IPO Report: On Deck Capital (ONDK)

December 16, 2014

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6 min read

On Deck Capital (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. It is based in New York, NY.

Three other companies are scheduled for the week of Dec. 15, 2014. The full IPO calendar is available at IPOpremium.

Manager, Joint-managers: Morgan Stanley, BofA Merrill Lynch, J.P. Morgan, Deutsche Bank Securities, and Jefferies.

Co-managers: Raymond James, Stifel, and Needham.

ONDK scheduled a $170 million IPO with a market capitalization of $1.1 billion at a price range midpoint of $17 for Wednesday, Dec. 17, 2014 on NYSE. SEC Documents

On Deck Capital IPO Overview

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 mos			*Adj net loss
On Deck Capital (ONDK)	$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 (LC) at $25	$9,025	47.3	3384.4	13.8	7.9	14%
			*adjusted for stock comp

On Deck Capital IPO Conclusion

Buy

Different business model than Lending Club (LC)

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 rev +156%

Loan losses 44% of gross revenue, Funding costs 12% of gross rev

Net rev +193%, Operating loss -10% of net revenue

Adjust loss -8% of net rev, P/E of -222 means cash burn rate vs market cap is relatively low

On Deck Capital IPO 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 durations and rigid collateral requirements that are not well suited to their needs.

On Deck Capital IPO 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.

On Deck Capital 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.