- 31Shares
May 3 will go down as a dark day in the history of this industry. First, we had OnDeck’s stock down 34% today after disappointing earnings announced last night. Now we have the first ever major round of layoffs as Prosper announced today they are letting go 171 people or almost 28% of its workforce.
I spoke with representatives from Prosper this afternoon about this big news. But before I get into that conversation below is the official statement from CEO Aaron Vermut:
It’s very difficult to say goodbye to our colleagues, and we’re grateful for their many contributions. Over the past year we invested for growth, but with the recent tightening of the capital markets we are refocusing on our core consumer loans business and building more resiliency into the company. This includes our key asset Prosper Daily. The Prosper loan portfolio continues to perform and meet investor expectations, and as we move forward, our priority remains on underwriting and servicing a high-quality loan product. We’re making these changes now from a position of strength to ensure we continue on our path to long-term success.
Early last year Prosper made their first acquisition that of healthcare lender, American Healthcare Lending. Soon after they announced a new point-of-sale product that they would be trialling through this new healthcare division. This new product did not work out as planned and the majority of layoffs are coming from this division.
In fact 97 of the 171 people laid off came from their healthcare division in Salt Lake City. They are closing down this office although their healthcare lending business will still exist as they continue to make their loans available for patients. But the point of sale business will be shut down – the result of an ill-timed bet on a future product.
Prosper was quick to point out that no one on the risk and underwriting team is being let go. They are “right sizing” the company for the level of volume they are at today and where they expect to be in the near future. Prosper is now focusing completely on its core business: three-year and five-year unsecured consumer loans.
Much has been made in the press of the headwinds facing the industry as investor interest has waned in the past few months. Prosper issued just under $1 billion in new loans in Q1 – its first down quarter since the current executive team took over in early 2013. It is fair to say it is a difficult environment right now for all platforms as traditional sources of funding have dried up. Now having said that, Prosper also reiterated that loans continue to perform, and new capital is still coming in today from Asia, Europe, the Middle East as well as new investors in this country. But it obviously isn’t enough to replace all the money that is leaving.
Prosper would not give a projection for Q2 but I think it is fair to say that they will likely experience another down quarter. Prosper’s viability as a business is not in any imminent danger, however, as they indicated they have more than $100 million in cash on hand.
My Take on the Bad News
There is really no way to sugarcoat this news. Coming on the back of the OnDeck earnings report it really is difficult times right now for this industry. Lending Club reports earnings on Monday and those results will be scrutinized more closely than ever before.
While I am the eternal optimist and I still very much believe in all the good things this industry is doing I have to say that this Prosper news will make the coming weeks and months much more difficult. I feel bad for the people losing their job many of whom I’m sure shared this same optimism for the industry.
I also feel bad for the many platforms who are desperately trying to raise money right now. There has never been a more difficult time to be raising new equity or debt and no doubt we will see some companies not make it this year.
I think it was Ron Suber, President of Prosper, who said it best in his presentation at LendIt last month: “It’s not just about origination growth, it is about building companies that last.” Sometimes you have to take a step backwards in order to ensure your way forward. That is what I think Prosper is doing here.
- 31Shares
This is surprise to NO ONE who understands this industry. Management cashed out at $1.8 BILLION. There is ZERO value here.
Yes, I believe that some of the management took some money off the table in their funding round from a year ago. But to say that management “cashed out” is misleading and unfair in my opinion. I know the top Prosper executives quite well and they are very much invested in this company both financially and personally.
Peter, I must be under a rock, but why is investor capital drying up in this space?
I’d like to know, too! I’m under a rock, but just pulled out money from another account with plans to further invest in Prosper…
There are many reasons that investors are taking their money out of Prosper. For a start Citi was a huge investor in Prosper (for securitization purposes) but that program ended because Prosper felt that their interests were not aligned properly and the fact the spreads have widened considerably.
Other investors are worried about credit quality. Prosper has raised rates a couple of times in recent months while at the same time raising loss expectations. Lending Club indicated recently that losses have also increased ahead of expectations.
The crazy thing here is that these increases in defaults have been relatively minor and they have happened before but given all the negative news this industry has seen recently some investors are spooked.
Most are not actually taking money out they are just not deploying new capital. I have spoken with the executive team at Prosper and they are working hard to replace the money and I am confident they will pull through this just fine. But the press love a negative story and have gleefully exaggerated the problems here.
Having said that big layoffs are negative for all involved – clearly Prosper made mistakes in growing too fast.
I doubt management was able to cash out 100% of their holdings at $1.8B. If they did, I’d love to get the list of VCs who allowed this, so I can sell them some cool stuff as well.
You can usually cash out ~10% at most of your holdings.
Sam
You wrote “Prosper was quick to point out that no one on the risk and underwriting team is being let go.”
But the WSJ wrote “Some of the management will be leaving too, including the chief risk officer, Josh Tonderys,”
The Chief Risk Officer is certainly part of the RISK TEAM, eh? So the statement Prosper gave you was note entirely truthful. Why is the CRO leaving?
Fair point Fred, I should have caught that. I admit I didn’t ask specifically about Josh Tonderys in my conversation.
WHY isn’t PROPER public so I could short them!!!!!
Yes, I am sure you are not alone in that sentiment. I don’t see Prosper going public any time soon.
Makes me wonder if I should invest with Prosper or not…
I still have significant capital invested at Prosper and I will not be making any changes. I still believe in the company and the management team.
I just have $25k with Prosper and will leave it for now.
I actually like LC’s site and interface better, so I have more invested with them.
Peter,
Thanks for the update. Best article yet on the subject compared to the other major media outlets.
It’s pretty interesting how quickly times change so fast. I’m not sure whether this is tough times, or simply rightsizing expectations in terms of valuations and growth.
Even if Prosper is now valued at “only” $1B or less, it’s still not bad from where it came from.
Very smart of management to cash out some in the previous round. All private company employees who are able to cash out some of their equity to VCs should. We’re in for a two year fade IMO.
Sam
Sam,
I think this can officially be called tough times. And I would be shocked if Prosper is still a unicorn after this. But as a private company that does not need to raise money right now they have the luxury of time on their side. We all hope this is a temporary malaise.
Though I’m long since out of the industry, (and back in online dating where I started) it’s good to read your excellent writing Peter. 🙂 Hope a few of my old colleagues made it through.
Good to hear from you Glenn and yes how times have changed since you were at Prosper.
Wow! Blast from the past? I can totally see you return to the online dating industry! I still remember one meetup we went to………. I saw your magic at work.
What company?
S
Hey Sam!
I work for the largest online dating company you’ve never heard of – White Label Dating. We control about 25,000 dating sites, but since we run the back end and allow others to put their brands on us, we are pretty incognito. 🙂
Believe it or not, online dating is a $4B a year business worldwide and 1 in 3 marriages now start online.
G.
Very cool! Could I start a niche online dating site and employ your company to set it up and run it? I think it would be fun! Just need to get a rough idea of the cost. Let’s connect!
Sam
I would guess their institutional investor demand has almost entirely dried up. The pure marketplace models are dicey…when things turn…they can turn quick and ugly. Combine that with a very heavy cash burn and you are in dire straits. That last round will keep them afloat for a bit, but this is no short-term blip. Their business is in peril. And just wait until SoFi meets their maker…that place is king of turds.
To say institutional investor demand has “almost entirely dried up” is inaccurate and clearly an exaggeration. Given that institutional demand at Prosper has been 90-95% of their loan volume for some time that would assume a 90%+ dip in originations. I am very confident that will not happen. Now, having said Prosper will almost certainly have another down quarter and it will probably be a significant drop. But there is still demand for their loans, it is just not as strong as it was a few months ago.
I agree that totally dried up is an exaggeration. The thing is.. we shouldn’t feel for the founders, who’ve been able to liquefy. We should feel for the EMPLOYEES who’ve taken salary cuts to join startups who are certainly NOT going to get liquid any time soon.
Sleep w/ one eye open startup employees! You can get richer working at an established firm.
But it’s hard to avoid the lottery ticket sometimes.
Sam
Hi Peter,
I have had a stomach ache for a while over the Lending Club stock price. So, I’ve been looking for an article to attach questions too. Unfortunately, this article had to be the one. A few questions: 1. In view of the news coming out of Prosper, do you expect similar news from Lending Club? 2. What do you thinking is accounting for much of the negative sentiment toward Lending Club? The stock was down more than 50% from the IPO opening price before the news from Prosper. So I’m wondering what you believe is driving the decline. 3. You’ve invested heavily in Lending Club and I’m wondering if you are losing any sleep. I’m just trying to gauge your level of concern with the future prospects of the company.
Ok. Many of these questions could take an entire blog post but I will do my best to provide some succinct answers.
1. No, I don’t expect similar news from LC but they announce Q1 earnings on Monday and I don’t expect everything to do rosy there. But no layoffs is my prediction.
2. The bears are worried about many things around LC. That they won’t be able to get to scale, their operating margins will not improve, the landscape is too competitive causing customer acquisition costs to rise, the regulatory environment is uncertain and delinquencies are increasing. The decline yesterday was because of ONDK. They are the only other U.S. public company in the online lending space.
3. No, I am losing no sleep over this. I am not worried about the long term viability of either LC or Prosper.
This is all a bit confusing and frustrating for just an individual investor like myself. It sounds like these are mostly problems within the huge institutional investor realm. Which for individual investors like myself, we never wanted to see to begin with. We were happy when LC and Prosper were simple individual-to-individual loan-matching services.
Now it’s sounding like they’ve gotten into trouble trying to grow way beyond individuals like us. I hope they don’t take us down with them. I’d be happy if they just went back to making this about individual investors again, but that’s probably out of the question now. Frustrating.
Simply don’t invest with them. You are taking on operating risk as well as credit risk. Think about it. If Renaud said there was no credit deterioration in the past 60 days-then all of a sudden—gee we have credit deterioration so we have to raise rates.
Do they sound like they know what they are doing?
Just use common sense-there are plenty of other better risk/reward investment opportunities.
Don’t be a guinea pig for them.
That (unfortunately) may be something I’ll have to consider going forward, but there’s still the matter of hundreds of notes already purchased for the next 3-5 years to consider as well.
Hopefully that’s premature though, and that Peter is right about this not being anything to lose sleep over regarding the viability of the operation going forward. It’s just frustrating seeing the institutional lenders (which we hated to see in the first place) now putting the operation at risk for the individual lenders that P2P lending was designed for in the first place. Or at least that’s the way it appears if I’m reading this news correctly.
Sorry to say I told you so……….amazing how fintech guys don’t listen to women…expensive lesson
Also-if I have a loan with lending club and know they are in such disarray-do I pay it back? Is there focus on collections diminished if the ship is sinking? What is going to be the impact on defaults?
Peter,
It is pretty clear in hindsight that Prosper has grown too fast. And they have done the vast majority of this growth on the back of institutional investors. I agree it would be better to have had more balance with more retail money in there. The trouble with having a purely retail investor focus is that it is very difficult to get to scale and thereby get to profitability. But a bigger focus on retail would have been more prudent – something that I have been pushing them on for many years now.
Lending Club has always had a stronger focus on retail so when they report earnings on Monday I don’t expect to see the same story as Prosper.
Peter,
It is quite an irony that this was predicted almost two months ago by an employee at Prosper. Do a quick google search ‘prosper layoff’ and you come across this glassdoor link from Feb 26
‘Prosper.com – Declining market and culture – set for layoffs’
I wonder what sort of culture has this company been going through. Almost all the reviews are negative since the beginning of the year. This doesnt compare the same across key companies including LC.
Do you have any views there and what have the execs being doing? i would guess it must be challenging to attract and retain key talent after all this.
Very interesting. I was not aware of the Glassdoor prediction from two months ago. Clearly they have had some challenges and it would be only natural that there is some negative sentiment inside the company. The execs I speak with are working very hard to right the ship but keeping morale up with the rank and file is made even more challenging I imagine after this week’s news.
Peter, thanks for the coverage. Been a while since we have connected. As you know, I manage my own small fund in the space and actually stopped buying from LC/Prosper over six months ago. Lots of reasons but mostly related to the product type no longer being suitable for the objectives of my fund. Regardless, it’s never fun to see news like this as I’m still a big fan of both companies and will invest personally as soon as they’re available in my state. I’m now rolling the capital into different income strategies now that I believe offer more attractive risk/return characteristics. Anyway, just wanted to drop a note and say thanks for the perspectives.
Hi Dan,
Good to hear from you. We missed you at LendIt this year. Curious to know hat income strategies you believe are more attractive right now. Can you share?
Peter…I missed being there! I had a conflicting conference and given that the MPL industry is not my primary focus at this point, I made the decision not to attend. I did miss it, though.
From an income opportunities standpoint, I’m primarily focused on real estate – both on the debt and equity side. Short term private lending to proven developers has unequivocally been the best performing slice of my fund’s portfolio. I also started a new fund to acquire real estate in stable, boring target markets where valuations are proven to have resiliency in a downturn, but rent-to-price ratios are attractive, thus generating strong yield. I’ve also been a buyer of small business loans, but less so recently.
Interestingly, the tables have turned somewhat and I’ve reconnected with lots of folks in the online lending space to kick around the idea of obtaining alternative funding for my RE deals. I haven’t pursued it yet as it turns out brick and mortar banks are still pretty good to work with on mid-to-large scale real estate, but I may do a deal with FundRise, RealtyShares, RealtyMogul, etc. one of these days.
For what it’s worth, my sentiment may change entirely with all the bearishness resulting from recent news. I wouldn’t be surprised if capital leaves, pricing flips, rates go up, and LC/Prosper are hungry for capital again – in which case I’d be the first in line to buy. Tough part there would be raising capital for the strategy given market sentiment. Will be an interesting next few months. Anyway…hope you are well! Best,
Dan
Thanks Dan. Real estate is certainly interesting and I am starting to add more exposure there in my own portfolios.
Surprisingly, capital is not leaving in droves from what I have heard the past two days although it looks like the Goldman/Jefferies securitization is going to fall through. Both companies have stopped buying loans apparently.
Can I ask you guys from an institutional POV, why would it be bad that LC and Prosper are raising rates? Doesn’t that simply mean higher returns for the investor in these loans? Or, is the rate increase an indication of deteriorating credit quality of the borrowers?
I’m a small time Prosper lender/investor who has made 7.2% on average a year for 3 years. Are the big guys seeing what the little guys aren’t?
Prosper let go of SLC staff mostly. So doesn’t that mean if they didn’t acquire whatever in SLC the other year, this news wouldn’t be as big of a deal?
Empire Building syndrome is inherent in all people. Just need to take advantage of those with the greatest need.
Sam
it means their pricing advantage over credit cards disappears. and once that is gone the customers go bye-bye. This entire business is a giant credit card refinance game.
I am in total agreement with this statement. One of the major barriers the industry has to solve for is replacing the credit card so that it’s not just a credit card refinance tool.
And it’s funny, because sites like Nerd Wallet and Credit Karma are one big credit card referral machine!
How can these companies talk about helping financial consumers, but at the same time, make the majority of their revenue from credit card referrals with interest rates in the 15% or higher range?
Someone tell me what I’m missing!
Sam
While I agree that Lending Club and Prosper still rely too much on credit card refinancing – they are obviously well aware of this fact and are doing their best to become more diversified.
What Observer and Jason fail to realize is that the rates at LC and Prosper today are still well below where they were three years ago and also still well below the average credit card rate. Having said that, there are two reasons to raise rates: the need to attract more investors or an increase in delinquencies. I think both stories are in play right now.
My bigger concern is that those credit card lines remain open for consumers once they refi their debt. A segment of consumers will inevitably max out their cards again and end up having troubles.
Yes, that is always a concern and will be watched very closely when the next recession hits. I do remember seeing a study from LC a couple of years ago that said a high percentage (I think it was 70% or more from memory) reduced their revolving credit within six months of taking an LC debt consolidation loan.
I think there’s a number of problems at work here. First, Prosper grew way too quickly. Second, all of these platforms have overpaid for borrower acquisition in the last 18-24 months. They all had to try and out bid each other for borrowers in the online lead marketplaces like Credit Karma and LendingTree.
How do you see the borrower acquisition strategies shifting over time so as to reduce the cost?
Jason,
I agree that customer acquisition costs have become a problem and many platforms are paying way too much.
I have seen many major platforms move away from Credit Karma and LendingTree in recent months but there is no easy answer here. A unique source of borrower flow is one of the most vital pieces of the puzzle now and I expect many more partnership deals and even acquisitions to any company that demonstrates they have a unique advantage here. Prosper’s purchase of BillGuard is one example. bank partnerships is another. There will be many more announcements in the 12 months on this front I expect.