Last month Google sunk $125 million into Lending Club – the leader in peer-to-peer lending. Does it mean anything about Google? Lending Club? The banking industry? Yes….a little. But much less than most pundits in the personal finance space would have you think.
Background On Lending Club
Lending Club is one of a few companies left standing in the peer-to-peer lending space. The SEC shook up this industry starting in 2007 and most of the players took their marbles and went home at that time. But Lending Club survived and thrived. Their model of putting individual borrowers and lenders together evolved into a billion dollar industry and they are the undisputed leader of the pack.
LC has gone big time. Their board of directors is full of big shots like former U.S. Secretary of Treasury Lawrence H Summers and other high achievers from the financial world. They also have an impressive list of investors. But the media really sat up and took notice when Google (GOOG) plunked down their $125 million to buy a piece of the action. When they made that move, it automatically tripled the value of Lending Club (in about a year) to over $1.5 billion. That’s nice for Lending Club and it may turn out to be a good investment for Google. But here’s why it’s not such a huge deal.
1. The Money
It’s true that for some people $125 million might be considered a lot of money, but not for Google. Look at Google’s balance sheet for 2012. They have close to $15 billion in cash and $60 billion in current assets. This $125 million investment represents less than 1% of its cash for crying out loud.
And you can see that total current assets have exploded by over $10 billion a year for each of the last couple years. Google added $125 million to its balance sheet in less than 20 days. In other words, if the value of their Lending Club investment goes to zero, they can make it up in about 3 weeks.
2. The Investment
Just as you make your investments as part of a strategic plan, Google’s move must be understood in context. The investment division of Google (Google Ventures) has gone deep and wide into peer-to-peer everything idea. They believe, and they are probably right, that large centralized businesses are going to be run out of town by the internet that can put sources and users together faster and cheaper.In the last year, Google Ventures bought into six other crowd-based businesses such as CutomMade, Luminate, Trada, Rockbot,Smarterer and Space Monkey. Nobody is investing in crowd based businesses like Google is.
Each of these companies do different things and the range is rather diverse. They cover jewelry, furniture, online publishing, SEO, music and a learning company.
These moves could signal that Google wants to become Sears/Wal-Mart/Amazon/Apple/Craigslist/Citi all rolled up together. But I doubt it. It’s more likely that Google made these investments as a way to make a few shekels before these companies go public.
Its investment in Lending Club is no different. LC is profitable and growing like crazy. Google is taking advantage of a good investment opportunity – why not?
What this means for Lending Club
It means nothing right now. Lending Club looks solid. They are a legitimate company and doing a lot of things right. Google’s investment reflects what the market already knows. It doesn’t change anything.
Down the line, Google could impact Lending Club’s direction as a significant shareholder. And Lending Club’s future isn’t certain either. Things look good now but things change. Remember Blockbuster and Sprint? They failed to change with the market and got smacked pretty good. There is no guarantee that the same thing won’t happen to Lending Club. If you are in business, there is always risk. But for borrowers and lenders right now, it’s business as usual.
Do you think Google’s investment is more significant? Why or why not?
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