Xconomist of the Week: Rebecca Lynn on the Financial Services Boom
Morgenthaler Ventures partner Rebecca Lynn shows up at just about every Health 2.0 event in Silicon Valley—heck, she organizes some of them, like Morgenthaler’s annual DC to VC health IT showcase. So if you only went to those events, you might think that was Lynn’s whole investing focus.
But in fact, the Xconomist’s portfolio at Morgenthaler ranges from health (Practice Fusion) to cloud computing (Socrata) to financial services (Lending Club). That kind of variety is mirrored in Lynn’s own resumé, which includes a BS in chemical engineering from the University of Missouri, a JD from the U.C. Berkeley School of Law, an MBA from Berkeley’s Haas School of Business, and jobs at Procter & Gamble and NextCard, an early online credit card company.
Lynn thinks it’s a great time to be innovating in financial services, for at least three reasons. First, an economic environment where interest rates are so low and lending practices are so strict that people are looking for places other than banks to park their money or get loans. Second, the advent of “big data,” including social data, which gives Web-based financial services companies new ways to evaluate risk and tailor their services. Third, the mobile revolution, which gives everyone instant access to information about their finances.
I talked with Lynn a couple of weeks ago about Lending Club and Pageonce, two Morgenthaler portfolio companies that are busy exploiting these trends. That week, Lending Club had just announced a big coup: the addition of John Mack, who served as CEO of Morgan Stanley until 2009 and chairman of its board until 2011, to its board of directors. Mack is a heavy hitter in the financial world, so Lending Club signing him up as a director was roughly equivalent to a music startup recruiting David Geffen or a food startup roping in Gordon Ramsay. Lynn was very happy about the news—and she explained in our conversation why financial services is an increasing focus for her firm.
Xconomy: You joined Morgenthaler in 2007 and financial services has been one of your focus areas, along with health IT, mobile, and Internet services. But you have a background in financial services that predates Morgenthaler.
Rebecca Lynn: I spent four years at NextCard, the first online credit card company. We owned the patent for real-time online approval for credit card consumers. I was employee number 30, was the first product manager, and ended up running all of their online marketing. That background gave me good exposure to consumer credit. A lot of VCs on the West Coast have payment experience, but very few people have credit experience, so I see a lot of deals in the credit and underwriting world just by virtue of that. When I first came to Morgenthaler I did a deep dive in financial services because that was my background.
X: One of your biggest financial services investments is in Lending Club. How did that come about?
RL: I was really intrigued by their model, their vision. They were disintermediating the banks. You can’t get much bigger than that. And they were doing this in the right way. They were scoring the loans themselves. They were also playing in the prime and superprime market, which, as I learned at NextCard, is super important. NextCard got into subprime [loans] very early and that is really what brought the company down. Subprime is something you can do later in a company’s life, but if you are doing prime and you have runway in front of you, you should keep doing prime.
I also liked how analytical and rigorous the company was, in terms of their understanding of the loan business. They didn’t take a balance-sheet risk. It’s not a bank; it’s not a financial institution at all, it’s a technology platform. That is exactly the kind of model I like to see when I’m doing early stage investing, because it’s a capital-efficient model. This is a marketplace where investors and borrowers are able to meet.
X: Say more about their model. Why is it more attractive than just starting a bank?
RL: Lending Club has a lot of efficiencies. They are not taking on deposits; they are strictly a platform. A borrower comes in, applies for credit, and they will match that person with a lender, and investor on the other side who wants to put money into the company. It’s not a brick-and-mortar situation. If you look at banks themselves, they are incredibly inefficient. If you put money into a savings account, you are getting virtually nothing back in interest. If you have an 880 credit score, which is incredibly high, you are still going to pay 13 percent to borrow money. The bank is keeping that. When you’re paying 17 or 18 percent on a credit card, you are just servicing the inefficiency of running these big institutions. There is a much more efficient way to run a company.
What Renaud [Laplanche, Lending Club’s founder and CEO] did is create a platform for investors and borrowers to interact directly. If you are an investor, you can choose to … Next Page »
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