At the 11th hour, on February 1, 2010, a group of 6 venture capital firms injected a small amount of money ($2 million) into Prosper.com in the form of a bridge loan. The terms of this loan were (as far as has been disclosed) identical to the terms of the $1 million investment from Nigel Morris on November 10th. These loans will convert to common stock when (and if) someone comes along with the next major chunk of money in the form of an equity investment.
This is a small amount of money on the scale of Prosper's operation. If we assume, as I did in the last post, that Prosper continues to burn cash at the same rate they did between the June and September quarterly reports, this new money is sufficient to keep Prosper operating until April 1st 2010 -- a relatively short time from now. Prosper's management will be working hard to find the next investor before this time is up. I wish them well.
To have a chance of growing to a sustainable revenue, Prosper needs an injection of $20 to $50 Million. Given the difficulties the business has had so far, it seems unlikely that this money will appear in chucks larger than $5 or maybe $10 million at a time. Management has lots of work to do.
While we're on the subject of sustainable business, lets look at how Prosper's loan orginations have grown with time. I estimate that Prosper needs $50 Million/month in loan originations to be sustainable. During the first year, volume grew nicely. After that there were a number of problems, including the SEC shutdown in late 2009.
Unfortunately, Prosper's loan volume after the restart have been comparable to those first months of 2006. Momentum died during the shutdown.
During the first two years Prosper's loan volume was driven largely by PR. In other words, you could see that borrowers came to Prosper after reading stories about Prosper in magazines and newspapers. Every time such a story appeared, you would see a spike in listings. PR is great for a new company, but it isn't sustainable. In the early days Prosper also managed to create an incredible buzz from a highly motivated community. That momentum was killed by Prosper's arrogant attitude toward the community.
For prosper the marketing problem is how to attract growing numbers of borrowers in a sustainable way. (Without PR and without a community?) Prosper has some new folks on board to try to sort this out. Now we get to sit back and see if they solve the puzzle.
And of course if the last 3 years have taught us nothing else, they must attract the right kind of borrowers -- those who will pay you back.
Great discussion among P2P lenders is found at Prospers.org .
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What will the repercussions of Prosper's bankruptcy be on other P2P lenders, notably Lending Club? Will potential lenders conclude that this business model in general terms is toast, or will they judge each one on its own merits?
ReplyDeleteDear veggivet,
ReplyDeleteI don't know the answer.
Perhaps Prosper's passing (if such happens) will make a contribution to the industry as a whole by showing what does and what does not work in the general P2P framework...
ReplyDeleteSometimes if you're investing in startups you have to invest in several to get the return, the first few being trailblazers that blaze the trail and develop the model.
I suspect P2P v2.0 may not be too far over the horizon :)