Is LendingClub a financial company or a technology firm? That's perhaps the most important question hovering over the company's highly anticipated initial public offering.
It's also a question with big implications for the rest of the so-called marketplace lending industry and, potentially, the broader financial services world.
If LendingClub is primarily a technology company, then its projected valuation of $4.3 billion to $5 billion seems entirely plausible. After all, the San Francisco-based company is the undisputed leader in a fast-growing, disruptive sector. Much like other hot tech startups, LendingClub's revenues have been more than doubling each year, with no obvious end to that pattern in sight.
The fact that LendingClub lost more than $23 million in the first nine months of this year? That's par for the course in Silicon Valley, where profitability is routinely postponed for the sake of growth. Consider the example of Twitter, which wasn't profitable when it went public last year, and still debuted with a market capitalization of $24.5 billion.
Some observers see LendingClub's growth trajectory as poised to follow those of high-flying tech firms. Henry Coffey, an analyst at Sterne Agee, wrote in a recent report that LendingClub shares are likely to be valued from $13 to $17 apiece, which is above the $12 to $14 level that LendingClub has projected.
Coffey wrote that "over time" he expects to see LendingClub's platform "touching all areas of the consumer and small business lending equation."
That prediction mirrors the bold claims made by LendingClub itself. "Borrowers are inadequately served by the current banking system," the firm stated in a pre-IPO regulatory filing, positioning itself as the future of the lending business.
At the moment, investors appear poised to buy into the idea that LendingClub is primarily a technology company. That view rests partly on the premise that the firm's underwriting capabilities will prove more efficient than what came before, and its web-based loan application platform will make bank branches obsolete.
But what if LendingClub is primarily a financial company, albeit one with a novel method of facilitating loans?
If so, there are no clear parallels for the firm's expected valuation. At a $5 billion market cap, LendingClub would be trading at 20 times its likely revenue for 2014, according to Autonomous Research analyst Brian Foran.
That ratio would "leave even financial technology investors with a nosebleed," Foran wrote in a recent research note. The market capitalizations of the closest comparable financial firms, Visa and MasterCard, are roughly nine to 12 times their annual revenue, he found.
When compared to banks, LendingClub is expected to debut at a higher valuation than regional institutions such as Synovus Financial Corp., which reported profits of around $180 million over the last four quarters.
There's also the fact that LendingClub generates most of its revenue today from personal loans, which make up a small segment of consumer lending, and have had ups and downs in different economic cycles.
"The actual product they're selling is plain-vanilla, old, and frankly has a very mixed history when banks have sold it," Foran said in an interview.
LendingClub's IPO, which is expected to happen this week, has enormous significance for the entire marketplace lending sector, which has been growing by leaps and bounds, albeit from a tiny base.
By extension, it also has big implications for U.S. banks, because the explosive growth that LendingClub's investors will expect would come at the expense of banks' small business and consumer lending. While banks are investing in marketplace loans on the back end, their businesses would change significantly if they came to rely on online platforms.
Until recently, marketplace lending was known as peer-to-peer lending, but LendingClub and other loan platforms have increasingly come to rely on institutional investors, such as banks and hedge funds, rather than individual lenders. Strong loan demand by those large investors has led to a slew of new entrants into the sector.
Sam Hodges, co-founder and U.S. managing director of Funding Circle, which operates a small-business loan platform, said marketplace lending is a fundamentally a technology business, though knowledge of financial services is necessary to succeed.
Ron Suber, president of Prosper Marketplace, which is Lending Club's biggest competitor, offered a similar take. "We are a collision of Wall Street, the banking industry, and Silicon Valley," he said.
If Lending Club's IPO goes well, it's a positive sign for other marketplace lenders. OnDeck, a small business lender, also plans to go public soon. That figures to be the next test of the thesis that these are tech companies, and finance is merely the field they happen to be disrupting.
Colin Wilhelm contributed to this report.