Renaud Laplanche's journey from scandal to second act
Within three months of his ouster from LendingClub, the major online lender he founded, Renaud Laplanche had a new digital lending company up and running called Upgrade. Two years later, the startup has raised $142 million and made $1 billion in loans to more than 100,000 people.
The story of how he did this says a lot about what it takes to succeed as a fintech startup, where the online lending industry is heading, and the rewards of being willing to start over and try again after absorbing the lessons of the first try.
Laplanche founded LendingClub, one of the first so-called marketplace lenders, in 2006. The company set out with the premise that consumers would be able to lend money to each other, cutting out the middleman: banks. This would result in lower-cost, more democratic loans and help people recover from costly credit card debt.
The company soon made a change to its model by selling the loans to institutional investors such as banks. It grew quickly — some say too quickly.
In May 2016, LendingClub’s board forced Laplanche and three other executives to resign.
Reports at the time said the board lost faith in Laplanche after it was informed that $3 million in LendingClub’s loans had been sold to the investment banking firm Jefferies with falsified dates. Loans were made to look newer to encourage their sale.
Though Laplanche discovered the doctored loans and ordered the internal probe, the board claimed he did not give investigators a complete account of what he knew.
The board also said Laplanche failed to fully disclose a personal interest he held in an outside fund, Cirrix Capital, while the company was contemplating an investment in the same fund.
Laplanche and other principals in the LendingClub saga would not speak on the record about the matter because there are ongoing investigations. According to news reports, the Justice Department and the Securities and Exchange Commission are investigating if Laplanche had any role in the suspect transactions that preceded his resignation.
Several knowledgeable sources shared this account of what happened off the record: Someone two levels down from Laplanche changed the dates on a few loans so they would meet Jefferies’ requirement for the age of loans it wanted to buy. The person confessed to Laplanche, who asked the employee to stay on and help fix the problem. Board members who thought Laplanche should have fired that person on the spot then fired Laplanche.
Some say the board overreacted.
“The whole LendingClub debacle was overblown in my opinion,” said Peter Renton, founder of the website Lend Academy and the LendIt online-lending conference. “We have only ever really heard one side of the story.”
Some observers say there was excessive pressure on the company to grow, almost forcing mistakes to be made.
“In retrospect, LendingClub probably went public too early,” John Buttrick, partner at Union Square Ventures, an investor in LendingClub and Upgrade, wrote in a blog. “Financial services companies are held to high standards in the public markets these days, regardless of size or vintage. In May 2016 the company faced compliance issues, and Renaud left the company, a difficult and unfortunate event for all involved.”
After leaving LendingClub that May, Laplanche took several weeks off to hike in the Swiss Alps with his family. In early summer, he gathered a small team that included former LendingClub executives to talk about creating a new company.
In August 2016, they formed Upgrade and moved into a San Francisco office a few blocks from LendingClub’s headquarters.
Jefferies, the bank that bought the LendingClub loans whose dates were altered, was the first loan buyer at Upgrade, Laplanche said. Jefferies did not respond to a request for comment.
LendingClub investors also quickly supported Upgrade.
“The investors heard the full story and continued to support Renaud,” Renton said. “He was able to raise a huge amount of capital quickly and relatively easily in a difficult fundraising environment.”
Laplanche said the people closest to LendingClub were the first to put money into Upgrade.
“Many of the initial investors were also investors in LendingClub or were observers on the board, like Union Square Ventures,” he said. “They had a really good sense not just of what happened but also of the previous 10 years and our approach to building an online lender.”
Buttrick at Union Square backs this up.
“He came to us and said he had unfinished business and was working on LendingClub 2.0,” Buttrick recalled in an interview. “We were very interested in that. Renaud and his team did a fabulous job of execution at LendingClub. I think his track record speaks for itself. Renaud is a clear thought leader in the consumer credit space and widely respected.”
Union Square Ventures invested in Upgrade in December 2016 and then again this August, when Upgrade raised $62 million in a Series C round led by CreditEase Fintech Investment Fund, bringing its total to $142 million in equity capital. All of its major investors, including Silicon Valley Bank, Union Square Ventures, Apoletto, FirstMark Capital, NOAH, Ribbit, Sands Capital, and Vy Capital, participated in this latest round.
To anyone who asks how Upgrade is going to prevent the re-dating of loans, Laplanche has a tech-savvy answer: blockchain.
It is using an Ethereum blockchain to track interactions with borrowers. Every borrower agreement is committed onto the blockchain, so there is a time-stamped, immutable record of the transaction and what that document looks like at that point in time.
“If there was a change to that document or someone tried to alter any data, that would be immediately visible,” Laplanche said.
Though people often refer to Upgrade as “LendingClub 2.0,” Laplanche prefers another label.
“I’d rather call it online lending 2.0,” he said. “We have a lot of experience and learned a lot from LendingClub, but we also try to look at the entire online lending industry and the first generation of platforms that were built during those 10 years from 2006 to 2016, and learn also from all the good ideas that I did not have at LendingClub and others had — but also from mistakes we all made and that should be corrected.”
Laplanche said this second launch has been easier than the first.
“Twelve years ago, the concept of borrowing online was still in its infancy, the personal loan product had fallen out of favor, and there were a lot more credit card originations than personal loans,” he said.
Today, the idea of borrowing online is more widely accepted by consumers, he said, and the personal loan has been reestablished as a mainstream product that can be cheaper than credit cards.
The challenge for Upgrade is to stand out among the stiffer competitive landscape. Goldman Sachs’ Marcus, SoFi and Upstart are just a few online lenders building traction.
One thing Laplanche said he is doing differently at Upgrade is focusing on consumer financial health and a range of lending products, including lines of credit, credit cards, mortgages and auto loans. The idea is to build more of a relationship with customers.
“At LendingClub, our relationships with our customers were very transactional because we had one product,” he said. “We would make a loan to a customer and not much would happen for two or three years, when we would make a loan again. That doesn’t encourage a lot of customer loyalty or brand recognition or affinity with our customers.”
Upgrade’s Credit Health service includes credit monitoring, credit alerts and credit education content. A credit score simulator lets the user see all their credit lines, how much they owe, then simulate the impact of decisions they make — like taking on a new credit card or making an additional mortgage payment — on their credit score. The simulator is based on credit bureau data.
Credit Health is meant to help consumers make better financial decisions, which might benefit Upgrade in the long run and act as a “glue” between products.
“That’s something that’s mostly missing from the first generation of platforms,” Laplanche said.
SoFi also tries to sell customers multiple types of loans and banking services, Laplanche acknowledges, but it focuses on young, high earners whereas Upgrade focuses on mainstream customers.
The average Upgrade borrower is late 30s or early 40s in age, with a 690 credit score and an annual income of $78,000, about twice the national average. The higher income is necessary because Upgrade heavily considers cash flow in its underwriting model.
The fact that Upgrade attracted 100,000 customers and $1 billion in loans in a little over a year stands out.
“Outside of Goldman Sachs’ Marcus, that’s the fastest ever,” Renton said.
Upgrade also offers an online personal credit line that lets customers borrow up to $50,000. That balance is then converted to an installment loan with a fixed interest rate and a term of up to five years. The annual percentage rates range from 6.46% to 35.9%.
This is a new product that’s never been done before, Renton said.
“That to me is more significant than anything else because it’s new, it’s different, and it sets him apart,” he said.
Buttrick agreed that competitors do not offer this product yet. “[Upgrade is] more nimble at figuring out how to meet the needs of current consumers of credit.”
This is not a ding on LendingClub and other online lenders.
“This is a huge market," Buttrick said. "There’s plenty of room for multiple billion-dollar companies in this space.”
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