Lightspeed bets on financial disruption

The government's concern is that P2P lenders are behaving like banks but aren't regulated, which may lead to consumers getting hurt. According to market research firm Reportstack, 71 of the at least 800 online lending platforms operating in China last year went bankrupt.

"There is still a lot of uncertainty but we feel the pure online model - where it is consumer-to-consumer - is the cleanest from a regulatory perspective and also the most scalable," says Ron Cao, managing partner at Lightspeed China Partners. "We don't touch the money, it's completely P2P. The platform provides information on risk so consumers can make their decisions."

Lightspeed invested in 99Bill, one of China's earliest online payment companies, in 2006. It took several years for the regulators to establish an approach and issue licenses. Cao sees the P2P lending following a similar evolutionary path.

With this in mind, Lightspeed led a Series B round of funding for PPDai, the largest online-only P2P platform. The round was worth tens of millions of dollars - Cao declined to be more specific - and including contributions from existing investor Sequoia Capital and wealth manager Noah Holdings. The new capital will be used for operations and the continued enhancement of the platform's online credit scoring system and IT infrastructure.

Founded in 2007, PPDai's service is free for lenders, while borrowers pay a commission. The company charges 2% of the borrowed amount for loans with a term less than six months, and 4% for loans with longer period.PPDai claims to differ from many practitioners by virtue of its strong risk controls. It conducts 2,000 dimensions of analysis to determine a borrower's default risk.

"They take all kinds of data, whether it's information provided by the borrowers or social media," Cao adds. "For example, they look at the borrower's Weibo account and track how often they post, what industry they are from, where they are located and how people in that geographic area have behaved in the past. All those data are crunched."

PPDai's market share is tiny - like all online P2P operators - although Celent notes that the broader P2P lending market grew from $30 million in 2009 to $940 million in 2012. It is on course to reach $7.8 billion by 2015. Consolidation is likely but Cao doesn't see it as a zero-sum game.

"They are so small compared to how big they can be - they could get to tens of millions of users," he says. "Most companies take money from one side, guarantee some sort of return and lend it to another side for a profit. That's the basic idea but there will be variations, such as companies that focus on car financing."

 

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• Topics
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• Lightspeed Venture Partners
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