It appears that Google is looking to diversify its investment portfolio as it continues to push money into alternative lending enterprises. Google Ventures has $300 million at its disposal for investment and it is adding more companies to its list of worthy candidates. On Deck Capital, a small-business lender, received $17 million from the search giant, while putting $125 million into peer-to-peer lender Lending Club. Google knows that revenue for services like Google AdWords comes from small businesses, so it serves its own interests by investing in companies that loan these companies money, particularly during a time when conventional lenders are making it tough for start-ups to get loans. For more on this continue reading the following article from TheStreet.
Two recent events underscore Google’s (GOOG) goal to profit from alternative lending.
Google Ventures, the $300 million venture capital fund designated specifically for investments in start-ups, led a $17 million expanded Series D financing round for On Deck Capital, a six-year-old online small-business lender that’s growing rapidly.
Tech venture capitalist Peter Thiel, co-founder of eBay’s (EBAY) PayPal and VC firm Industry Ventures, also participated in the expanded round, On Deck noted in a May 1 release.
Then, Internet search giant Google took a minority stake by investing $125 million in peer-to-peer lender, Lending Club. Google’s investment was part of a secondary transaction in which the company acquired shares from existing investors, Lending Club announced in a May 2 release.
"Lending Club is using the Internet to reshape the financial system and profoundly transform the way people think of credit and investment," Google’s vice president for corporate development David Lawee said in the release.
While spokeswomen from both Google units say the two operate as separate entities (even though Google is the sole limited partner in Google Ventures), it can’t be a coincidence that both are eyeing investment opportunity in the alternative lending space. As traditional capital remains tough to come by, even with somewhat improved bank credit, alternative lenders such as On Deck and Lending Club are to be reckoned with.
A large part of the Google AdWords business comes from small businesses, so it’s in the company’s interests to see small businesses grow and expand.
The alternative lending market, which includes credit cards and receivables financing, hovers around $1 billion vs. SBA bank lending at about $35 billion.
Rohit Arora, CEO of Biz2Credit.com, an online marketplace connecting small- and medium-sized businesses with lenders and other tools and resources, says, however, that as more banks start lending to small businesses again, higher credit-quality businesses will have more choices, meaning alternative lending to those businesses is likely to decline.
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"There is still a gap for loans for businesses less than 2 years old and those looking for loan amounts up to $25,000, and this might be the gap that Google is focusing on," Arora says.
Google also could see an opportunity to help its own small merchants with a product aimed at financing AdWords purchases as well as looking to develop new credit offerings for Google Wallet customers through Lending Club, he says.
Still, if Google wanted to bet on alternative lending winners, these two companies have both been linked to potential IPOs.
Lending Club has publicly stated it is working toward an initial public offering in 2014.
"We reached profitability in Q1 2013, and right now we’re focused on scaling the company, Lending Club CEO Renaud Laplanche said in a statement. "We expect that we’ll be ready for an IPO sometime in 2014, but the actual timing will depend on market conditions,"
Lending Club has issued more than $1.65 billion in loans since 2007, including more than $350 million in the last quarter through peer-to-peer lending, which facilitates personal loans to borrowers of up to $35,000 in three- or five-year terms from qualified retail and institutional investors.
Small businesses have been increasingly using alternative forms of lending such as peer-to-peer lending when more traditional financing has been tough to get. The company also plans to expand into small-business lending later this year.
On Deck CEO Noah Breslow said in an interview in February that while there wasn’t pressure to go public this year, it could be an option in the next two to three years.
The fast-growing small-business lender has funded more than $450 million in loans to Main Street businesses through its technology-led loan platform.
Yet, given that Google Ventures is involved now, combined with the fact that On Deck keeps adding more investors to its list, and lending by the firm continues to rise — even as traditional lenders dip their toe into small-business lending again — it’s feasible that time frame could be stepped up.
Breslow wasn’t available for comment.
"On Deck has found an efficient way to connect millions of small businesses around the country with the working capital they need to grow their companies," Karim Faris, general partner at Google Ventures, said in a statement. "We invested in On Deck because we believe in the team’s game-changing vision, strong talent and disruptive technology.
"The resiliency of our economy heavily relies on a healthy financing environment for small business owners who are very focused on building their enterprise, and alternatives for getting financing are limited and very cumbersome. OnDeck aims to make this process fast and as lightweight as possible, allowing entrepreneurs to focus on creating and selling their products and services," Farris said in a follow-up statement to TheStreet.
The Google Venture investment brings On Deck’s Series D financing to a total of $59 million. The company announced in February that it had raised $42 million in a round led by Institutional Venture Partners. On Deck had previously secured a credit facility from Goldman Sachs (GS) and Fortress Investment Group (FIG) in August 2012.
Google Ventures, formed in 2009, has 160 companies in its portfolio. It says it’s mission is to provide "seed, venture and growth stage funding to the most innovative and promising entrepreneurs across a variety of stages."
The fund has sold a number of its portfolio companies, including acquisitions by Facebook (FB), Yahoo! (YHOO), AOL (AOL) and even, Google.
It’s also had a few successful IPOs, including HomeAway (AWAY) and Silver Spring Networks (SSNI).
A Google Ventures spokeswoman said that the fund is not a "typical corporate strategic fund," meaning that it invests for financial return as opposed to funneling ideas and companies up to the parent company.
Still it’s got to be a strong vote of confidence for both of these companies and for the alternative lending space in general that Google is now behind them.
This article was republished with permission from TheStreet.