I received a comment to last week’s blog, “Funding for the Rest of Us Entrepreneurs”, asking for specific alternative lending sources that start-ups could access.  I had mentioned peer-to-peer financing as a potential funding growth area.  Peer-to-peer financing or crowd financing are financial transactions between individuals without the intermediation or participation of a traditional financial institution. Peer-to-peer financing can take the form of debt, equity or grants.

Peer-to-peer lending sites registered with the SEC, such as Prosper and Lending Club, have become viable funding sources for debt capital, with $196 million and $113 million funded loans to date. This past week’s announcement that Diaspora.com, a proposed Facebook alternative, had raised more than $100K in pledges in less than 12 days on Kickstarter.com increased awareness and greater hope for peer-to-peer pledged capital.

A more detailed description of each of these sites follows:

Prosper – provides a marketplace for borrowers and lenders.  Borrowers create a request with a description of the reason for the loan, the loan amount ($1K – $25K) and the maximum interest rate.  Borrowers also can include personal stories, endorsement from friends and group affiliations.  Prosper provides a summary of the borrower’s credit history (Minimum 640).  Lenders then can bid on the borrower’s listing in increments of $25 – $25K.  Prosper takes loans of the lowest interest rate and combines them into one loan.  Prosper also administers the loan repayment.

Lending Club – works similar to Prosper except that Lending Club sets the interest rate instead of bidders.  The minimum FICO score is 660.

Kickstarter – Online medium for entrepreneurs and artists to raise money for specific projects.  Project creators develop a project page that provides a description of the project, the amount of funding required and rewards for different levels of pledges.  The creator also must set a funding deadline (1-90 days).  Backers pledge money to projects they want to support.  The minimum pledge is a dollar.  Only credit cards are accepted.  Backers do not received any debt or equity position in the company or project.  Only projects that reach the funding goal by the deadline receive money.

There remains a gap in peer-to-peer equity investing.  This gap looks like it will soon be filled by Profounder.com, which is scheduled to launch this fall.  Profounder is led by Jessica Jackley, previously the co-founder of Kiva, the first peer-to-peer micro-financing site.  Although information on the company is limited, the Profounder landing page describes the service as a way for entrepreneurs “to create a simple professional fund raising pitch; reach out to friends and family members and the community for investment; collect funding online; and manage and reward investors over time”.

Crowd sourced equity capital solutions have not worked to date due primarily to securities regulations that prohibit companies from “general solicitation and advertising” unless towards accredited investors, which most people are not.  It will be interesting to see how Profounder will work around this hurdle.

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About the blogger:

Jeff Maglin is a partner at vokse, a business consulting firm that specializes in developing business plans for start-ups and early stage ventures.  Jeff has over 10 years of business plan writing development experience, working in a range of industries and across business functions. Prior to his current role, Jeff held management positions in product management, marketing and sales. Jeff also is active in the New York City entrepreneurship community.  Jeff has a BA from the University of Michigan and an MBA from Carnegie Mellon University.

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