Wall Street is downright giddy about online lending.
On the heels of LendingClub's blockbuster initial public offering late last year, smaller rival Prosper Marketplace has just raised $165 million from investors including the asset management units of Credit Suisse and JPMorgan, valuing the company at $1.87 billion.
Once tucked away in a small corner of San Francisco's start-up scene, LendingClub and Prosper have exploded onto the public stage in recent years, as big-money investors recognized the opportunity to generate fixed-income returns that far exceeded what they could get elsewhere.
Prosper's financing announcement on Thursday followed 300 percent loan growth in the first quarter to $600 million. In 2014, Prosper originated $1.6 billion in loans, compared with $4.4 billion for LendingClub.
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Both companies have grown rapidly by issuing consumer loans of up to $35,000 to low-risk borrowers at rates below credit cards, and turning to institutional and individual investors to finance the debt.
Prosper needed eight years to issue its first $1 billion in loans, reaching that mark in April 2014. It took just another 11 months to triple that number to $3 billion.
But even with such expansion, profitability is a challenge. Familiarizing consumers with the brand and efficiently spending marketing dollars requires a steep investment in technology and people.
Prosper spent $42 million on sales and marketing in 2014, accounting for over half of its total revenue. The company recorded a net loss of $2.67 million.
Spending efficiently and profitably
Here's one way to think about it: Every time you get a mailer, see a banner ad or get shown an offer and you don't become a customer, that's a cost for Prosper.
"It's all about going out doing marketing, getting customers and converting them with a contribution margin that pays for all the overhead and leaves a little profit," said Prosper Chief Executive Officer Aaron Vermut. "We have to be really efficient with our marketing dollars and focus on making the process and frictionless as possible while maintaining our underwriting standards."
In October, Prosper addressed that head-on, naming former Hotwire marketing head Cheryl Law as its chief marketing officer. The company is investing in mobile apps for iOS and Android, modernizing its web experience, which Vermut admits is a little "long in the tooth," and focusing on overall brand building.
Prosper is also utilizing technology that it acquired in the recent purchase of American HealthCare Lending to reach potential borrowers at the point of sale. In the case of elective medical procedure, when the customer is given the option to pay by credit, debit or with cash, another choice is to take out a Prosper loan. The algorithmic underwriting technology quickly prescreens to determine if the patient is eligible and on what terms.
"We're going to be moving into other verticals with the point-of-sale solution," Vermut said.
The new face of banking
Two years ago at this time, none of this seemed likely. A former Wells Fargo executive, Vermut had just joined, in January 2013, along with his dad and a fresh $20 million funding round led by Sequoia Capital. The company was in such dire straits that the new capital valued it at $40 million after the financing.
Prosper's value has since multiplied 46-fold and its employee base has jumped from about 80 to 310 (with only 35 of the 80 still on board).
The company has raised $280 million over that time from investors including BlackRock and Institutional Venture Partners. The new financing includes participation from USAA, the giant Texan financial services firm.
"Prosper is bringing much needed innovation to financial services," Vic Pascucci III, head of corporate development at USAA, said in the statement. "We applaud their efforts to build a product for consumers built on trust, transparency and excellent customer service."