New Fintech Unicorn – Prosper!

WIRED: Online peer-to-peer lending platforms have surged in popularity by connecting people who want to borrow directly with people who want to lend. And now banks want in on the action.

On Wednesday, San Francisco-based startup Prosper announced a new $165 million round of financing led by Credit Suisse NEXT Investors, and which included participation by J.P. Morgan Asset Management, SunTrust Banks and USAA, among others. The new funding raises Prosper’s valuation to $1.865 billion—making it eligible to join the elite club of “unicorns,” or startups valued at over $1 billion. The round also shows just how big investor appetite has gotten for startups offering tech-driven solutions to bypass traditional banking methods.

The idea is simple: services such as Prosper sidestep traditional bank loans, which can involve complicated applications and lengthy wait times, and connect borrowers and lenders directly online. Both Prosper and rival Lending Club launched in 2006. In spite of the 2008 economic meltdown and a host of regulatory issues, the two emerged as credible financing alternatives with very real consumer demand. Prosper has issued more than $3 billion in total loans, while Lending Club has facilitated more than twice that amount, to the tune of $7.6 billion.

And they aren’t alone. A slew of similarly-themed startups are cropping up to expand the world of financial tech, or “fintech,” on the whole. There’s OnDeck, another company that lends sums of money to small business owners who have a hard time borrowing money from banks, and Fundera, a kind of Kayak for small business loans that shows potential borrowers all of their options on one platform. On the wealth management front, companies like Wealthfrontand Betterment offer automated portfolio management at prices they say are cheaper than traditional money manager. Lenda seeks to transform home loan financing with a service that runs entirely online.

Investors have picked up on the trend, which is heading into the mainstream. In December, both OnDeck and Lending Club saw hugely successful IPOs; OnDeck’s shares rose as much as 40 percent in their market debut, while Lending Club raised over $1 billion in its offering.

Taking Credit

But even as some startups seem to be shooting ahead—Lending Club is the clear leader of the pack so far, with such esteemed investors as Kleiner Perkins’ Mary Meeker and Morgan Stanley CEO John Mack sitting on its board, and even a little company called Google taking a minority stake—Prosper insists that it’s different in ways that will make it a winner in its own right.

Prosper CEO Aaron Vermut says his company is singularly focused on unsecured consumer credit loans—or loans that aren’t protected by any collateral. In the process, he says Prosper is growing. In the last quarter, the company facilitated close to $600 million in loans, 200 percent more than the same quarter one year ago, he says. “[Lending Club] used to be ten times bigger than us, and now they’re maybe two or two and a half times bigger than us,” Vermut says.

Vermut admits that there’s no guarantee the platform will remain unscathed in another economic downturn, but he’s relatively confident that Prosper may be able to weather a potential crisis, in part because of the company’s model of reliance on consumer credit. “Credit card companies actually did reasonably well through the crisis of 2008,” he says. The economy would have to tank hard before Prosper’s lenders saw real losses, he says. Loan defaults would have to jump to more than triple the platform’s current 3 percent rate.

It’s no coincidence, Vermut says, that many regional banks and asset management groups participated in financing Prosper this time around. The move was strategic rather than a potential conflict, he explains, because small banks don’t traditionally offer unsecured credit loans, anyway. “We’re really good at lending credit to consumers,” he says. If that’s true, banks are going to want a piece of that action, whether they’re the ones lending the actual money or not.