if you have spreadsheets or other documents you have available you can certainly link to a Google docs or any other storage mechanism where you can link to a spreadsheet of the business plan. Dave Lavinsky: Excellent. Now what is the maximum amount of a loan? Do you specify how much you’re looking for? And if so, what is the maximum amount? Renaud Laplanche: Loans are anywhere between $1,000 and $25,000 and you cannot have any more than two loans for any particular individual. Dave Lavinsky: Okay so you can get up to $50,000 total?

Renaud Laplanche: One person can get up to $50,000. Dave Lavinsky: Got it. And is there any time between when you can apply for the second loan? Renaud Laplanche: Yes. You can only apply for a second loan if you show six months of consecutive on time payment on the first loan. The first loan is for $25,000 and then six months later you can possibly take a second loan. Dave Lavinsky: That doesn’t mean you had to pay back the first $25,000. It just means you made the interest and principal for the first six months. Renaud Laplanche: That’s right. And all loans are three year term, fully amortizing so you pay part of the principal and interest each month. Dave Lavinsky: Got it. Pretty good terms. Perfect. What about is there any opportunity to get an equity investment and/or take the investor offline or is it a very blind system where if I’m the entrepreneur or the person raising capital I don’t really know which investor put in the money? Is that correct? Renaud Laplanche: Yes. Most business investors like to remain anonymous. Also on the borrower side there’s no obligation to display your identity to the other members. Lending Club verifies the identities of both, the borrowers and the investors. They’re anonymous to each other. We’ve seen in quite a few new ventures and business loans that the borrowers make the decision to actually display their full name. I think that also helps build up credibility. Dave Lavinsky: Got it. Excellent. Let me ask you another question about the use of the loans. As you’re aware, you’re an entrepreneur. You’re also a person as well that has expenses. What other uses should entrepreneurs consider using Lending Club for in addition to business uses? What are some traditional uses of these personal loans? Is it to pay for weddings and events or is it in lieu of credit card financing? Maybe you could talk about that a little bit.

Renaud Laplanche: Sure. About 20% of the loans are small business loans and new ventures. Out of the remaining 80% you have a pretty large majority of 55 to 60% of loans are actually for refinancing of existing higher interest debt. Many people and it’s actually the history of the company. Many people pay a very high interest rate on their credit card and really did not intend to take a loan from their credit card in the first place. They were charging their credit card as a means of payment thinking that they would pay that balance at the end of the month and end up not paying that balance and end up with essentially a loan carrying interest at 18%, 24%, sometimes 29%. We have a lot of customers coming to us to pay down the balance or pay it off entirely and replace it with a fixed rate, lower interest rate loan from Lending Club which is also a more responsible way of borrowing because they’re amortizing loans so you actually pay down the loan over time and you know you’re completely out of debt after three years. Paying off credit card balances is really a very large portion of all the loans posted on Lending Club. Besides that we hear a lot of one time events like a wedding or expensive item purchase or unexpected expenses like medical bills. Dave Lavinsky: Excellent. So I want to move away from Lending Club for a second and talk about what other sources of capital have you raised for your business? You mentioned credit cards, angel financing and venture capital. And what lessons do you have for other entrepreneurs in terms of raising those sources of capital? Renaud Laplanche: I think I raised about $50 million altogether, so most recently about $30 million for Lending Club. I think the environment right now is tough. There are no questions there. It’s not the ideal time to go out and raise money. But I think there are still quite a few VCs and business investors that are active. There is more pressure on valuation but there are active investors so it is possible to raise money now. I think it is more than ever a numbers game. It’s important to know which investors are likely to invest in a given project based on – do some research on what their investment policy is. Out of the investors

that are active in your space, it is really a numbers game and should be treated like a sales pipeline. It’s always safe to have twenty or thirty firms at the top of the pipeline because there’s going to be a lot of attrition and different people are going to have different views of the business. So out of twenty or thirty you just have more chances to find the two or three VCs that will get it and make the investment. Dave Lavinsky: Can you contrast raising venture capital for Triple Hop where I’m assuming you were much less of a proven entrepreneur because you didn’t have that exit to Oracle versus Lending Club? Was it easier for Lending Club? Were you more of interviewing VC firms as opposed to them interviewing you? If you could talk about that, that would be interesting. Renaud Laplanche: The second venture is a lot easier than the first one for sure -- partly because of the track record; partly because some of the investors in the first company really wanted to be part of the second company. I had some part of the Series A funded already by previous investors. But I think I got lucky in the sense that I started the first company in 1999. At the time the funding environment was really a lot easier. The good old times were you could raise $1 million in financing money based on a five slide PowerPoint without much substance behind it. I think those times are gone now. If it’s your first venture right now I think it’s really important to partner with other entrepreneurs, partner with people who have done it before, who have a track record. Dave Lavinsky: When you talk about twenty or thirty firms and it being a numbers game, was that more for Triple Hop or did you really go for the same amount for Lending Club as well? Renaud Laplanche: It was more for Triple Hop and more what I’ve seen other entrepreneurs do recently. Because of Lending Club we got lucky in the sense that I think in Series A we talked to five firms and four of them were interested. We ended up settling with the two who we thought could bring the most value. For the Series B we talked to five firms as well. The round was closed very quickly. We had the first contact discussions in early January. We had the redemption in mid-February and the round was closed in mid-March. It went really well, partly because of the track record leading us in

and partly because the company was doing really well. But in terms of what I’ve seen other entrepreneurs do now, it really is a numbers game. A lot of VCs will just not be interested, will just not get it, but in that case just move on and go to the next. Again, there are active investors out there and some people will get it and some might think it’s a really great idea. Dave Lavinsky: How do you go about choosing VCs? You talked about you had four interested and you chose two. Obviously that’s a great position to be in. Was it a valuation issue? Was it fit with the partners? Was it strategic value? What were the main criteria that you used to determine which VCs that you wanted in the round? Renaud Laplanche: It wasn’t so much valuation. At the end of the day whether you end up with a $30 million or $50 million valuation, that’s not going to make a very big difference. What is going to make a difference is if you have the right partners to build the company up. I tend to pay a lot more attention to the person who’s going to be on the board rather than the firm behind it. The firm is important. For sure it needs to be a firm that’s big enough to be able to participate in following rounds and to add the size and the scale really provide the value and connections for the other partners. All those things are important but not as much as the person who’s going to be on the board, who’s really going to help make some of the key decisions and really would be the person who brings the most value. We really decided based on the individuals more than the firms. Dave Lavinsky: Excellent. Can you go a little bit further with that in terms of the person on board? Because a lot of entrepreneurs and I don’t know if you were in this position when you were first raising capital for Triple Hop, a lot of first time entrepreneurs just see the VCs as the ability to write a check. They don’t understand the strategic value and the value of having one of them sit on your board. Can you talk through a little bit about maybe some more concrete examples of the value they bring to you, particularly now that you’re a more seasoned entrepreneur?

Renaud Laplanche: Sure. A good board can deliver really great value for the company both in terms of the strategic input and guidance. When you look at probably most board members at the large VC firms sit on another five or six boards and they talk with their partners at least once a week and get information and benchmarks and data points from maybe another fifty or sixty companies. So they are aware of a lot of the things that area happening on the market and are able to deliver that information to you in a way that would take you a lot of time and resources to get that information by yourself. Good board members have a lot of experience. They’ve been through situations that we might be entering many times before and can provide benchmarks and best practices and guidance on how to deal with those situations. Good board members are also very well connected and they can provide key introductions to other firms down the road when raising capital again but also to key partners, either companies in their portfolio or companies they have connections to, including large companies. Most of our board members are very well connected here within Silicon Valley to many of the big firms and financial services firms that we do business with or will do business with in the next few months. Dave Lavinsky: Excellent. One final question for you -- what other lessons do you have for entrepreneurs who are seeking capital to start or grow their businesses now that you’ve done it a few times? Renaud Laplanche: I think we touched upon it already. One is really recognizing that it is a very time consuming process but it’s also a very important process. Certainly talking to a lot of firms takes more time than just talking to two or three firms. But I think in the current environment it is important to go broad because there are just less deals getting done and investors are suddenly not as quick to issue term sheets than they were two years ago. It is important to go forward. At the end of the day it might seem like a waste of time initially but at the end of the day it’s probably going to get a deal done quicker. As I said probably not focus too much on valuation but really focus on who are the right people to help you build the company going forward.

Dave Lavinsky: Excellent. I think that was great. Once again, Renaud Laplanche, the CEO and founder of Lending Club. I encourage everyone listening to this call to check it out. Once again, LendingClub.com. To reiterate, for entrepreneurs you can raise up to $50,000. You’d have to raise $25,000 to start with. Then six months later after making your principal and interest payments you’ll be eligible for another loan up to $25,000. I do encourage everyone to check it out. Renaud, that was some great information based on your experience and I really appreciate your time today. Renaud Laplanche: It was a lot of fun. Thank you. Dave Lavinsky: Excellent. Thanks a lot. Renaud Laplanche: Bye.