Avant is the fastest-growing startup since Groupon . Lending Times interviewed their team to identify how they were able to reach a $2 bil valuation in only 3 years.
Avant’s ( www.avant.com ) Co-founder John Sun tried for a loan from a brick and mortar institution and found the process to be time-consuming and frustrating. This snowballed to Avant, an attempt at re-inventing the consumer finance market. John Sun, with his other co-founder Paul Zhang lured Al Goldstein, their previous boss at Enova International (previously CashNetUSA) to co found Avant with them. Goldstein, who had started Enova as an online Subprime lender had already achieved great success in the industry when he sold the company for 250 million dollars in 2006.
Avant started as Avant Credit and in direct competition with well funded peers like Lending Club and Prosper. The USP which helped differentiate the company was its willingness to finance the so-called “Middle America” or “Near Prime Debt”. Unlike Lending Club and Prosper, who were focussing only on Prime and Super Prime Debt with FICO score of 660 and more, Avant with its 1000 variable model and prior experience of the CEO in subprime credit catered to all credit levels. Another reason for targeting Near Prime was because of the start-up’s unique funding model. The company in the initial starting up period kept almost 100% of the loans on its books. This translated to Avant being more of an Online Bank versus the loan originator model of Lending Club and Prosper. This strategy resulted in a higher cost of funds and automatic targeting of near prime so as to make the spread between borrowing and lending more attractive.
The unique model of keeping the loans on its balance sheet has enabled the company to fund the borrowers in as little as a day. This has created a moat around the business versus the established competitors who take an average of 7 days to approve a loan. A borrower looking for immediate cash has no other option but to turn to Avant for immediate requirement. The company does not charge any origination fee as compared to 1-5% of loan amount charged by Prosper and Lending Club. The company has also expanded to UK by opening an office in October 2013 just 8 months after issuing their first loan. The Middle America has been a very fertile hunting ground for Avant. In an interview, Goldstein described their average customer as Americans making 40-85 grand a year with an average FICO of 650. The upstarts had left 40-50% of the addressable market underserved and Avant has swooped in aggressively to capture the market. It is important to realise that prime and super-prime customers would most likely have traditional options of debt open to them at competitive rates. The ability to take risk on below prime and to stomach the higher delinquency rates has helped in acquisition of new customers.
Their growth strategy seems to be appreciated by investors who have poured more than 650 million dollars in the Chicago start-up. The last round, a series E was closed in November 2013 at a rumoured Valuation of around 2 Billion Dollars. The series E saw marquee investors like General Atlantic, JP Morgan, Tiger Global and 4 others pump in 325 Million Dollars. The company has also raised almost 1.1 Billion Dollars in Debt and has a loan portfolio of more than 2 Billion dollars. Its 350 thousand customers have given it a 4.5 rating on CreditKarma, with 76% of those ratings being 5 stars. The 800 employee company also bought out a debt management app and platform, ReadyForZero. Rapid growth has fuelled rumours of an IPO, but the CEO is sitting tight after seeing the backlash against listed peers like Ondeck and Lendingclub.
The next course of growth story is now being written by the management, who is looking to muscle in the Auto Loans and Credit cards segment. Considering that according to Equifax, more than one third of such loans were taken out by subprime borrowers in 2015, Avant is going after a massive addressable market. The company has also restructured its Balance Sheet with a securitization deal with Jefferies Investment Bank. So the company is earning a second income stream by allowing investors to buy its portfolios at a premium. The mix between the balance sheet lending and securitization is 50-50 and would lead to a sustained ramp-up in credit as the company would no longer be constrained by the leverage on its balance sheet. The major concern for both equity and debt investors is that as seen in the 2008 crisis, the subprime category will fall off a cliff on the first sign of trouble in the economy. Their riskier portfolio has a delinquency rate 10% higher than its peers and the company can start haemorrhaging serious money if this rate were to double. The founders have stated in many interviews that their secret sauce is the over 1000 Variable model. FICO metrics like repayment history on cards, mortgages and auto loan are considered along with “non-traditional data” like apartment rental information, cell phone bill history and even qualitative elements like the time of filling out the loan application, use of upper-case or lower-case letters, etc.
The company charges 9-36% on its loans versus 6-33% for Lending Club and 6-36% for Prosper. The investors understand the enhanced interest is due to servicing of the subprime sector. The important issue is whether the investors have priced their risk correctly on funding a company keeping its subprime loans on its balance sheet and more importantly, will the company be able to survive a 2008-like downturn when subprime borrowers were the first to be laid off during a recession. Till the jury is out, it certainly seems that Al Godstein and his team at Avant have been able to find gold in the middle of the pyramid.
Authors : Heena Dhir and George Popescu