As many investors hunt for yield and banks remain hesitant to lend at pre-crisis levels, peer-to-peer lender Prosper is hoping to fill that gap—with a key investor betting big on Prosper's strategy.
The peer-to-peer company has generated $95 million in funding, with the most recent round in January coming from Sequoia Capital, about $20 million.
Sequoia partner Pat Grady, who sits on Prosper's board, said there's big growth potential for the space during the next few years. "There is plenty of room in the space for additional competitors and it has the head room to become a big business," Grady said.
(Read more: Hunting For Yield? One Place You May Not Have Looked)
How Prosper Works
Prosper works to connect borrowers and lenders online. Borrowers post a loan listing with the amount they require on the website. Potential investors then review the listings and can select those that meet their criteria. Borrowers must then make fixed monthly payments, which are paid to lenders' accounts on the site. In this way, Prosper differs from traditional banks, since it does not use its own capital to make loans.
According to Prosper, investors using its service have average returns of 10 percent over three years. Investments like these are far less volatile than equities, and with the pay schedule similar to bonds.
"We are providing both sides of the market, both the borrower and the lender, with a unique proposition," said Stephan Vermut, chief executive of Prosper.