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About the Author IPOdesktop

During the IPO season Francis Gaskins, editor of IPOdesktop.com & director of research for Equities.com, regularly appears on CNBC TV, Bloomberg, thestreet.com & other financial cable channels. On the day of the Visa IPO he appeared on four cable TV financial shows including Bloomberg & CNBC. Over the past five years he has been quoted over 500 times by such financial media as the Wall Street Journal, Bloomberg, Reuters, Associated Press, USA Today among others. Those quotes are available at IPOdesktop.com. His varied personal interests include violin playing. For example, he is concertmaster of the Palisades Symphony. He also holds an MBA from Harvard Business School (finance) and an AB from Princeton University (economics).

IPO Preview: OnDeck Capital


Based in New York, NY, OnDeck Capital (Pending:ONDK) scheduled a $170 million IPO on NYSE with a market capitalization of $1.1 billion at a price range midpoint of $17 for Wednesday, Dec. 17, 2014.

The full IPO calendar is available at IPOpremium

SEC Documents

Manager, Joint-managers: Morgan Stanley, BofA Merrill Lynch, J.P. Morgan, Deutsche Bank Securities, Jefferies
Co-managers: Raymond James, Stifel, Needham

End of lockup (180 days): Monday, June 15, 2015
End of 25-day quiet period: Monday, January 12, 2015

Summary
ONDK is a leading online platform for small business lending. ONDK is seeking to transform small business lending by making it efficient and convenient for small businesses to access capital.

Valuation
Glossary

Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs*

Price /BkVlue

Price /TanBV

% offered in IPO

annualizing Sept. 9 months

 

*Adj net loss

     

OnDeck Capital

$1,125

17.6

-222.1

4.4

4.7

15%

             

LC price range mid-point raised to $13, priced at $15, traded at $25

   

LendingClub (NYSE:LC) at $25

$9,025

47.3

3384.4*

13.8

7.9

14%

     

*adjusted for stock comp

   
             

Conclusion
Buy

Different business model than LendingClub

LC is a platform that collects transaction fees but doesn’t retain term loans. LC Is not subject to credit risks. ONDK retains term loans, like a bank or finance company. ONDK is subject to credit risks.

  • Gross revenue +156%
  • Loan losses 44% of gross revenue; Funding costs 12% of gross revenue
  • Net revenue +193%, operating loss -10% of net revenue
  • Adjusted loss -8% of net rev, P/E of -222 means cash burn rate vs. market cap is relatively low

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business
ONDK is a leading online platform for small business lending. ONDK is seeking to transform small business lending by making it efficient and convenient for small businesses to access capital.

Enabled by its proprietary technology and analytics, ONDK aggregates and analyzes thousands of data points from dynamic, disparate data sources to assess the creditworthiness of small businesses rapidly and accurately.

Small businesses can apply for a term loan or line of credit on ONDK’s website in minutes and, using its proprietary OnDeck Score, ONDK can make a funding decision immediately and transfer funds as fast as the same day. ONDK has originated more than $1.7 billion in loans and collected more than 4.4 million customer payments since ONDK made its first loan in 2007.

ONDK’s loan originations have increased at a compound annual growth rate of 127% from 2011 to 2013 and had a year-over-year growth rate of 171% for the nine months ended September 30, 2014.

The 28 million small businesses in the United States are integral to the U.S. economy and the vibrancy of local communities, employing approximately 50% of the private workforce.

According to Civic Economics, spending at local retailers and restaurants returns to the local community on average more than double the amount per dollar spent as compared to spending at national chains.

Small business growth depends on efficient and frictionless access to capital, yet small businesses face numerous challenges that make it difficult to secure such capital.

Small business owners are time and resource constrained, but the traditional borrowing process is time consuming and burdensome.

Small businesses surveyed by the Federal Reserve Bank of New York indicated that the traditional funding process required them, on average, to dedicate 26 hours, contact 2.6 financial institutions and submit 2.7 loan applications.

These challenges exist in part because it is inherently difficult to assess the creditworthiness of small businesses.

Small businesses are a diverse group spanning many different industries, stages in development, geographies, financial profiles and operating histories, historically making it difficult to assess creditworthiness in a uniform manner. Small business data is scattered across dynamic online and offline sources, making it difficult to aggregate, analyze and monitor.

There is no widely-accepted credit score for a small business, and frequently a small business owner’s personal credit score is used to assess creditworthiness even though it may not be indicative of the business’s credit profile.

Furthermore, small businesses are not well served by traditional loan products. In addition, small businesses often seek small, short-term loans to fund short-term projects and investments, but traditional lenders may only offer products that feature large loan sizes, longer duration and rigid collateral requirements that are not well suited to their needs.

Intellectual property
ONDK currently has six patent applications pending before the United States Patent and Trademark Office (five provisional and one non-provisional) that seek to protect proprietary techniques relevant to ONDK’s products and services.

The patent applications relate to how loans progress through ONDK’s automated platform, verification of borrower identification, fraud detection and the use and verification of certain data in its proprietary OnDeck Score.

A pending patent does not provide any meaningful intellectual property protection unless the patent is ultimately issued. ONDK intends to pursue additional patent protection to the extent ONDK believes it will be beneficial.

ONDK has registered trademarks in the United States and Canada for “OnDeck,” “OnDeck Score,” “OnDeck Marketplace,” the OnDeck logo and many other trademarks. ONDK also has filed other trademark applications in the United States and certain other jurisdictions and will pursue additional trademark registrations to the extent ONDK believes it will be beneficial.

ONDK is the registered holder of a variety of domestic and international domain names that include OnDeck.com and similar names as well as businessloans.com.

Competition
The small business lending market is competitive and fragmented. ONDK expects competition to continue to increase in the future. ONDK believes the principal factors that generally determine a company’s competitive advantage in its market include the following:

  • ease of process to apply for a loan;
  • brand recognition and trust;
  • loan features, including rate, term and pay-back method;
  • loan product fit for business purpose;
  • transparent description of key terms;
  • effectiveness of customer acquisition; and
  • customer experience.

ONDK’s principal competitors include traditional banks, legacy merchant cash advance providers, and newer, technology-enabled lenders.

5% shareholders pre-IPO

  • RRE Ventures IV, L.P. 15.0%
  • Entities affiliated with Institutional Venture Partners 14.1%
  • Entities affiliated with Village Ventures 10.6%
  • SAP Ventures Fund I Holdings, LLC 9.9%
  • Entities affiliated with First Round Capital 5.5%
  • Google Ventures 2013 L.P. 6.2%
  • Tiger Global Private Investment Partners VII, L.P. 5.9%
  • David Hartwig 9.9%
  • James D. Robinson III 15.0%

Dividends
No dividends are planned.

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