Pando

Chicago's Avant acquires fellow Y Combinator alum ReadyForZero to bolster smart lending platform

By Michael Carney , written on March 31, 2015

From The News Desk

Two of the most exciting names in consumer lending and debt management have joined forces. San Francisco- based credit education startup ReadyForZero has been acquired Chicago’s Avant, a big data-driven platform. Both companies have ties to Y Combinator, with ReadyForZero graduating from the accelerator in 2010, and Avant co-founders John Sun and Paul Zhang participating in a later class under a prior company called Debteye.

The companies are not revealing the financial terms of the deal, although ReadyForZero co-founder and CEO Rod Ebrahimi tells Pando that the deal consisted of a combination of cash and stock and that the company’s investors were supportive of the decision to join forces with the more well-capitalized acquirer. ReadyForZero had raised $4.8 million through its June 2011 Series A round, from a list of investors that includes Citi Ventures, Polaris Partners, and 500 Startups, as well as individual angels.

For Avant (fka, AvantCredit), this acquisition is part of a concerted effort to offer more personal finance tools to its current and potential customers – middle-market consumers with FICO credit scores between 580-720 – with the goal of making them better borrowers. Over the last four years, ReadyForZero has helped consumers pay down $220 million in debt, while its smart repayment tools have been proven to help consumers raise their FICO scores by as much as 40 points. Perhaps just as attractive from Avant's perspective, ReadyForZero claims that it has also helped reduce net-credit losses at top banks.

With this deal, which closed at the beginning of March, Avant is launching its first ever West Coast office with a focus on engineering and product management. Ebrahimi and co-founder Ignacio Thayer tell Pando that the majority of ReadyForZero’s 12 pre-acquisition employees will be relocating from San Francisco to Los Angeles’ Playa Vista neighborhood and staying with the company. Avant co-founder and CEO Albert Goldstein tells Pando that the company has 15 employees in LA and 640 in Chicago, with plans to double in size over the next year.

The ReadyForZero brand and product will live on post acquisition, according to both companies, while many of the company’s credit and debt management tools will also be integrated directly into the Avant site. The companies are still determining whether they will retain a paid premium tier within the ReadyForZero platform, but Goldstein says that the goal is to reach as many consumers as possible and thus many of the most popular paid features may soon be free. As of today, ReadyForZero will begin reccommeding Avant among its alternative lending options, which previously had included LendingClub and Prosper.

“ReadyForZero reflects our mission of financially empowering consumers and we are excited to bring this next level of personalized service to our customers,” says Avant Chief Credit and Risk Officer John Sun.

The decision to sell at this surprise comes as somewhat of a surprise, considering that ReadyForZero appeared to be the leader in what was no doubt a hot and growing category of debt management solutions. Unlike superficial debt tracking products like Mint, ReadyForZero uses proprietary algorithms and deep understanding of the mechanics of FICO – in part through a partnership with the Experian credit reporting agency – the company helps its users intelligently repay debts. For example, the company will ask consumers how much of their income they can dedicate to debt repayment each month and recommend exactly how much to apply to each outstanding loan and credit card balance, based on factors like balance, interest rate, and loan term. The company has also developed an award-winning blog that shares credit awareness and education content with consumers.

But according to Ebrahimi, ReadyForZero had determined that while the opportunity in credit management opportunity was undeniable it wasn’t possible to build a large enough business in this category alone. It turns out not enough consumers are willing to pay – in its case $10 per month – to better manage their debts. Less than 5 percent of ReadyForZero consumers have upgraded to the paid tier historically. Armed with this data, the company had long ago decided that it would ultimately need to get into lending if it wanted to build a big business.

By joining forces with Avant, it can avoid much of the learning curve along the way, while also gaining access to far more resources. Avant has made more than 150,000 loans to date, totaling nearly $1 billion in value. The company’s average customer has a FICO score of 650, and annual income of between $40,000 and $70,000. The typical Avant loan is $5,000, with a term of 12 to 48 months and an APR between 9 to and 39 percent. As the company’s costs of capital decline and it is able to more effectively manage its risk through improving technology, Goldstein said Avant is targeting APRs closer to 10 percent in the future. This would put the company more in line with traditional credit cards and bank loans, while also moving it out of the often-controversial – and occasionally regulatory suspect – high-interest lending category occupied by payday lenders and other seedy capital sources. Avant has seen approximately 15 percent of its loans default, historically.

Avant has raised more than $1 billion in debt and nearly $400 million in equity, including a $225 million Series D round closed in December from investors that include Tiger Global Management,  August Capital, KKR, DFJ Growth, RRE Ventures, and Peter Thiel*. The company has previously completed two smaller, talent and technology acquisitions, according to Goldstein. This is Goldstein’s second bite at the alternative lending apple, having previously founded Enova International (fka, CashNetUSA), an early online short-term consumer lender that grew its loan portfolio to $125 million, before being acquired by Cash America.

Avant is currently operating in the US and UK, but global expansion is a major focus following last year’s mega equity round. Goldstein notes that credit is scored similarly around the world, but consumer awareness and understanding of this process internationally badly lag that here in the US – a bold statement considering the level of misunderstanding that US consumers have about FICO and good credit practices. Avant will measure success of this deal based on number of users and number of global markets that ReadyForZero is able to reach while part of its platform. Ebrahimi and Thayer plan to grow their team to as many as 50 people over the next year, in part with the goal internationalizing the ReadyForZero product.

The alternative lending category has been booming of late, in part due to advances in big data technology, as well as the enhanced visibility of category leaders like LendingClub, which just went public in December. The market has stratified into several tiers. LendingClub and competitor Prosper targeting Prime borrowers with credit scores of 680 and above. Avant targets the middle market, while ZestCash**, Affirm, Earnest, and others target the subprime borrowers traditionally served by payday lenders. Across the industry, these companies are turning technology both to better assess the risk of prospective borrowers and to more effectively acquire and service existing and prospective customers. While Avant and several of the above companies act as primary lenders, the market is also evolving to see many of the top platforms, including most notably LendingClub, license their data and risk management technology to third party lenders for use in evaluating prospective borrowers. Goldstein notes that Avant has plans to move in this direction in the near future.

LendingClub’s IPO prospectus put the US consumer debt balance at $3.3 trillion, suggesting that the market opportunity is massive and there’s likely room for all of the above competitors to succeed. That said, succeeding as a lender is about more than having access to the most capital and offering it to borrowers on the best terms. Avant has shown itself to be highly capable in the pre-lending risk management side of the business, but post-lending borrower servicing is another matter entirely. By helping consumers better understand the totality of their personal credit and debt picture, the company has the opportunity to reduce its own losses on loan defaults, while also raising the credit profile of its customer pool, thus enabling them to borrow more, at the same or lower rates.

We are still in the early innings of the alternative and big data-driven lending era. While companies continue to innovate on the back-end data and risk management fronts, many sources of capital still appear indistinguishable externally to borrowers. As Avant demonstrates today, one way to stand out in this space is for lenders to offer more tools and a better debt management experience to consumers. By acquiring the leader

[*Disclosure: Thiel’s Foudners Fund is an investor in Pando.]

[**Disclosure: Michael Carney has accepted a position as an associate at Upfront Ventures that begins in April. Upfront has no affiliation with the companies which are the subject of this article, but has invested in ZestFinance, which is a data-driven lender focused on the subprime market. This post went through Pando’s usual editorial process.]