Prospectus Summary
PROSPECTUS SUMMARY This summary overview of the key aspects of the offering identifies those aspects of the offering that are the most significant. This summary is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary may not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.ON DECK CAPITAL, INC.
Our Company
We are a leading online platform for small business lending. We are seeking to transform small business lending by making it efficient and convenient for small businesses to access capital. Enabled by our proprietary technology and analytics, we aggregate and analyze thousands of data points from dynamic, disparate data sources to assess the creditworthiness of small businesses rapidly and accurately. Small businesses can apply for a term loan or line of credit on our website in minutes and, using our proprietary OnDeck Score, we can make a funding decision immediately and transfer funds as fast as the same day. We have originated more than $1.7 billion in loans and collected more than 4.4 million customer payments since we made our first loan in 2007. Our loan originations have increased at a compound annual growth rate of 127% from 2011 to 2013 and had a year-over-year growth rate of 171% for the nine months ended September 30, 2014.
The 28 million small businesses in the United States are integral to the U.S. economy and the vibrancy of local communities, employing approximately 50% of the private workforce. Small business growth depends on efficient and frictionless access to capital, yet small businesses face numerous challenges that make it difficult to secure such capital. Small business owners are time and resource constrained, but the traditional borrowing process is time consuming and burdensome. Small businesses surveyed by the Federal Reserve Bank of New York indicated that the traditional funding process required them, on average, to dedicate 26 hours, contact 2.6 financial institutions and submit 2.7 loan applications. These challenges exist in part because it is inherently difficult to assess the creditworthiness of small businesses. Small businesses are a diverse group spanning many different industries, stages in development, geographies, financial profiles and operating histories, historically making it difficult to assess their creditworthiness in a uniform manner, and there is no widely-accepted credit score for small businesses. In addition, small businesses often seek small, short-term loans to fund short-term projects and investments, but traditional lenders may only offer loan products that feature large loan sizes, longer durations and rigid collateral requirements that are not well suited to their needs.
The small business lending market is vast and underserved. According to the FDIC, there were $178 billion in business loan balances under $250,000 in the United States in the second quarter of 2014, across 21.7 million loans. Oliver Wyman, a management consulting firm and business unit of Marsh & McLennan, estimates that there is a potential $80 to $120 billion in unmet demand for small business lines of credit, and we believe that there is also substantial unmet demand for other credit-related products, including term loans. We also believe that the application of our technology to credit assessment can stimulate additional demand for our products and expand the total addressable market for small business credit.
To better meet the capital needs of small businesses, we are seeking to use technology to transform the way this capital is accessed. We built our integrated platform specifically to meet their financing needs. Our platform touches every aspect of the customer lifecycle and a potential customer can complete an online application 24 hours a day, 7 days a week. Our proprietary data and analytics engine aggregates and analyzes thousands of -1- online and offline data attributes and the relationships among those attributes to assess the creditworthiness of a small business in real time. The data points include customer bank activity shown on bank statements, government filings, tax and census data. In addition, in certain instances we also analyze reputation and social data. We look at both individual data points and relationships among the data, with each transaction or action being a separate data point that we take into account. A key differentiator of our solution is the OnDeck Score, the product of our proprietary small business credit scoring system. Both our data and analytics engine and the algorithms powering the OnDeck Score undergo continuous improvement to automate and optimize the credit assessment process, enabling more rapid and predictive credit decisions. Each loan that we make involves our proprietary automated underwriting process, and approximately two-thirds of our loans are underwritten using a fully-automated underwriting process that does not require manual review. Our platform supports same-day funding and automated loan repayment. This technology-enabled approach provides small businesses with efficient, frictionless access to capital.
We believe that the differences between our approach and the approach adopted by traditional lenders are what have allowed us to better address the challenges of small business lending. In our approach, manual underwriting has largely been replaced by an automated, data-driven approach to credit assessment. Expensive branch networks have been replaced by an online website for applications and account management. Service of consumers and businesses of all sizes has been replaced by a singular focus on small business. In addition, we are subject to less regulation than traditional lenders because we do not make loans to consumers nor do we take deposits. We believe that differences in our loan products allow us to better meet the needs of small businesses. Small business owners typically seek small, short-term loans so we offer term loan products that range in size from $5,000 to $250,000 and feature terms of 3 to 24 months versus traditional lenders that offer larger and longer term loans. At September 30, 2014, our outstanding loans had original loan balances ranging from $5,000 to $250,000. We also offer a line of credit product that can be approved more quickly than comparable products offered by traditional lenders. We believe that small business owners prefer predictability so we offer fixed interest amounts and automated daily or weekly repayments compared to traditional lenders that offer both fixed and variable rate loans with monthly repayments. We also believe that small business owners value flexibility so we don’t have the rigid collateral requirements that are typical of traditional lenders. All or substantially all of our term loans and lines of credit are currently collateralized through a security interest in our customers’ assets, but we do not require a minimum amount of collateral to make a loan. We intend to transition to unsecured lines of credit in the near future.
We lend to a wide variety of small businesses across more than 700 industries and in all 50 U.S. states and have recently begun lending in Canada. The top five states in which we originated loans in 2013 and in the nine months ended September 30, 2014 were California, Florida, New York, Texas and New Jersey, representing approximately 14%, 10%, 8%, 8% and 4% of our total loan originations for the year ended December 31, 2013 and approximately 15%, 9%, 8%, 8% and 4% of our total loan originations for the nine months ended September 30, 2014, respectively. Our most frequent customers are professional services firms, retailers, restaurants and food service companies, healthcare specialists and wholesalers. We also lend to customers with a range of financial and operating histories: our customers have a median of $568,000 in annual revenue, with 90% of our customers having between $150,000 and $3.2 million in annual revenue, and have been in business for a median of 7.5 years, with 90% in business between 2 and 31 years.
We have a diverse and scalable set of funding sources. These include debt facilities, securitization of small business loans generated by OnDeck and the OnDeck Marketplace, a proprietary whole loan sale marketplace that allows institutional investors to directly purchase small business loans from us. We believe that having diverse sources of capital enables us to reduce our average cost of capital, provides multiple sources of capital in a variety of economic climates and provides increased flexibility as we seek to increase our loan originations. Affiliates of certain of our underwriters in this offering are participants in our various financing facilities and have acted in various administrative roles in connection with such facilities. For further information, see the section titled “Underwriters.”
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Our business has grown rapidly. In 2013, we originated $458.9 million of loans, representing year-over-year growth of 165%, and in the first nine months of 2014, we originated $788.3 million of loans, representing year-over-year growth of 171%, all while maintaining consistent credit quality. In 2013, we recorded gross revenue of $65.2 million, representing year-over-year growth of 155%, and in the first nine months of 2014, we recorded gross revenue of $107.6 million, representing year-over-year growth of 156%. During 2013 and the three months ended September 30, 2014, our Adjusted EBITDA was $(16.3) million and $2.6 million, respectively, our (loss) income from operations was $(19.3) million and $0.7 million, respectively and our net (loss) income was $(24.4) million and $0.4 million, respectively. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a discussion and reconciliation of Adjusted EBITDA to net (loss) income. As of December 31, 2013 and September 30, 2014, our total assets were $235.5 million and $466.0 million, respectively and the unpaid principal balance on loans outstanding was $216.0 million and $422.1 million, respectively.
Industry Background and Trends
As a result, we believe that small businesses feel underserved by traditional lenders. According to the FDIC, the percentage of commercial and industrial loans with a balance less than $250,000 has declined from 20% of total dollars borrowed in 2004 to 13% in the second quarter of 2014. According to Oliver Wyman, 75% of small businesses are looking to borrow less than $50,000. In addition, according to the second quarter 2014 Wells Fargo-Gallup Small Business Index, only 25% of small businesses reported that obtaining credit was easy.
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Challenges for Small Business Owners
Modernization of Small Businesses
Our Solution
Our mission is to power the growth of small business through lending technology and innovation. We are combining our passion for small business with technology and analytics to transform the way small businesses access capital. Our solution was built specifically to address small businesses’ capital needs and consists of our loan products, our end-to-end integrated platform and the OnDeck Score. We offer two products to small businesses to enable them to access capital: term loans and lines of credit. Our proprietary, end-to-end integrated platform includes: our website, which allows small businesses to apply for a loan in minutes, 24 hours a day, 7 days a week; our proprietary data and analytics engine that analyzes thousands of data attributes from disparate sources to assess the real-time creditworthiness of a small business; the technology that enables seamless funding of our loans; and our daily and weekly collections and ongoing servicing systems. A key differentiator of our solution is the OnDeck Score, the product of our proprietary small business credit-scoring system. The OnDeck -4- Score aggregates and analyzes thousands of data elements and attributes related to a business and its owners that are reflective of the creditworthiness of the business as well as predictive of its credit performance. Our proprietary data and analytics engine and the algorithms powering the OnDeck Score undergo continuous improvement through machine learning to automate and optimize the credit assessment process.
Our customers choose us because we provide the following key benefits:
Our Competitive Strengths
We believe the following competitive strengths differentiate us and serve as barriers for others seeking to enter our market:
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Our Strategy for Growth
Our vision is to become the most trusted lender to small businesses, and to accomplish this, we intend to:
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Risks Affecting Us
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” beginning on page 14. These risks include, but are not limited to, the following:
Corporate Information
Our principal executive offices are located at 1400 Broadway, 25th Floor, New York, New York 10018, and our telephone number is (888) 269-4246. Our website is www.ondeck.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus. We were incorporated in Delaware in May 2006.
OnDeck, the OnDeck logo, OnDeck Score, OnDeck Marketplace and other trademarks or service marks of OnDeck appearing in this prospectus are the property of OnDeck. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this prospectus.
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 and are therefore subject to reduced public company reporting requirements. We will remain an emerging growth -7- company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering.
Offering Related Conversion
Upon the completion of this offering, we will no longer have any shares of preferred stock or preferred stock warrants outstanding. Upon completion of this offering, 23,725,822 shares of our preferred stock will automatically convert into shares of common stock. Also at such time, all outstanding preferred stock warrants will automatically convert into common stock warrants and the related liability will be reclassified to additional paid-in capital. The consideration we received in respect of the preferred stock outstanding at September 30, 2014 ranged from $0.73 to $29.42 per share and averaged $7.68 per share. Each share of preferred stock will convert into one share of common stock without the payment of additional consideration. In addition, certain shares of preferred stock were already repurchased and retired in 2013, when we voluntarily redeemed certain shares of Series A and Series B preferred stock for an aggregate price that was approximately $5.3 million in excess of the carrying amount. The portion of the redemption in excess of the carrying amount was recorded as a reduction to additional paid-in capital and added to net loss to arrive at net loss attributable to common stockholders in the calculation of loss per common share.
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