The Advent of Crowdfunding and Marketplace Lending at Berkeley-Haas

Questioning the Status Quo

As one of the top business schools in the world, Berkeley-Haas has always been at the forefront of bringing to light the latest and greatest trends that influence our economy and shape the way we conduct business. Our school’s defining principle of ‘Question the Status Quo’ also encourages our faculty and students to initiate engaging and insightful conversations in all leading areas of innovation and marketplace disruption. While the concept of peer-to-peer lending first developed in U.K. in 2005, and has continued to expand into the U.S. since, however, the recent rapid emergence of this FinTech space, thanks largely to the passage of the 2012 JOBS Act, has largely escaped academic platforms, including Berkeley-Haas, till now.

This past semester, two Berkeley-Haas Executive MBAs, Lucky Sandhu and Kanak Rai, organized the first-of-its-kind ‘Crowdfunding and Marketplace Lending Panel’ event in which they brought together industry thought leaders, Cal and Haas faculty, students, alumni, and guests from other universities, to initiate an open and engaging conversation, largely around opportunities and risks, while separating hype from facts, surrounding crowdfunding and marketplace lending.

A Warm Welcome on Campus

The evening began with an hour of networking, as over 100 attendees Panel_2gathered from Cal and from around the Bay Area. All four of Berkeley-Haas’s programs – Undergraduates, MBAs, EMBAs, and EWMBAs were well-represented, with students, alums, faculty and guests mingling together over hors d’oeuvres and drinks. Dean Rich Lyons kick-started the event with a warm welcome speech, in which he highlighted the importance of leading the conversations in Finance and Technology as a means to furthering innovation in FinTech and learning from each other as ‘Students Always’.

The panel event began with Kanak Rai, EMBA ’15, followed by Professor Lee Fleming, of the Fung Institute of Engineering Leadership acknowledging the many event sponsors and personnel who had come together to make this event possible. Kanak further spoke about why and how he and Lucky went about understanding the importance of a discussion around this topic at Berkeley-Haas. Haas Professor Adair Morse then gave a contextual background about crowdfunding which she explained was attracting a lot of interest and capital in the three silos – rewards-for-finance philanthropy, debt and equity. She explained how marketplace lending represented the most massive and fastest growing area in the debt silo, i.e., personal, small business and real estate loans. Professor Morse described the various types of debt recipients, their evolving nature, and the various investor classes funding these recipients.

Meeting the Star Panel

Lucky Sandhu, EMBA ’15 led the panel discussion by inviting each of the four accomplished panelists to briefly introduce themselves.

Panel_1

  • Jason Best, Co-Founder and Principal, Crowdfund Capital Advisors, was also directly instrumental in legalizing crowdfunding in the U.S. through the JOBS Act of 2012.
  • Chris Brocoum, Vice President of Finance, Lending Club, and Haas alum.
  • Jeremy Todd, Director, West Coast Sales, Orchard Platform, and UC Berkeley alum.
  • James Wu, CEO and Founder, MonJa, a San Francisco FinTech startup that empowers institutional investors with market insights for marketplace lending, and Haas alum.

Key Insights from the Panel

After panelist introductions, Lucky got straight to the point and initiated the panel insights with the question, “What were experts saying back in 2010-2011 about debt and equity crowdfunding?” Jason Best answered by describing the reaction to equity crowdfunding as early as four to five years ago, “People said we were crazy and unencumbered by facts.” Clearly, views on this have shifted dramatically as we consistently heard from all panelists on why this is a trend with the potential to completely change the way that the entire lending ecosystem works.

In response to a question on why marketplace lending has gotten so much traction recently, Chris Brocoum and James Wu talked about the tremendous opportunity in the spread that existed between what traditional banks and credit card companies charge (annual percentage rates well upwards of 18%) and what they offer investors on their deposits and savings (around 1%). Marketplace lending allows investors with higher yields in their investments while allowing borrowers to lower their cost of capital. Jeremy Todd further noted that traditional banks have not extended credit quite as much to both consumers and small businesses since the financial crises of 2008. He described marketplace lending as a fundamental shift towards speed and efficiency in getting a loan approved – “a matter of minutes” versus up to 30 days that traditional banks take in approving and originating the same loan.

In highlighting the estimated total addressable market (TAM) for marketplace lending, Jeremy Todd offered the following figures: There are already almost 150 lending platforms in the U.S. In 2014, $12 billion in loans funded. In 2015, $25 billion in loans is expected to fund. This figure is projected to grow to $250 billion in the next five years. James Wu added that Foundation Capital and Goldman Sachs put the TAM at $1.0 trillion and $1.3 trillion, respectively.

Credit risk models are key in the way debt is underwritten and originated in marketplace lending. Risk mitigation in credit models holds the longer term competitive advantage for firms as they vie for sustainable supremacy amidst growing competition. Chris Brocoum noted that big data was playing a critical role in how unique credit models are being developed. More specifically, how much data does a company have? What is the history of such data? What level of analytics can be performed from the available data?  It is these pieces tied together that will provide for the most valuable, sustainable and resilient of all models.

In looking at imminent risks confronting marketplace lending, the panelists noted several areas. These include the lack of secondary markets which limit the amount of capital available for making additional loans, inability of smaller players to securitize their loan pools which further constrains liquidity, future business cycle downturn risks, investors continued thirst for yield and how that would be maintained in the face of increasing competition, and regulators from the U.S. Treasury closely monitoring this space for potential additional regulation in the future.

This was an event that utilized the full resources that Berkeley-Haas has to offer, not only in terms of organization and space, but also by demonstrating the power of our vast network and collaborative community. Many thanks to Lucky and Kanak for ‘Questioning the Status Quo’ and for going ‘Beyond Themselves’ to add value to our collective Berkeley-Haas experience.

 

Join www.Facebook.com/BerkeleyHaasCrowdfunding for continued conversations on all things crowdfunding at Berkeley-Haas.

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