Why Canaan Partners backed a digital pawn shop

October 17, 2012, 12:42 AM UTC

FORTUNE — Pawn shops aren’t exactly considered a big target for venture capital investors, but there isn’t really any other pawn shop like Borro.

The London-based company lets users get short-term loans of between $1,000 and $1 million, by handing over high-end personal items like jewelry, antique cars and fine wine. It then charges monthly interest rates of between 3% and 4%, plus another 3%-3.5% in fees over the term of the loan.

Borro recently raised $26 million in new VC funding led by Canaan Partners, a U.S. venture firm whose portfolio includes P2P lending platform Lending Club. So I spent some time on the phone talking Borro with Canaan partner Dan Ciporin, who led the deal.

What follows is an edited transcript:

FORTUNE: How did you hear about Borro?

DAN CIPORIN: It came through a Lending Club investor. Not an equity investor, but from someone who used to work with us as an analyst and then went to work for a hedge fund that, I believe put as much as $10 million onto the Lending Club platform and was enormously happy with it. He was looking around at other alternative finance vehicles and found Borro but, because of the hedge fund’s criteria, couldn’t participate. So he said we should take a look.

At the time, Borro had just launched in the U.S. after operating in the UK for three years. So I contacted the CEO and he indicated that they were just starting to raise money. As he described the company, I heard a lot of similarities to the initial formation of Lending Club. Obviously there are differences in terms of maturity, and the loan source and the specific arena – structured credit for secured personal assets, as opposed to unstructured credit – but both were looking to disrupt finance.

One other big difference is that while Lending Club was largely for folks who needed a relatively small amount of money, while Borro is focused on people who have expensive jewelry, artwork, etc.

Correct. The focus, I’d say, is more on well-to-do folks in terms of assets. But it’s amazing that, when you look at the demographics, the number of people with lots of assets and very little liquidity is very high.

Would you consider expanding down market?

It’s something we’ve talked about, so I’d say it’s in the consideration stages. We want to make sure that Borro, unlike things like payday loans, help people monetize their past rather than mortgage their future. The reality is that, on the high-end side, there is no compelling need to go down market in terms of driving growth.

Borro isn’t really a digital pawn-shop, because it doesn’t actually sell the items. It just holds onto them as collateral. Any plans to offer more traditional pawn services?

The immediate answer to that question is no, although there is a discussion underway about whether that should be an option. One of the distinctions is that pawn shops’ average loan for items tends to be $200 and a lot of the way they make money is by hoping someone doesn’t claim the asset they paid so little for – and then sell it at a much higher price.

The premise of Borro, right now, is to be a temporary source of liquidity rather than a marketplace for used goods. The only exception is if someone doesn’t pay back their loan, at which point Borro does take claim of the asset.

So users actually give Borro the items? 

Yes, a lot of the assets are things that can be easily mailed, like a Rolex watch or diamond earnings. Borro gives them a prepaid FedEx label.

Will the company need to raise additional private financing? 

I don’t think the company will need more VC funding before getting to profitability. In terms of growth capital, it’s possible that Borro would raise some money to fund things like infrastructure improvements.

Such as?

Right now we store things in our own facilities, but if we had a way to track items without having to keep them on Borro’s premises, that could be the type of product expansion that could require growth capital.

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