Facebook, Lending Club and Microsoft

A little over a month ago TechCrunch made an argument that Facebook could be the next Microsoft. I thought it was an overly bold headline and I countered with an article of my own - Why Facebook is NOT the next Microsoft: Lending Club example. Peer to peer lending through Lending Club is only available to Facebook users.

Wired has just published a glowing article about Facebook that makes the same Microsoft comparison - How Mark Zuckerberg Turned Facebook Into the Web's Hottest Platform.

"And by turning itself into a platform for new applications, Facebook has launched a whole new branch of the software development industry, just like Bill Gates did with MS-DOS in the 1980s. By allowing developers to charge for their wares or collect the advertising revenue they generate, Zuckerberg set up a system for every programmer to get paid for their efforts. Now venture capitalists like Bay Partners are scrambling to fund almost anyone who has an idea for a Facebook application."

According to the article, Facebook turned down a $1 billion dollar from Yahoo. I've heard the claim before but not the details:

"...Zuckerberg disagreed, but when Yahoo came calling with a bid of $1 billion in cash, the pressure became too much. He relented in July, verbally agreeing to sell Facebook to Yahoo. Strategically, it seemed like a good match. Yahoo had hundreds of millions of users, but its foray into social networking was struggling. Facebook had cool tools and was looking for a mass audience.

The timing, however, couldn't have been worse. In the days after Zuckerberg agreed to sell, Yahoo announced it was projecting slower sales and earnings growth, and that the launch of its new advertising platform would be delayed. Its stock price plunged 22 percent overnight. Terry Semel, Yahoo's CEO at the time, reacted by cutting his offer from $1 billion to $800 million. Zuckerberg, who had been warned about Semel's reputation for last-minute renegotiations, walked away. Two months later, Semel reissued the original $1 billion bid, but by then Zuckerberg had convinced his board and executive team that Yahoo wasn't a serious partner and that Facebook would be worth more on its own. He rejected the offer and became famous as the cocky youngster who turned down $1 billion.

Today, Zuckerberg, 23, is famous for other reasons. For one thing, analysts think he could be the nation's richest man under 25, with a net worth estimated at $1.5 billion. But more important, he has transformed his company from second-tier social network to full-fledged platform that organizes the entire Internet. As a result, Facebook is the now most buzzed-about company in Silicon Valley, and Zuckerberg is constantly compared to visionaries like Steve Jobs and Bill Gates."

The comparison between Zuckerberg and Gates is probably a better one to make that Facebook and Microsoft. Both dropped out of school to build a technology company. Gates built an empire and became the richest man in the world. Zuckerberg is estimated to be the richest man under 25. It's a wonderful story and I'm a big fan of Facebook. Lending Club was very wise to start on the Facebook platform. But Facebook is still not the next Microsoft.

If Facebook is the next Microsoft what does that make Lending Club?

Lending Club receives $10 million in venture capital

Tomorrow Lending Club will announce that is has received $10.26 million in Series A funding led by Canaan Partners and Norwest Venture Partners. Since its launch three months ago, nearly $1 million in loans have traded hands on the peer to peer loan marketplace. According to TechCrunch, Jeff Crowe and Dan Ciporin (former CEO of Shopping.com) are also joining Lending Club's board of directors.

Rex Dixon, director of social media content, says Lending Club will use this money to expand beyond the Facebook platform. GigaOM also writes about the Facebook connection, "It may turn out to be a new way of proving your model: Launch an application on the Facebook Platform, see if it works, and if it does, take your hard data to a group of VCs and raise capital to grow your business." As I wrote about in an earlier post, I think the Lending Club/Facebook association is overblown. The technical challenges of moving from Lending Club to a broader audience seem very small and would probably cost little money. I would have to guess that Lending Club plans to launch a significant marketing campaign with the funds and hire more people.

The peer to peer lending market is hot right now. In June Prosper secured an additional $20 million in venture captial (for a total of $40 million) and will expand to Japan. Globefunder has raised 1.5 million in seed capital and Loanio is expected to launch this fall.

Update: Lending Club has now announced the VC on their blog. According to their CEO, Renaud Laplanche, "Facebook now has over 6 million active user groups which are prime targets for financial services. However, Facebook users are younger than the average online population, and our strict screening criteria (640 minimum credit score, less than 20% DTI) led us to decline about 75% of all applications, as younger borrowers tend to have a lower FICO score. We are coming up with new tools to help the “declined” borrowers understand the importance of good credit and take specific actions to improve their credit score. We will be using the funds to expand beyond our current Facebook application."

Why Facebook is NOT the next Microsoft: Lending Club example

Duncan Riley presents the argument that Facebook could become the next Microsoft in a provoking story on TechCrunch. I disagree. I'll use Lending Club (which is available exclusively to Facebook users) as an example. Facebook provides a community of users and publicity to Lending Club, but Lending Club is not tied to the Facebook platform. First, excerpts from Duncan's argument:

"Facebook is starting to become the one stop shop for content and interaction, be it through feeds, blog creation, image uploading and just plain ol’ social networking...In May 2007 Facebook launched F8, the Facebook Platform. In a market place that was rich with choice, Facebook offers a platform from which interactive applications can be run exclusively from Facebook itself. Although today it’s far from becoming a dominant platform, in little over 2 months 1000’s of new applications have been offered to Facebook users, with many, many more to come. The richness of the various applications on Facebook is driving user growth; simply people flock to where things are happening. In many ways the growth is similar to the growth rates in the early days of Microsoft Windows."

"Although Web Operating Systems lack wide user uptake to date, the amount of venture capital flooding into Web OS startups is a clear indicator that smart people believe that Web Operating Systems will eventually be a huge hit."

"Imagine that in 2-5 years time Facebook has become the No. 1 destination on the web. Facebook as a Web OS is the leader in online storage, online applications, email, blogging and of course social networking. How people interact with Facebook has changed; Facebook OS has absorbed Facebook F8, all previous Facebook applications work under Facebook OS, but they work more like Windows does today; Facebook has become your desktop and not just an internet site."

"The difference with Facebook will be how the various applications are glued together, and this is where Facebook already has the advantage: Facebook’s origins as a social networking site means that everything they launch is linked in to that central core."

"Yet Facebook is a closed shop; there’s no open source in Facebook and every app built for it will not work with other sites."

Lending Club is only open to Facebook users. In my opinion, Facebook offers only two advantages to Lending Club - community and publicity. These are two significant advantages and they should not be downplayed, but Lending Club is in no way wedded to the Facebook platform. In fact, none of the lending or borrowing actually occurs in Facebook at all-it occurs on a normal web page just like Prosper. Although over 11,000 people have installed the Facebook application, it's almost silly to call it a Facebook application because really it's just a link to the Lending Club homepage. This a screenshot of the Lending Club application in Facebook. If you click on Start Borrowing or Start Lending you are directed to the Lending Club homepage. If you try to start lending or borrowing from the homepage you will be directed to Facebook. Once your account has been authenticated with Facebook there is no longer a need to return to Facebook for any borrowing or lending.


Here's a look at the two advantages that Facebook does provide to Lending Club:

Community. Facebook calls themselves a "social utility." The thousands of people who use Facebook share information in networks and groups. Some are established based on offline networks such as work or school and others are formed among strangers within Facebook. The theory is that loans to friends and groups within these Facebook communities are less likely to default due to established relationships of trust. This is somewhat mitigated by the fact that borrowers and lenders remain anonymous through screen names. Once you have authenticated your account, the only connection to Facebook is the affiliations column. The affiliations column will show two bubbles if the borrower is a member of any Facebook group and three bubbles if the borrower and the lender (you) have a group in common. You can also view the groups that the borrower belongs to. Although borrowers can maintain anonymity through screen names I imagine that through a little detective work someone could use the Facebook group information to identify some borrowers. Within Facebook there are discussion boards similar to the Prosper forums.


Publicty. Facebook is growing rapidly and generating a great deal of buzz. The publicity benefits Lending Club because they are part of the story. For example, it generates articles like NetBanker's list of top Facebook money applications where Lending Club is #1. In addition to the on and offline media buzz surrounding Facebook, there are also features built into the "application" which make it viral within the Facebook community. When you install the application you are asked if you want to promote Lending Club by putting a box in your profile, placing a link in your left-hand navigation, publishing stories in your News Feed and Mini-Feed and placing a link below the picture on any profile. All these help promote Lending Club to the thousands of users inside of Facebook.

Facebook is in no way tied to the Facebook platform. As with many Facebook applications, Facebook provides a community and publicity but does little else. It will be very easy for Lending Club to move off the Facebook platform. In this way, Facebook is not a data black hole and will not become the next Microsoft.

Prosper has built its company primarily through traditional media public relations. The list of press coverage is impressive including this week's story in the Wall Street Journal. Lending Club is running a much more aggressive "web 2.0" advertising campaign by launching in Facebook, writing a blog, and sponsoring a YouTube video contest. Lending Club has plans to move off the Facebook platform in the near future. You can sign up for an email update on their homepage to be notified when they do. Of course, you can also sign up for our email updates as well (top right of page).

Update: Lending Club CEO Renaud Laplanche added a very insightful comment. I've moved it here for those that subscribe via RSS or email: "Good analysis Tom. Lending Club's Facebook-only presence is more a matter of marketing positioning (helps convey the idea that person-to-person lending in general, and Lending Club in particular, will be more successful in an environment where people feel connected to each other, and where we can easily expose these connections) and product development (using Facebook as a public Beta to gain a lot more user feedback and filter traffic before we further open the gates) rather than technical constraints."

Lending Club's Blog educates readers

Lending Club is challenging Prosper to become the leading peer to peer loan marketplace in the United States. They have been online since May 26th - just six weeks. I have not signed up as a lender or borrower yet, but I've been watching their blog pretty close. I've been very impressed with their communication with their community through the blog.


Of course they have the normal things you would expect on a corporate blog such as Lending Club announcements, but they also make a genuine effort to educate users on sound financial principles (mostly the perils of credit card debt). The posts are not overly technical or complicated. Most seem to be written for the average college age person. Someone who might be applying for their first credit card or taking out their first loan. They are clearly attempting to target the Facebook demographic. Here's a quick wrap up of the Lending Club Blog from the last six weeks along with some brief notes from me:

Education

Good Credit Part 1 - The importance of good credit - aimed at college students; housing, job, car
Good Credit Part 2 - FICO Review - what is credit; also see Components that make up a FICO score
Good Credit Part 3 - How to maintain good credit
Investment Mistake 1 - Procrastination
Investment Mistake 2 - Money Ignorance
Financial Independence - develop financial plan, start now
P2P Lending 101: The C's of Credit - character, capacity to pay, capital, collateral
Beware of the credit card access check - don't use the blank checks that credit cards send you without reading all the fine print
Know where your money goes - basic budgeting
Keeping tabs on your credit - one free copy of your credit report per year
Three financial ships - work, investment, charity (receiving, not giving)
Students: Don't be afraid of student loans - difference between 'bad' credit card debt and 'good' student loan debt
Primer on debt reduction - pay of highest interest rate debt first, consolidate debt
What banks don't want you to know - explains the practice of "universal default"; how banks can change your rates if you are late with a payment on another account
Credit Card debt is not simple - minimum payment on a $1,000 credit card debt can be a 22 year commitment
How much profit do credit card issuers generate - $16 for every $100 in outstanding credit balance
Is FICO score a reliable indicator of credit-worthiness - broaches topic of social credit scoring, how someone is more likely to pay their debt on time when they borrow from a community of people they know
Read the fine print - how credit card companies deliberately deceive card holders; the make a pledge "Lending Club does not operate with small print"
Double-cycle billing. Say what? - double cycle billing is used by 1/3 of credit card issuers and significantly increases interest
Grace Period - difference between effective annual rate (ERA) and APR and credit card grace periods
Jargon Watch: Defining DTI - percentage of a consumer’s monthly gross income that goes toward paying debts
Jargon Watch: Defining FICO - stands for Fair Isaac Corporation and is the standard credit scoring system used today; Lending Club's minimum FICO for borrowers is 640

Lending Club Promotion

Why a personal loan from Lending Club makes the most sense - interest rate, fixed payments/term, unsecure loan
Lending Club: an alternative to credit cards

Lending Club News

Close rate: 71% - a sharp increase from the original reports that only 1/3 of loans were closing
LendingMatch: Diversification and Matching - Lending Club's technology that helps lenders build their portfolio with respect to their risk/reward profile and their social connections through Facebook; also read this about LendingMatch
One week on Facebook - the report from their first week (4,000 users signed up in the first week; they are at just over 10,000 now)
Lending Club: How do we make money? How are we different than a bank? - financial comparisons between Lending Club’s operating model and bank’s models are difficult

From all early indications, Lending Club clearly has the best blog among peer to peer loan networks. By providing good, common sense financial advice they will attract an audience that will likely turn into borrowers and lenders.

Lending Club hits quarter million dollar milestone

Six weeks after opening its doors, Lending Club has brokered peer to peer loans worth a quarter million dollars. Lending Club is Prosper's only real competitor in the United States and is currently only open to Facebook members. This milestone comes just two weeks after passing the $100,000 mark. These mini-milestones have generated significant online buzz and have been reported in Mashable and TechCrunch. Lending Club is reporting the following statistics so far:

Lending Club Statistics
Facebook launch - May 24, 2007
First loan closed - June 6, 2007
Passed $100,000 in loan origination - June 20, 2007
Passed $250,000 in loan origination - July 5, 2007
Loans issued - 52 ($259,325)
Verified lenders - 411
Total members - 2,392
Facebook installs - 10,430
Facebook groups and networks - 20,936
Top Facebook group - Apple Students
Top borrowing State - Florida
Top lending State - California
Average Interest Rate - 10.28%

eHub interviews Lending Club CEO

Emily Chang from eHub conducted an interesting interview with Lending Club's CEO Renaud Laplanche. Here are a few noteworthy quotes:

Motivation to start Lending Club: When I started my first company in 1999, I charged the first few expenses on my credit card. Over the next few months, I had put $20,000 on my card, but was surprised that I was paying 18% interest despite my good credit score. I was too busy to shop around for lower rates and read the fine print. Instead, a few friends offered to lend him the money he needed, at a 10% interest rate. This experience set the founding principles of Lending Club...

Current company composition: We now have 21 people and will be adding another 20 in the next 6 months. The 3 main team members are myself (Renaud Laplanche), John Donovan and Joaquin Delgado. We have a diverse background of entrepreneurship, financial services and technology: before founding Lending Club, I founded TripleHop Technologies and sold it to Oracle in 2005. John Donovan developed and managed credit and debit products for Mastercard for 17 years, and Joaquin Delgado was my CTO at TripleHop and has a PhD in Computer Science, specializing in matching algorithms and user profiling. We also have team members who joined us from eBay, Oracle, Wells Fargo, Razorfish and Photobucket.

Current web traffic: We launched 4 weeks ago and all traffic is gated through Facebook at this point, but we’re already seeing more than 1,000 unique visitors per day.

Future of Lending Club: We launched exclusively on Facebook on May 24, 2007. In the next 6 months, we will be focusing on making the platform even easier to use and adding a few key features, and will also be expanding beyond Facebook. In the next 2 years, our goal is to make person-to-person lending mainstream: we want to make it so easy, simple and economically efficient that it is the first option borrowers think of, before even thinking of charging their credit cards or walking into a bank. On the lending side, we will continue to promote loan portfolios as a separate asset class that investors should consider when reviewing their asset allocation strategy...If we do this right, and we convey the value proposition clearly, in 10 years from now the mere idea that people once used to walk into a bank to get a loan or carried credit card balances will seem odd.

Thanks Emily for a great interview and the insight into Lending Club.

TechCrunch's bias - Prosper versus Lending Club

I'm a big fan of Michael Arrington's TechCrunch. It's the premier blog about Web 2.0 products and companies. According to Technorati, TechCrunch is the fourth most popular blog on the net. Many new web start-ups can trace their success back to a TechCrunch anouncement.

As I compared TechCrunch's anouncements this week about Facebook's Lending Club and Prosper, it seemed to me that TechCrunch favors Lending Club. Despite being the clear leader in social lending, TechCrunch has only covered Prosper three times in the last 18 months. First when they launched in early 2006, when they anounced milestones last October, and then this week when they raised $20 million in venture captial. Lending Circle received milestone coverage when they reached $100,000 in loans while Prosper didn't receive milestone coverage until they reached $20 million in loans.

In general, Facebook seems to be a TechCrunch darling. When Duncan Riley, one of TechCrunch's writers wrote a post that was somewhat critical of a Facebook feature, Arrington chided him in the comments, "errr, Duncan. This is a pro-Facebook blog. Didn’t you get the memo?"

Prosper could probably be doing more to court TechCrunch. The news about Prosper's $20 million in venture capital was broke by rateladder after Prosper's CEO told a room full of people at Prosper Nights SF. TechCrunch didn't pick it up until hours after a press release the next day. Perhaps giving TechCrunch an early tip about the news would help maximize media coverage.

This couldn't be better - while I was writing the post another Facebook social lending story has hit TechCrunch's front page. This is about ChipIn, a free widget based service that enables users to collect money. From their report:

ChipIn, a free widget based service that enables users to collect money has launched a Facebook application that brings micropayments to Facebook.

ChipIn on Facebook supports existing Facebook events or can be used separately with ChipIn created events. Creation of new “ChipIn’s” is simple, the ChipIn Widget can be customized using photos from a users Facebook account and each ChipIn can also be promoted directly to Facebook friends.

We covered Lending Club, the exclusive Facebook P2P lending service on June 20; ChipIn is at the other end of the spectrum targeting micropayments, yet together they demonstrate the continuing growth of finance on Facebook. There is any number of new Facebook applications being launched daily, and whilst many provide a wow factor and are useful, not that many to date have a real world financial use. It’s not too farfetched to imagine ChipIn being used as a political or charity fundraising tool on Facebook in the near future.

The social lending market is heating up and we are going to see more and more competition against market leader Prosper. The largest market for social lending, in my opinion, is among the web savvy. Prosper would do well to promote their services via the blogging world instead of a press release. Perhaps that is their goal with the referral program?

Facebook's Lending Club passes $100,000 mark

Just following the announcement that Prosper secured an additional $20 million in venture capital, Facebook's Lending Club made an announcement of their own - they just passed the $100,000 mark in loans to users. While not even close to the $70,000,000 that has exchanged hands on Prosper, it is significant considering Lending Club has only been live for one month. An additional $212,650 in loans is expected to close in the next 12 days.

Lending Club differs from Prosper in several ways. Most notably, they do not provide an auction format. Lenders and borrows can simply commit funds at pre-determined interest rates. Lending Club is also limited to Facebook members and hopes to leverage trust from established social networks.