Matt Burton, Co-Founder & CEO of Orchard

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It has been an extraordinarily busy past couple of weeks as far as industry news goes. So, I wanted to get the perspective of someone who is well connected with both investors and lending platforms on to the show to talk about the recent events.

Matt Burton is the CEO and co-founder of Orchard Platform, the leading ecosystem company connecting investors with platforms. Matt had some very interesting things to say about the recent news which we cover in some details in this episode of the Lend Academy Podcast.

In this podcast you will learn:

  • Matt’s take on the big Lending Club news from Monday morning.
  • What Matt has been hearing from Orchard’s large investor clients around this news.
  • How Matt’s conversations have been with other lending platforms.
  • Why Matt believes the long term success of this industry hinges on how we react in difficult times like this.
  • How Matt thinks the industry will evolve going forward.
  • What stage of development the industry is in now.
  • How platforms can gain back the trust of investors.
  • What platforms need to do to prepare for a difficult time ahead.
  • Matt’s perspective on the reaction to OnDeck’s Q1 earnings.
  • How these online lending platforms should be valued.
  • What Matt thinks about the recent Prosper downsizing.
  • Thoughts on the recent U.S. Treasury white paper.
  • What has been going on at Orchard recently.
  • How many new platforms they brought on board in Q1.
  • Why and how a secondary market will be developed in our industry.

Please read a transcription of our conversation below.


Welcome to the Lend Academy Podcast, Episode No. 64. This is your host, Peter Renton, Founder of Lend Academy.


Peter Renton: Today on the show, it is great to welcome back Matt Burton. He is the CEO of Orchard and someone who is really at the center of this industry. I wanted to get him on the show right away, he was gracious enough to do this at very short notice because I am recording this just a day and half after the news broke of Renaud Laplanche, the CEO of Lending Club, his departure from Lending Club, improprieties there that have been reported on extensively so I wanted to get Matt on just to sort of give everybody some perspective of what he is seeing. He looks at both sides of the business, the investor side and the platform side so I wanted to get him. We delve into what he has been hearing in the last 36 hours and we also talk about other things that have happened, the other news of the last week. We talk about the Treasury white paper that just came out today and we talk about Orchard of course, and what’s on tap for those guys. So I hope you enjoy the show!

Welcome back to the podcast, Matt.

Matt Burton: Thanks for having me, Peter.

Peter: Okay, so we’re recording this less than 36 hours after the bombshell was dropped from Lending Club first thing Monday morning so we’ve had a little bit of time, not a lot, to really digest this news. So I wanted to start off really dealing with this head on. Just give us your take on the news out of Lending Club.

Matt: Yeah, I woke up to a series of text messages and voicemails yesterday morning, with people kind of anticipating big news on Lending Club. When we finally heard that it was Renaud resigning I was in shock like many of the other people in the industry. You know, I spent kind of most of yesterday and today trying to catch up with industry participants as well as the press just to kind of figure out what happened and where do we go from here…seems to be a pretty common thread that is percolating through the ecosystem.

Peter: Yeah, and you’ve got a fairly unique position here in the industry talking with both investors and platforms. So what have those conversations been like? Let’s just start with the investors first. Has there been kind of any overreaction, what have the conversations been like with investors?

Matt: I’ve actually been impressed with a majority of the investors who we work closely with for not kind of overreacting based on headlines. Most wanted to see more information and want to talk directly with Lending Club to get more of the facts, but nobody paused buying on our platform, nobody is kind of taking drastic action as a result of this switch. You know, I think it’s a really good sign for the industry and I expect that the capital acquisition process will probably take a little bit longer than it used to as investors are careful, but I don’t think that there is going to be a massive pullback…the guys who are on the verge of signing loan purchase agreements…we heard yesterday afternoon a couple of them say that they are still planning on going forward with the existing agreement. So I think it might have slowed momentum a little bit, but probably didn’t change long term trajectory for investors.

Peter: That is great to hear because I know you talked about it on Bloomberg earlier today and you were relatively upbeat. I presume the reason you’re relatively upbeat is what you said is that the investors that you speak with are not changing anything as of right now. That is quite amazing to me and it shows obviously a lot of confidence in the industry broadly. As far as conversations go with platforms, how has that been over the last 36 hours?

Matt: The first reaction I think most people had was just shock and then kind of the realization of like wow, this has been a really rough seven days of news in the industry between Prosper kind of right sizing their business for the current conditions and the OnDeck earnings and shifting more of their loans volumes to balance sheet which Wall Street didn’t have demands for…their loans in the marketplace is a negative sign which I think is not completely true, but…you know…even Square got kind of hammered when they came out and so it’s been tough, but over all, I think it has been an overreaction. The more you dig into these results, the more that you talk with the platforms, they feel really good about their long term prospects and the businesses they’re building. I don’t think the business models are in question here.

Peter: Right.

Matt: I think there was a speed bump we hit in terms of the capital acquisition in February and March. This was not limited to just our space, but across the credit spectrum. This is the first time that our space has really hit something like that and so, of course it was challenging, but the long term prospects of the industry are going to depend on how we react to the these types of situations and how we make sure that we build in the proper procedures in place to make sure it doesn’t happen to us again and we’re not surprised by it.

Peter: Right, right, I saw a comment, I think it was from David Klein at CommonBond saying Renaud has left the industry, but the fundamentals have not left with him. The fundamentals of the industry are still the same and it feels like the press…obviously they love a juicy story like this and there has been hundreds and hundreds of articles written in the last 36 hours and it’s good to see that certainly there are some people at least talking common sense and it sounds like that’s some of the people you’re talking with.

So looking back here in six or twelve months time, do you think we’re going to see this as a speed bump, the start of a pretty rough stretch or not even a start because we’ve had some challenges in the last couple of months, as you just mentioned. Do you think there’s going to be a fundamental shift in the industry or how do you feel like it’s going to impact us going forward?

Matt: Yeah, I think, one is we’re very focused on what’s going on in the US on this conversation. It’s obviously a super important market, but in my conversation with platforms internationally, I don’t think that they’re going through this market turbulence like we are so that’s always kind of good to remember as we’re going to look back upon this event because most of the concerns are related specifically to the consumer unsecured space.

In terms of kind of where we are, in kind of what I would call the press cycle, you know as well as I do when this space started growing and started to get covered there was no one talking about it in 2011 or even 2012 and the press was just completely ignoring the space. And then there was this kind of discovery phase where they wrote a lot of articles about discovering it and then I think the space got a lot of hype and now after the hype phase the press is always looking for the tear down phase and so I think that’s what we’re going through right now and I think what comes next and whether it is six or nine or twelve months will be the re-discovery phase.

So we’ll just have to kind of work our way through this press cycle and continue to let the numbers speak for themselves, build profitable businesses that grow and impact the consumers, small businesses and investors in the right way and I think we’ll be fine. It doesn’t feel good when you’re kind of in the eye of the storm.

Peter: Right, right, so in some ways what you’re saying is this may really be the beginning of the next phase, like the hype is all gone. I mean at LendIt last month the hype was pretty much gone anyway. We all know about the challenges that some platforms have had with investors pulling back, but it sounds like this may really be the next phase of the industry. I tend to agree with you there, the fundamentals are unchanged. The challenge may be is that companies like Lending Club, it’s going to take a while for them to regain trust with investors.

So do you think you’re going to see capital maybe moving away from Lending Club and into Prosper or Avant or Marlette, what are your thoughts on where investor capital might go just in the short term like the next 3 to 6 months?

Matt: Yeah, it’s hard to tell today where that’s going to be. I do believe that capital will flow to the platform that has created the highest amount of trust, the best in class systems. Data transparency is huge for investors right now. In my belief and it came up in the Treasury white paper is we need secondary markets in this space and so I believe the capital will also flow to the platforms that embrace secondary markets once those get live, but, yes I mean I think it’s going to be an interesting next six months on the capital acquisition side. From my standpoint, almost every single platform is hyper-focused on capital acquisition so we will see which ones do the best job.

Peter: Right, right. I want to talk about secondary markets in a little bit, but I want to just expound on that next point. You say which ones will do the best job so clearly, if you’re trying to raise equity capital right now and I know you guys did a raise late last year, this must be a terribly difficult time to be raising equity capital. Do you think we will see many companies go under in the next six months?

Matt: I personally don’t think we’re going to see a lot of companies go under. I think if you’re looking on the originator side, companies that are, let’s say your originating $50 million a month and you’re breakeven or losing a little money. My guess is that almost all these platforms could cut their volumes by a third or half, take out the less profitable portion of their origination and become cash flow positive…probably have to go through some resizing of the company structure in the process, but I think that a lot of them have the path to getting cash flow positive if they wanted to make that happen. Now what does that come with? It comes with the cost of growth though and equity investors have been [valuing] …growth over everything, has been kind of the mantra…

Peter: Right.

Matt: ….for the past 18 months when it comes to these equity investors and so I think that those days are done. The difficulty in raising new equity today is unless you have a forcing function, unless you have a reason for investors to act now, they’re going to kick the can down the road and not make a decision and that, you know, what used to take three months to raise a new equity round could easily be six or nine or twelve and it’s a very difficult thing for entrepreneurs to be in that situation because you want certainty around your funding because it’s very hard to plan when you’re not sure when your next equity round is going to be.

Peter: Right, right, very good point, very good point. Anyway, I do want to move on from the Lending Club saga and talk about a few other things because it has been a busy news week for the past week. We started off…we had the OnDeck earnings at first which disappointed many people and their stock was down dramatically, not quite as dramatically as what Lending Club went through, but certainly it declined a lot and I wanted to get your perspective on OnDeck’s first quarter earnings. Do you think they were punished a bit too harshly, what’s your take?

Matt: Yeah, I mean, I think one what you’re seeing is that the equity markets react to the fact that because capital is more scarce in this space, they’re expecting growth rates to slow and if you look toward a lot of the forward guidance that they’ve given, it kind of lines up with that so that’s one piece to it.

The other piece was I think they were punished, or at least in the news, for having a shift from funding their loans via their marketplace to funding them off their balance sheet and this speaks to a core problem that I feel like a lot of these companies have today in that it’s not clear what metrics equity investors should use in order to value these companies. So there is less and less equity analysts out there and if your business is fundamentally hard to value and it’s a newer business model, in OnDeck’s case it is a hybrid model, it’s just kind of an uphill battle and so you see these times where it’s kind of like anything doesn’t go perfect and there’s this kind of a lot of panic that goes on.

So I think as an industry we really need to figure out how are these platforms going to be measured because multiples off revenue clearly doesn’t make sense. I think on the other extreme, book revenue doesn’t make sense. We’ve got to figure out a way that an equity analyst can do an apples to apples comparison Looking at a couple of platforms to understand which one is doing a good job.

Peter: Right, yeah, that’s a good point because listening to the OnDeck earnings call it feels like if you’re selling loans on the marketplace, you recognize the revenue right away and if you’re selling on the balance sheet, you recognize the expenses right away insofar as you’ve got a kind of expense all of the provisions for losses upfront.

So it’s a huge difference in earnings when you’re recognizing what might be a one or two year loan, recognizing all the revenue upfront or you’re recognizing all the expenses upfront and it feels like this is going to be the challenge. They want the flexibility of moving from a marketplace onto a balance sheet and back again, but their earnings are going to be affected so much. So, as you say, it looks like people haven’t worked out how to do this. I mean, what are your thoughts, how do you think they should be valued?

Matt: I think it’s a tough question because these are brand new businesses that have…I think today the hybrid model has a lot of attraction, you see a lot of new originators go that direction because it allows you to fund your business in a lot of different economic environments, but the downside of that is, what our exact discussion is, it’s harder for you to explain the intrinsic value of your company to an investor. My view is that the easiest way to explain the value is to become profitable, if they just start making money, then everything gets easier.

Peter: Right.

Matt: Then we can argue over the details, but I really think that if these companies could get as profitable as quickly as possible a lot of the short sellers would be pushed out of the space.

Peter: Right, right, that makes sense. So let’s move on to Prosper. It feels like three months ago that they announced their round of layoffs…it was only seven days ago as we’re recording this anyway, so what are your thoughts on the news out of Prosper and given the Lending Club news, it seems like not that big a deal at all. Obviously, it’s a big deal for those people who lost their jobs, but wanted just to get your reaction on Prosper.

Matt: I think last year…take LendIt for example, you know there was a ton of announcements by a lot of platforms, oh we’re going to do this product line and then that product line and serve all of these different populations. I think you realize that’s a really hard thing to do. When times are good though you have equity investors who are supportive of all of that and you have big growth targets so you want to kind of stretch your core competency. I think what Prosper realized was that they had stretched themselves too thin a little bit and in the current environment it didn’t make sense for them to be trying to do multiple products at once.

So they decided to cut back and go to their core which I think was the right decision. Hindsight is 20/20 you could argue…oh, I shouldn’t have expanded last year or you’ve expanded too fast, but it’s really tough when you’re in the moment and you’re dealing with a lot of different constituents that you’re trying to please, both internal and your board, potentially going to IPO that mistakes can be made, but I think that they did a good job of hopefully dealing with it all in one shot and it’s not going…I mean the worst being for start-ups is where they have like a trickle off layoff where over the course of a year there’s nine different layoffs and that’s just the painful way. Hopefully they just took their medicine all at once.

Peter: Right, right, let’s hope that is the case. So now switching gears to the Treasury…just a few hours ago, released their report. They did their request for information last summer and we now have the fruits of that labor, I guess we would say, so did anything stick out for you in the report today from the Treasury?

Matt: You know, I was actually really pleased when I saw it the first time. I think a lot of the recommendations were mentioned by companies in the RFI, obviously the devil is in the details on a lot of these things but just kind of reading through the common themes and their recommendations. I thought it made sense right, I don’t think any of the industry participants would disagree in a large way with a lot of them, but the common themes were making sure that transparency was at the core, that you have sound operations and credit models, borrower enhancements and safeguards needed to be improved over time, setting a high bar and obviously, the secondary markets piece is something that is dear to me. I was glad that that got mentioned. I think it was important that they said that regulatory clarity can benefit the market. The people actually in the space want to know how to build businesses in a way that the regulators will view as being best in class.

Peter: Yeah, for sure. I think one of the other things they talk about is regulatory clarity will benefit the market and I think that’s something we’re not going to be clear on for some time, but I think all of the regulators can look at this. It sounds like, and I haven’t read the whole thing yet given that it’s 40/50 pages long and it came out a few hours ago, but it’s clear that…there doesn’t look like to me to be any really bad news for the industry in this at all, as far as I can see. That’s what was a worry. It seems like a good resource for regulators as they’re considering any changes that may come. Speaking of which, there seems to be a lot of activity these last few months on the regulatory front, anything you are hearing out of Washington, D.C. that you can share?

Matt: At Orchard we filed for our broker dealer so we’ve had our own list of stuff that we’ve been busy with and the SEC so that’s kind of been the focus of ours…but, overall the Treasury used some of our data for their white paper and we’ve seen kind of an interest in a lot of the different governmental organizations just to get education on our industry.

I would say education and data are the two things that they’re looking for the most so we had some kind of input on that side but,overall, it’s been pretty quiet. This is an interesting time for DC, it’s a presidential year, they’ve got a lot going on. You know, we haven’t been in the spotlight yet and hopefully, we won’t be, but I’m glad this white paper came out. I agree because it’s a guide for other regulators to understand the space and hopefully, we find a way to continue to work together as an industry to build relationships that go deep with regulators.

Peter: Yeah, for sure. So I want to talk about Orchard, at least, for some of the show here. I know there’s been a lot going on, but firstly, why don’t you give us an update. I think when we chatted back in February, you’ve just seen in the previous couple of weeks things had really shifted on the investor side of the business so why don’t you give us an update on what’s going on at Orchard, how you’ve been affected over the last two/three months.

Matt: Yeah, I think the disruptions within the credit market in February led to a lot of the people who were kind of working their way down our funnel on the institutional investor side to take a look at the high yield markets or other spaces and so I don’t think those investors are necessarily gone, but they’re relative value investors so they had other places to kind of look for a little while. So we did see kind of a slowdown in activity moving through our funnel on the institutional investors’ side in Q1.

Interestingly enough, there’s a lot of new investors who have come into the space who are more kind of distressed investors. They kind of moved in when the headlines turned negative so over the past three weeks it has been interesting to watch them come in. But most of the activity at Orchard over Q1 has been on the originator side as we have sized up a number of partners and they have gone through kind of our on-boarding process where we help standardize, normalize and bring up the quality of the data to an institutional grade to get these platforms ready to start working with multiple institutional investors. So we’ve been super busy, we had 16 integrations going on in Q1.

Peter: Wow, does that mean 16 different platforms or is that…

Matt: Yeah, 16 different data sets.

Peter: Data sets.

Matt: …that we’re normalizing, yeah, platforms exactly.

Peter: Right.

Matt: So, yeah it’s across merchant cash advance, small business term and consumer unsecured have been…obviously, the next steps for us is student and auto are the ones we’re looking at/being asked and kind of that we’re seeing…but, overall everybody is taking capital acquisition more serious and so we’ve seen a lot of interest in our products on the originator side just to help them institutionalize themselves to a greater degree.

Peter: Right, so then let’s just talk a little bit…you mentioned you’re applying for your broker dealer license, you talked about secondary markets…we chatted I think it was back in 2014 and you hoped to have secondary market in place within 12 months. Obviously, that didn’t happen, where are you at today? Is this something you want to do yourself or what? Firstly, why are you getting a broker dealer license and does it have anything to do with the secondary market?

Matt: The joke in my product engineering team is we’ve already built secondary markets twice (Peter laughs) and this going to be the third time that we build it.

Peter: Third times the charm! (laughs)

Matt: Yeah, essentially I mean…just to go back to the Treasury white paper, I think the regulatory uncertainty has been at the heart of this problem in which multiple times we’ve gotten close to coming out and launching, but have not been able to get the reassurances from participants and from regulators that we know that we’re in good standing.

Given our expectation that this is going to be an important cornerstone of the industry, we want to do it the right way and I don’t want what happened to Lending Club and Prosper to happen to me where we spend a ton of time and energy building it only to find out later that we get shut down. So we ended up going through the whole process again through last fall…and finally, just said look. I don’t think we’re ever going to get the exact certainty that we need, we better just get our broker dealer and take the stance that we expect that the SEC is going to regulate the space, that it is a security and there are pools of loans and then just build the business with that standard in mind. So that’s how we’ve decided to move forward.

Peter: So you have willing participants on both sides, on the investor side and on the platform side as far as participants in the secondary market?

Matt: Yeah, so on the platform side, we had willing participants last year as well.

Peter: Right.

Matt: What’s been interesting is in Q1 we’ve seen a number of institutional investors come to us and say…hey, I’m looking to sell a portion of my portfolio or I want to double down and focus all of my buying on one of the consumer platforms versus buying on three so there’s definitely the demand right now on the investor side as well I think we’re seeing, but it’s one of those things that until we get our broker dealer we’re not going to feel comfortable having those transactions flow through us.

Peter: Right, right, sure. So do you think there’s also demand from institutional investors for aged portfolios to buy outside of the securitization markets? Do you see that as a possibility as well?

Matt: Yeah, I personally think there is demand there. It hasn’t been told directly to me recently, we’re going on a road show next month to just go talk to a wide variety of both platforms and institutional investors both in this space but also participants that we think would be good to bring into the fold so I think I’ll probably know the answer to that question better by the end of June.

Peter: Right, right, okay. So before I let you go, what else is happening at Orchard, I hear your about to move into new offices, I mean, what else are you working on?

Matt: Yeah, for anyone who has been to our offices, it is super cramped at the moment, I feel really bad about it, but at the same time signing leases in New York City is not an easy process. So yeah it looks like we’re going to be moving into new offices in July, just getting the final details on the lease and it will be an exciting next step for the company. We’ve been in five offices in the past two and a half years, it looks like we’ll be able to stay at this one hopefully for over two years, but we’ll see, it’s the nature of the beast when you’re building start ups, it’s tough to have the right amount of real estate because you tend to outgrow it quickly.

Peter: Yeah, right. Okay, well it’s always a pleasure chatting with you, Matt I really appreciate your time today.

Matt: Yeah, thanks Peter.

Peter: Okay, see you later.

Matt: Bye.

Peter: I hope that has provided everybody with a bit of perspective on the current events. It’s easy to get wrapped up in doom and gloom and the sky is falling when you’re following the articles in the press, but Matt has certainly shed some light on the fact that it’s business as usual for a lot of people in this industry. Now having said that, this doesn’t mean that there won’t be an impact, even a potential dramatic impact on some participants and we obviously don’t know what the fallout is going to be at Lending Club, but the reality is this industry is strong, the fundamentals are unchanged and I expect, as does Matt that we will be around for a long, long time.

On that note, I’ll sign off. I very much appreciate you listening and I will catch you next time. Bye.