Lending Club Stumble highlights the internal weakness of upstart companies

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After internal investigation reveled that the Founder of Lending Club Mr. Laplanche was indulging in improprieties in its lending process, including altering millions of dollars’ worth of loans, he was ousted from the company and the share prices took a hit falling 34%. The downturn has exposed these upstart companies which have started to falter Lending Club joins the list of Prosper and OnDeck who are facing serious challenges in this economy to sustain themselves.

An accomplished sailor and founder of Lending Club, Mr. Laplanche was hosting executives from hedge funds, Goldman Sachs and other banks — part of his effort to win over Wall Street on his plans to upend traditional banking with a faster, more democratic form of lending.

He already had endorsements from Lawrence H. Summers, the former Treasury secretary, and John Mack, the former chief of Morgan Stanley, who joined his board. At Lending Club’s initial public offering in December 2014, the company was valued at over $8 billion.

But on Monday, Lending Club announced that Mr. Laplanche had resigned after an internal investigation found improprieties in its lending process, including the altering of millions of dollars’ worth of loans. The company’s stock price, already reeling in recent months, fell 34 percent.

The company’s woes are part of a broader reckoning in the online money-lending industry. Last week, Prosper, another online lender that focuses on consumers, laid off more than a quarter of its work force, and the chief executive said he was forgoing his salary for the year.

The problems at Lending Club, in particular, threaten to confirm some of Wall Street’s worst fears:that as favorable economic conditions begin to turn, they will reveal many upstart companies with weak internal controls that have been feeding inaccurate information to starry-eyed investors.

“It is clear this is bad news not just for Lending Club, but for our entire industry,” Peter Renton, who founded Lendit, a leading industry conference, wrote in a blog post on Monday. “Really bad.”

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