Prosper.com is losing money
Many of our readers know, we've been working on ways to improve our return on equity to pay for graduate school. We were considering putting a chuck of cash into prosper.com, but decided against it for a number of reasons.
Having a bit of money in the site, we still spend a fair amount of time dealing with prosper related business, including writing about the company, managing our loans, and corresponding with other bloggers about prosper.
Most recently I heard back from Prosper's corporate staff, and based on my correspondence with them, I've concluded the company is NOT currently profitable.
My reasoning is as a follows:
Income: From what I've been told, Prosper has brokered about 19 million worth of loans. Now, I assume that Prosper's primary income stream from loan origination, brokering fees and miscellaneous (Click here for their fee info), is about 2.00%. On a basis of 19 million, their total before tax income would be $380,000.
Expenses: Now, Prosper has 7 management staff, probably a techie or two, and is looking to hire another tech. Also, they have a call center in India. Plus, the company has to cover over head and office space. All of this costs money.
Assume that each of these seven management staff earn a salary of 50,000 annually (that's a LOW estimate for San Francisco) and that the call center contract is probably an additional $40,000, they you have a rough total of $540,000 in staff salaries (10 staff at 50k, plus 40k for call center). If you assume that leases and overhead is an additional $20,000 annually, then prospers total expenses, minimum, are: $560,000 (extremely conservative considering start up costs).
Expenses greater than income: Last time I checked $560,000 was more than $380,000. In other words, It looks to me like proper is cash flow negative, e.g. they are LOOSING money. From our estimates, which are conservative, Prosper would be starting to make a profit once they reach the $30M mark in loans.
This is not unexpected, after all, they are a start up. However, it does indicate that Prosper's long term viability is questionable. For those of you who are considering putting a large sum of money into the service, you might consider taking a more limited position, or waiting until the figures become somewhat more favorable.
Best of luck and have a great day!
-James and Miel
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4 comments:
I think the key word is that they are a start up. I believe they are well funded, but currently forget the numbers.
It extremely rare for a company to open it's doors and be profitable right away. I doubt that even Google was making money 8 months after it opened it's doors. Was E-Trade? I doubt it. It does take some costs to lay the infrastructure down, but the key thing to note is that they are like Ebay. Their only costs could be development and marketing. They own no product and are just a broker. This means that their costs will stay fixed, but borrowers put more money in loans their profits will grow.
They could be holding the money that isn't in loans (i.e. what's sitting in people's account) in some interest baring account making another 3-4% on it. That could be a significant chunk of change.
Lastly, lenders hold the promissary note for your loans, so if Prosper goes out of business, the money is not lost.
I wonder why you emphasize "NOT currently profitable" and "LOSING money", when like you say, it isn't unexpected.
Prosper really is just waiting for the economies of scale to kick in - it seems that they won't need actually too many more people to manage it. Maybe more technical support. But so much of it is run by the users themselves that there seems like there is little for the people who work there to actually do. Once more loans start coming in, they should start turning a profit. I still think it is a very viable business model.
Note the bit at the bottom about venture funding:
http://sfbay.craigslist.org/sfc/sls/242714631.html
Prosper claims they have $20 million in venture funding. By your (very conservative) expense estimates, they'll be working through that for 15 years or so, even if they make no revenue at all. I suspect they're spending about twice what you posted, but I'm not terribly concerned about it.
However, your caution is well founded. As an investor, putting the whole wad into any single investment scheme (with a few exceptions - index funds and whatnot) is a bad idea if you have the oppertunity to diversify. And no, loaning to hundreds of people through the same site isn't really diversified.
What is your assessment of Prosper now 1 year later?
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