Trouble In Paradise: Lending Club And Prosper

By Mark Roderick CrowdFunding Beat  Sr. contributing editor and crowdfunding attorney with Flaster/Greenberg PC.

Lending Club and Prosper are going through a rough patch. Renaud Laplanche, the CEO and founder of Lending Club, just resigned amid allegations of financial irregularities, while Prosper recently laid off more than a quarter of its employees.

But those are only the ripples on the pond’s surface. What’s going on underneath is that Wall Street is losing faith in the business model – that is, losing faith in the quality of the loans made on the Lending Club and Prosper platforms.

Not long ago, Wall Street financial institutions couldn’t get enough of Lending Club and Prosper loans. Now the same institutions are cutting back and the effect is severe.

images

To me, there are two lessons.

This is a Brand New Business Model, and It’s Going to be a Bumpy Ride

Marketplace lending started with the observation that banks pay much less interest to depositors than they charged to borrowers, and that technology should allow someone to decrease that spread, making a profit in the bargain. Lending Club and Prosper grew by substituting proprietary algorithms for traditional bank due diligence. The algorithms seem to work,and institutional investors rushed in.

But marketplace lending has been around for less than 10 years and nobody knows how the algorithms will perform during a down cycle. It’s not a big surprise that Wall Street money managers, aware that the economy might be due for a downturn, are hedging their bets.

The fickleness of Wall Street money managers doesn’t mean the business model of Lending Club and Prosper is broken. To me, there is little doubt that algorithms and big data willreplace traditional bank due diligence – not only in consumer lending, but in other parts of the Crowdfunding ecosystem as well. But the algorithms and business models might well have to be adjusted, and nobody should expect a straight line from A to Z.

The fickleness of Wall Street money managers leads to the second lesson.

Wall Street is Fickle

Soon after launching a Crowdfunding platform, you realize there’s a choice where you look for investment capital. You might have begun with the idea of raising money from the public – that is, from retail investors – but you realize quickly that you can also raise money from institutions.

Raising money from institutions is often much easier because, well, institutions have more money. But there are a couple downsides:

  • You started off hoping to become a household brand, but if most of your money comes from institutions you risk becoming merely a deal originator for institutions, with far less clout and long-term brand value.
  • You started off idealistically hoping to bring high-quality investments to the public, but if most of your money comes from institutions, you aren’t.

The experience of Lending Club and Prosper reveals another downside: Wall Street is fickle. If you build your Crowdfunding business based on large investments from a handful of institutional investors it’s a lot of fun on the way up, but when the institutions pull the plug it’s a hard fall.

Ideally, a Crowdfunding platform can have it both ways, using institutional money to build the business while building its brand with the retail public, to the point where the business can survive and prosper even if institutional tastes change. I don’t know whether that’s possible, but I hope so.

261

Markley S. Roderick concentrates his practice on the representation of entrepreneurs and their businesses. He represents companies across a wide range of industries, including technology, real estate, and healthcare.

 

 

 

Tags: , , , , , , , , , , , , , ,

HEADLINE NEWS

Telegraph.co.ukThe biggest crowdfunding failuresTelegraph.co.ukThe popularity of equity crowdfunding has exploded in the UK, with platforms such as Crowdcube and Seedrs having raised hundreds of millions from investors wanting to buy a slice of an early stage business. But such invest [...]

VentureBeatHow crowdfunding will transform inner citiesVentureBeatIt's been only six months since Regulation Crowdfunding was legalized, and it's already proving to be highly successful funding source for new businesses. 50 percent of companies that have closed on their fina [...]

Israel's Insulog launches crowdfunding campaign for smart insulin ...FierceBiotechInsulog launched a crowdfunding campaign for a connected insulin tracker for diabetics who use insulin pens.and more » [...]

ForbesThree Tips For Chinese Startups Launching In The U.S. Market Via CrowdfundingForbesEntering international markets has always been challenging, but some Asia-based companies have a found a surprising new strategy: crowdfunding. Three of the largest crowdfunding campaigns this sum [...]

Crowdfunding: A Welcome Resource For ResearchersUtah Public RadioCrowdfunding is a term you have probably heard recently. The idea is to solicit a large number of small to medium donations in order to fund some kind of project or product development, and there are many online platform [...]

wwlp.comMaking sure you're giving to trustworthy crowdfunding effortswwlp.comKNOXVILLE (WATE) – There are more than a thousand GoFundMe and other crowdfunding sites to help people who lost everything in the Gatlinburg wildfires. How do you know you're giving to someone who r [...]

SprudgeRaw Material Are Crowdfunding A Coffee Mill In ColombiaSprudgeThis is not a call-out, it's just a fact, and I include myself among the accused. If you live in a city and like going to coffee bars, chances are you spend more time thinking about what's happening inside [...]

ForbesHow Asia Is Adopting Crowdfunding From The WestForbesEntrepreneurs of the Kickstarter crowdfunding platform make a demonstration with a picture of football player Luis Figo during the Web Summit at Parque das Nacoes in Lisbon on November 8, 2016. PATRICIA DE MELO MOREIRA/AFP/Get [...]

The IndependentThe Supreme Court Brexit case only happened because of crowdfunding – and you won't have heard of the people ...The IndependentWhen you volunteer in a legal aid clinic, you see how many people aren't able to access justice because of a lack of funds. Crowdfund [...]

Cosmopolitan.com4 Women Who Prove You Don't Need to Be Rich To Start Your Own BusinessCosmopolitan.com“It's a ton of work, but the wonderful and challenging part of crowdfunding is that there's no barrier to entry,” she says. “It's open to everyone.” Brown views he [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

CrowdFund Beat Media

WATCH: Crowdfunding Securities Lawyers & RegA+ Boot Camp ln.is/www.youtube.co…

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |