(Jonathan at My Money Blog has a very in-depth two part review of Prosper.com. My Money Blog is one of my favorite sites, which is why it’s in my blog roll and feed reader. It’s worth familiarizing yourself with that article before continuing here with my rebuttals.)
At a couple of points, Jonathan mentions the prospect of Prosper (try saying “prospect of Prosper” 5 times fast) going out of business. DINKs Finance has mentioned this before. In James and Miel’s analysis, Prosper needs to be making a minimum of $560K while they were only at $380K. They determine from the conservative estimates that Prosper “would be starting to make a profit once they reach the $30M mark in loans.” Prosper passed the $30M some time ago. Prosper are now making $800K a year according to Jonathan’s analysis.
I’d say that James and Miel are very conservative with their estimates. In San Francisco the salaries are probably double the $50K suggestion and cost at least 1M a year, so I suspect there is a still a deficit. If there were ever a money crunch they would only need to employ enough people to keep the servers up and running. The business model is that of a market maker – they ship no product and carry no inventory. They don’t need warehouses and can scale by adding more central servers. Pets.com, Kozmo.com, and Webvan.com couldn’t claim that. You don’t need a business degree to realize that this is one of the most efficient businesses imaginable. In addition, Prosper has no competitors in the US (Zopa is supposedly coming at some point).
If we were to assume that Prosper still have $200K yearly burn rate from payroll and other experiences, it’s worth figuring out how long they can last before they’d go out of business. According to Prosper’s own website they are “Prosper has raised approximately $20 million.”. Using a third party source we find that Prosper “has raised about $12 million in a second round of funding… Prosper’s funding comes after a $7.5 million first round a year ago. Fidelity Ventures led round, which included existing investors Accel Partners and Benchmark Capital. Omidyar Network also came in as a new investor.” Hmmm, so that’s nearly 20M spread over a 200K a year burn rate, which gives them… nearly 100 years before they go out of business. I’m sure that some of that money has been spent already, so maybe they only 75 years left.
Let’s go back and look at the Prosper’s growth. When DINKs Finance had posted, Prosper had only an estimated $380K revenue. Five months later My Money Blog estimates that they have $800K – more than double. It may be hard to continue that huge growth rate, but I haven’t seen a sign of slowing down. Is it still growing? According to the Prosper Developer APIs, they have $45.5M as of 3/20, just 18 days after Jonathan used the $40M number. So suddenly instead of having a burn rate of 1M-800K (or 200K) it’s 1M-900K (or 100K). With the burn rate cut even further they can now last for over 125 years. Looking at the numbers, they should be profitable by May.
The more I look at it, betting that Prosper goes out business is like betting that the Yankees don’t win a game this year. Both are possible, but no one would take those bets.
Even though I just finished making the huge argument why Prosper won’t go out of business, it’s worth noting that lenders get the promissory note for each loan. The borrowers are directly in debt to the lenders. Yes, it would be impractical to go get $50 from 100 different accounts across the country, but you should be able to do so if necessary.
Here are some additional thoughts…
Prosper has doubled their managment fees, so one would have to take that into account as well.
Also, I’ve noticed that prosper is getting more word of mouth buzz. For example, my brother emailed me yesterday and mentioned that he heard about prosper from a friend in Hawaii. This also supports your contention that prospers amount of money under management is increasing.
I agree that it is very unlikely that they will go under. Even though they aren’t profitable I think they would easily get more funding if needed to get them there. They have a pretty lean business model – have you ever had to speak to a human? I just wouldn’t be like the “pensioner” person and drop a mil :)
I definitely will be looking into Prosper again in the future, it’s good that they show their stats openly.
Very interesting. I am thinking that the burn rate might be higher, could you elaborate on how you came up with 200k annual burn rate? The reason I ask is that during the dot-com boom burn rates of 200k PER MONTH were considered paltry. Now, I know that those companies were spewing money they shouldn’t have, but still, the running of the business may require more than salaries – how about legal fees, accountants, health insurance, rent (on top of servers), electricity, bandwidth charges, etc. This operation is bigger than two guys running a web server out of a basement.
However, since I’m a Prosper lender I am anxious to see it succeed.
Lazy Man says
For the most part I was taking the analysis that DINKs Finance (see link in story) had done and for the most part tripled it to 1M. I still think that this is pretty conservative as salaries alone are typically $100K in San Francisco and I assume that they have more than 10 people. Thus their burn rate is probably more than the $200K that had in the story. However, if they ever had a money crunch, they COULD scale down the company to two technical guys running a web server in a hosting facility. I’m sure that the 800K revenue (from Jonathan’s math) would more than pay for bandwidth, electricity, etc. of those people.
I want to make the distinction that Prosper CAN be run at a profit even if they choose not to do so at this moment. Prosper has very few “necessary expenses.” Many of the dot-com boom companies couldn’t scale down if necessary.
Marcus asked the question I wanted to ask. I am sure their burn rate is much closer to $2M/month for operations including data center fees, credit reporting bureau relationships so they can do hard pulls, etc. They’re also located in the Financial District of San Francisco, which is mostly Class A commerical space. (I helped move an office from 101 California to 345 California in 1998. Market rate at that time was like $50/sq ft. Could be up or down after the dotcom crash happened.) It seems that their location is inside the Charles Schwab HQ, and across the street from Crocker Galleria, one of the poshest shopping malls in the city. (Versace is located there, as well as the tasty San Francisco Soup Company. I recommend the butternut squash soup.)
Electricity is still pretty expensive in San Francisco, but a lot of places have their data in Arizona instead where the electricity is subsidized by the dams owned by the BLM.
I think you are right, they are probably choosing not to be profitable at the moment, and that’s probably a good strategy for them since they have an actual revenue generating business model.
Unlike Jonathan, I have $100 in fun money there. For me, it’s not a serious investment vehicle, nor will it ever be, but I like the concept a lot.
I’ve been lending on Prosper for over a year, with a small amount of money spread over 26 loans – my Prosper account value has just reached $2000. (Yes I know that this is not small to many, in fact it’s not a small amount of money for me, but I understand that it is a small sum of money as investing goes). After fees and whatnot, I’ve made nearly $200, and all of my loans obviously have between two and three years. I’m incapable of doing the math on this, but I’m happy with my rate of return so far.