Industry Profile – David Klein
CEO & Co-founder, CommonBond
It has been a busy few months for David Klein, CommonBond’s CEO and Co-founder. The rapidly growing New York-based student lending platform has recently hit several milestones on its way to lowering the cost of higher education in the U.S. This summer, CommonBond completed its first securitization at $100M with an investment-grade rating from Moody’s, raised $35M for Series B funding from leading fintech venture investors, and most recently, expanded its student loan program to over 2,000 universities nationwide, across all degrees, at both the graduate and undergraduate levels. However, as the company continues to scale, offering more products to more people, it has never wavered from its commitment to deliver better rates, a simple tech-enabled experience, and best-in-class customer service to high quality student borrowers.
While Klein began his career working in corporate America, he always knew deep down that he wanted to start his own company. Coming from a long line of entrepreneurs in his family, the entrepreneurship bug has always been firmly planted in his DNA. “For a while, I was viewed as the black sheep in the family,” says Klein, having worked for corporate juggernauts McKinsey and American Express. However, staying true to his convictions (and genes), Klein decided after 10 years in the corporate world that he was ready to build something.
Klein considered two options going forward – start a company on his own immediately or pursue a MBA and use business school to incubate and accelerate an idea. Fortunately, both for Klein and for thousands of students to follow, he chose the latter. “It was precisely because I went to business school that I stumbled upon the personal pain of student loans,” says Klein. Having to shoulder the totality of the financial burden of graduate school himself, Klein grew intimately familiar with student lending and noticed three glaring issues – rates were unnecessarily high, the process was excessively complex, and service was very poor. The system was fundamentally flawed and he knew there had to be a better way. Klein, leveraging his background in finance and entrepreneurial aspirations, set out to solve this huge problem that he and lots of other students were having, and became “maniacally focused” on building a platform to do so.
As Klein anticipated, Wharton proved to be fertile hunting ground for starting a business. Not only did he find his two co-founders in fellow classmates Mike Taormina and Jessup Shean, but he was also able to access the myriad resources and opportunities Wharton offered to students. Klein quips that the entrepreneurship community was so strong that an early iteration of CommonBond was rejected from a student business plan competition. “We got great feedback though,” admits Klein.
Klein spent the summer after his first year at Wharton in New York, alongside Mike Taormina, building out CommonBond and drumming up interest in the platform amongst the investor and borrower communities, before eventually dropping out of Wharton to push CommonBond forward full time. Shortly thereafter, Klein and his team raised their first round of outside capital with the intention of launching a pilot program at Wharton. In November 2012, CommonBond launched a $2.5M loan program which ended up serving 39 total borrowers, both in school as well as refinance borrowers. The pilot program was instantaneously successful and proved three things. First, it proved that consumer demand in the market was strong – within 24 hours of launch, the program ended up having $2.5M of demand – at only one school. Second, the program showed that investor demand was strong, having exceeded their initial goal of raising $1-2M. Third, the pilot’s success confirmed the operational acumen of the team and its systems. “Within a few short months, we were able to disburse every last bit of the fund on the dime,” says Klein. With a proven model and a clear mission, Klein was ready to launch nationally in September 2013, bringing $100M in the next year to fund and refinance student debt. Since that point, CommonBond has grown expediently, expanding every 6 to 9 months – it started with 20 MBA programs, later reaching 200 schools across 14 degree programs, and as of this month, now includes 2000 schools across all degree programs both at the graduate and undergraduate levels.
Today, most lending platforms are characterized by one of two types of funding models. Marketplace lenders, such as Lending Club, pair borrowers and lenders, while balance sheet lenders, such as OnDeck, loan off their own balance sheets. However, CommonBond employs a hybrid model, citing the merits of running both capitalization structures in parallel. “There’s a virtuous cycle where the more securitizations you do on the balance sheet side of the equation, the stronger your economics are on the marketplace side of the equation. And, the more marketplace funding you do, the less equity capital intensive the business model is,” says Klein. “We think there is a happy medium of balance sheet and marketplace as a funding strategy for a platform to optimize economics on both fronts sooner than if you just focused on one exclusively,” continues Klein.
Since the early days at Wharton, CommonBond has always been a very values-driven company and believes that they are doing more than just offering students a better rate on a loan. “When you become a borrower on CommonBond, you become a part of a broader community that’s geared towards propelling your personal and professional success,” says Klein. Whether holding borrower dinners and panels across the country to connect borrowers with career opportunities or helping borrowers through times of economic hardships, CommonBond offers programs to empower its high quality borrowers. Klein provided an example of a recent Harvard Business School graduate and community member who was in a transition period between jobs. Not only did CommonBond eventually connect her with her dream job through its network, but they also enrolled her in a program called CommonBridge that matches borrowers in between jobs with consulting opportunities at CommonBond. The program allowed her to connect with influential people relevant to her career, build a more robust portfolio of work, and gain much needed disposable income. Given the level of talent among CommonBond’s borrower pool, it’s a win-win situation for all parties involved. While this particular story could seem like an aberration, it’s clear that Klein has an abundance of these types of stories and that community is at the very core of CommonBond’s mission.
While CommonBond has done a great job of building community at home in the United States, they also feel it’s important to build community abroad. “I’ve always felt that business can and should be a positive force for change,” says Klein, who reveals that he’s always been drawn to companies with strong social missions, such as Warby Parker and TOMS. “I want to do business with companies whose values I share, and as it turns out, so do a lot of other millennials.” Given this framework, Klein launched the CommonBond Social Promise in partnership with Pencils of Promise, stipulating that for every degree fully funded, the company will fund the education of a student in need for an entire year. By the end of 2015, Klein expects his company to have donated $200K to its Social Promise since inception. In fact, Klein will be traveling to Ghana along with a handful of borrowers and employees from CommonBond to visit the schools that they have been supporting through its program.
Bolstered by an impressive track record and recent influx of capital, CommonBond is looking to expand beyond student lending and refinancing into other asset classes, products, and services going forward. CommonBond’s average customer is 32 years old, making over $100K, and has a FICO score of 770. “This is an ultra creditworthy borrow group whose financial needs will evolve over time.” says Klein. CommonBond is uniquely positioned to serve this population customer-centric products across the financial spectrum, given its existing infrastructure, technology, and reputation. “Our aim is to shift the culture of borrowers and to set a new expectation among all financial players in the space,” says Klein. “We should be serving borrowers better. We want to become known for more than just a great product that will save students $14K over the life of loan,” continues Klein. Most people would be content with simply changing student lending, but Klein has larger aspirations to change the world. Some might argue that he’s already done both.