Need cash to start a business? You could try getting a loan from a bank. Or sheepishly asking your parents. Or - heaven forbid - you could approach a venture capitalist. But now, there is a new option: You could ask a group of strangers from across the country.
Chris Larsen, co-founder of E-LOAN, and John Witchel, an entrepreneur, have started Prosper.com, an online marketplace for people-to-people lending. According to its Web site, Prosper was "created to make consumer lending more financially and socially rewarding for everyone."
The concept is simple and innovative: Prosper allows a person to list and bid on loans in an online marketplace that works similarly to eBay. Borrowers create loan listings up to $25,000 and set the maximum interest rate they are willing to pay. Lenders set the minimum rate they are willing to earn. After the bidding ends, Prosper handles the collections and repayments on behalf of the lenders and borrowers.
Lenders are not left to blindly decide on a borrower. Aside from viewing borrowers' credit scores, lenders are able to select borrowers based on affiliation with certain Prosper groups.
In an interview with BusinessWire, Larsen stressed the importance of groups and said they "are at the heart of fostering a culture of responsible borrowers."
These groups are comprised of people with similar interests, backgrounds and affiliations, and the reputation of these groups depends on the repayment records of their members. This creates a social environment where group members are encouraged and pressured to keep their repayments on schedule. Groups that have earned a good reputation are thus able to attract lenders offering lower rates.
Unlike a traditional bank, Prosper allows borrowers to receive money from lenders who are genuinely interested in the reasons behind the loan. This means that entrepreneurs looking for cash to start a business could find lenders who are also entrepreneurs and would like to help out with a new venture.
Prosper generates revenue by charging a one percent fee on funded loans from borrowers and a 0.5 percent loan fee to lenders.
Prosper's ties to eBay do not end at their bidding-style similarities. One of Prosper's main investors is the Omidyar Network, established by eBay founder Pierre Omidyar, a Tufts alumnus (LA '89). To date, Prosper has raised almost $20 million through its various investors.
For entrepreneurs, Prosper could become an alternative source for obtaining start-up capital. The most common sources for start-up capital are banks, angel investors, venture capitalists and friends and family. All of these sources, however, have their disadvantages.
For instance, young entrepreneurs may experience great difficulty obtaining bank loans due to a lack of credit history or insufficient collateral. Many entrepreneurs also avoid venture capital because of the legitimate fear of losing managerial control of their businesses.
Pamela Goldberg, Director of the Tufts Entrepreneurial Leadership Program, believes Prosper is giving more individuals the opportunity to become angel investors. Goldberg sees Prosper as creating a system that is "bypassing banks but isn't doing things so terribly different. It's allowing individuals to prosper by lending to other individuals without taking a piece of their business."
While Goldberg believes there is potential for Prosper to become successful, she is nonetheless skeptical about people's willingness to lend money to strangers: Prosper offers no guarantee that loans will be repaid and borrowers are not required to have collateral.
Goldberg recognizes that Prosper does offer some interesting benefits, but she warns that there is a fairly high level of risk involved in using its system. In her opinion, "the theory behind Prosper is terrific. Sometimes you need a couple thousand dollars to get out of trouble, and this takes away the middleman or the big corporation. It's a good thing for the borrower, but it's hard for me to understand who would lend and what would motivate them to lend."
Prosper has the potential to serve as a useful lending tool for many people. For young entrepreneurs, especially, it could be a new and convenient source for venture funding.
Prosper was created with a social vision of connecting people to people. Its success, much like eBay's success, will likely be dependent on one factor more than any other: trust.
