Prosper and Zopa Bring the Business Model

An ongoing theme in the Web 2.0 world is concern about the lack of business justification for many new companies’ existence—or as Russell Beattie recently put it, “the complete loss of business perspective.” But despite the occasional missile launched by the likes of Russell, much of the tech blogosphere’s concern feels perfunctory, like the last half-second of a radio ad when the announcer blurts “some restrictions may apply.”

That said, I’m okay with the suspension of disbelief necessary for many Web 2.0 companies. You never know what some of them may figure out along the way, and I salute them all for trying. It’s how innovation happens.

Where I get surprised, though, is when an Internet start-up emerges with the business case front and center, and it doesn’t get much attention. I’m referring here to Prosper, a company that launched in February. Except for a mention on TechCrunch, there is a notable lack of commentary about Prosper from the tech blogosphere A-listers. In fact, I didn’t find out about Prosper from my usual feeds; I heard about it from my wife Jacqueline, who read about Prosper in The Economist.

What is Prosper? It’s a people-to-people marketplace for loans. From the Prosper Web site:

The way Prosper works is intuitive to people who have used eBay. Instead of listing and bidding on items, people list and bid on loans using Prosper’s online auction platform.

People who want to lend set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on loan listings they select. People who lend can easily diversify using “standing orders”, which automatically make many small loans to different borrowers.

Prosper follows a UK-based company, Zopa, with the same idea. (By the way, for a great example of an effective corporate blog, check out Zopa’s.)

The core concepts for Prosper and Zopa are:

• They are lighter weight, more efficient middlemen than institutional lenders, enabling better rates for lenders and borrowers.
• By directly connecting lenders and borrowers—making them real to each other—Prosper and Zopa are lowering the risk of default while attracting investors who want to add meaning to where they put their money (helping start a particular person’s small business, for example).
• With Prosper, borrowers can affiliate into groups, which have incentives to attract new Prosper members and thus they become Prosper’s vir(tu)al marketing team.
• Both companies charge a small commission on each loan: 1% to the borrower.

Whether these concepts work in practice has yet to play out, although Zopa seems to have made solid progress in its first year. The real test on risk and fraud issues will be when the services become popular enough that they routinely attract, and hopefully defeat, bad or malicious users.

But the unknowable future aside, the interesting thing about Prosper and Zopa today is they are innovating in the business model first, technology second. Given the amount of talk about start-ups with those priorities reversed, you’d think that Prosper and Zopa would merit more attention, especially considering the potential parallels to what eBay did for person-to-person selling.

And speaking of eBay, one of Prosper’s board members is Bob Kagle of Benchmark Capital, an early investor in and current board member of eBay. Oddly, Benchmark also lists Zopa as one of its portfolio companies. Another Prosper investor is Omidyar Network, the investment group established by eBay founder and board member Pierre Omidyar. So if either Prosper or Zopa gets traction, look for eBay to buy it faster than you can say “Skype.”

In the meantime, I love the idea behind what these companies do, and I wish them luck executing their plans.