Foundations For All

... and like Led Zeppelin, the Beatles and the Rolling Stones before them, Zopa is  likely to cause an uproar in the United States. Zopa is the originator of peer-to-peer lending, with a lion share of the market in the U.K. Last week, they received regulatory approval to launch their services in the U.S.

In a move near and dear to my heart, Zopa is partnering with credit unions to challenge main stream banks as well as those hardcore finance and social community guys in the San Francisco Bay.

NuWire Investments, quoted Douglas Dolton, global CEO of Zopa. “Last year Americans donated $295 billion to charity, and what we saw was a way for investors to be able to invest their money safely with a great rate of return, but still satisfy that need that we clearly have as Americans to share our money with other people.” Douglas, if you want to allow investors to get a charitable deduction and share there money with others using Zopa, please come talk to me. FoundationsforAll has an idea that just might work for you!

A few days ago, I issued a thinly vialed plea for PayPal to provide an account management and transaction processing platform for charitable microfinance organizations. I also posted my notes on potential PayPal competitors. Digging deeper into Prosper's progress, business model, investors and intentions, I may have issued a plea to the wrong company.

Prosper's initial investors include Omidyar Networks, the mission-driven investment vehicle for E-bay's founder, Pierre Omidyar, and his wife, Pam. Since 2004, Omidyar Networks has supported economic development through investments (like Prosper), grants, and public policy initiatives. Their influence gives me hope that Prosper will come to the aid of entrepreneurial and charitable microfinance organizations like FoundationsForAll.

There is also a sound business reason for Prosper to grow as a platform for microfinance investment. They have clear designs on becoming the Sallie Mae or Freddy Mac of microfinance loan obligations[1,2].  If you ever had a loan for education, a home purchase, or a new car, you benefited from a process called securitization. This reduces the costs, diversifies the risks and increases the amount of funds available in the lending process.

If Prosper becomes the "transaction clearing house" for a large portion of the peer-to-peer and microfinance lending markets, they will be in an excellent position to turn those loans into securities that can be sold on a stock market. Take it from a Wharton alum, the securitization business is like having a license to print money.

As an industry observer and potential beneficiary, I can't wait to see what Proser does next...

In my last post, I called on PayPal to provide a turn-key solution for charitable microfinance organizations. In researching that article, it became clear that PayPal is facing increased competition in the online payment processing space.

There is a recent spike in venture capital investment focusing on the small loan processing space, often called peer-to-peer or person-to-person lending (p2p). These investments or new launches include companies like Prosper, LendingClub, Zopa, Wonga, Obopay, and GlobeFunder.

Prosper raised $20 million in June[1a] after serving 460,000 members and $96.4 million loaned since its launch in 2006[1b]. The company has raised $40 million in total from first rate firms including Accel Partners, Benchmark Capital, DAG Ventures, Fidelity Ventures, Meritech Capital Partners, and Omidyar Network[2]. The service is open to anyone looking for loans, not just entrepreneurs. The bidding process used to determine loan rates may be too complex, and therefore intimidating to novice users. The management team is impressive, including Chris Larsen founder of E-Loan, and Chris Denend the manager of Dreamweaver's Ultra Dev team (just to name a few).

In August, LendingClub - which allows lending between Facebook members - has raised $10.26 million seed round from Canaan Partners and Norwest Venture Partners[3]. $2 million of this first round was raised earlier in the year to launch it's initial offering in May, which has generated significant traffic[4]. The remaining funds are earmarked for expanding into the rest of the online world.

First impressions of the LendingClub site: "this is a really high class place for loan sharks to hang out and pretend to be respectable." This odd feeling was further reinforced by the open job position for a "Collections Officer." The map of lenders on the homepage is better suited for people looking for a pawnshop than a loan. Maybe I spent too much time in Atlantic City as a kid. I really wanted to like this site and company, but somehow that didn't work out. The company has a great management team and incredible momentum, so I'm probably being a bozo.

Zopa has raised $34 million to date. In March, it closed a $12.9 million third round lead by Bessemer Ventures[5]. This UK based company claims to be the innovator in this field. As the self-describe innovator in "social lending", Zopa has a community orientation that reminds me of Zipcar (without the polished user interface). Zopa has announced plans to enter the US market. Time will tell if they have what it takes to displace the hardcore San Francisco finance guys at Prosper or the FaceBook Friends at LendingClub.

In June, Wonga raised $6 million in its first round of financing[6]. It uses a community "trust" score to determine the borrowers credit limit and loan duration. I've discussed the concept of community trust scores with my cofounders at FoundationForAll.org. I'd love to see it in action at Wonga.

Also in June, Obopay - an online community and service that operates around helping you manage your personal finances - added the ability to transfer funds via AIM and mobile phones[7]. A visit to there website suggests, the mobile payment platform is the company's near-term growth engine. At a flat fee of 10 cents a transaction, they are priced significantly lower than PayPal. Interestingly, the management team includes former PayPal CFO, Dave Johnson.

It's clear that GlobeFunder has ambitions to enable microfinance transactions in developing economies. That said, it's $1.5 million seed funding is focused on its launch in the United States [8]. The site allows prospective borrowers to seek funding after completing a robust background check including identity, credit scoring, residency, debt and income validation[8]. I'm impressed by the thorough nature of the background check, but this may limit its efficacy as a tool to help the smallest businesses receive the growth capital necessary to expand. Still, in a world of for-profit peer-to-peer lending, I'd want to make sure I'm not loaning funds to an inmate, criminal, deadbeat, or terrorist organization.

PayPal clearly has designs on becoming the payment processing platform of the future. It has moved beyond processing payments on Ebay to supplying payment processing for merchants, credit & debit cards to consumers and even high yield savings accounts. But, I am most curious about its ability to support microfinance lending and repayment transactions.

Kiva has relied on PayPal to handle over $13 million in microloans  to 20,000+ entrepreneurs by 200,000+ lenders[1].  Paypal further supports Kiva's lenders and entrepreneurs by waiving normal transaction fees. This is a sizable contribution given Kiva's $2 million monthly growth rate[2].

Where Kiva's not-for-profit model connects investors and entrepreneurs directly, Paypal's parent company Ebay is betting on a model that is more reminiscent of Wall Street than community sites like... well, Ebay.  On October 25th, Ebay launched MicroPlace which allows people to invest as little as $100 in a securitized portfolio of microfinance loans. MicroPlace connects individual investors to organizations like the Calvert Social Investment Foundation that create pools of microfinance investments from thousands of local partners[3]. This increases the amount of funds available for microfinance investment while reducing transaction costs and diversifying risks (think Fannie Mae, Sallie Mae).

Paypal will provide the transaction processing for MicroPlace. Ebay say's profits from MicroPlace will be donated to various charitable organizations, including (but not limited to) the Ebay Foundation [4].

In addition to these high profile microfinance institutions, several others appear to be relying on PayPal to provide transaction processing. These include OPENaid International,  Garmeen Foundation,  Globe Giving and more.

As an aspiring social entrepreneur, I implore PayPal to offer a turn-key solution for microfinance organizations that will allow donors/lenders/investors to contribute and withdraw funds, transmit funds and loan repayments to/from entrepreneurs, and maintain account balances and transaction history for registered users.

[1] "A Letter to Kiva Lenders" Kiva Blog October 31, 2007
[2] "Kiva.org Crosses $11 Million in Microloans to Developing Nations", Josh Catone ReadWriteWeb.com September 13, 2007
[3] "Microplace Launches Investment Website to Address Global Poverty" Patrick Mitchell CalvertFoundation.org October 24, 2007
[4] "Ebay-owned MicroPlace Launches MicroFinance Site" Julie Sloan Wired.com October 24, 2007

This country's past and future success is based on a culture of innovation, entrepreneurship, diligence and flexibility. We should welcome honest, hard working immigrants based on a combination of skill and dedication.

Our continued prosperity requires thought leadership and the infusion of ideas from other cultures and new perspectives. It also requires dreamers -- who regardless of their skill level are willing to take risks in pursuit of a better life for their families.

A Path Forward
- Give undocumented workers a reasonable path toward legal work visas and ultimately citizenship
- Expand the number of work permits offered to both skilled and unskilled workers
- Enforce minimum wage and work safety laws for all workers regardless of citizenship or visa status
- Stop spending money on a fence across the Mexican border and reallocate the funds to worker training and enforcement of work safety legislation
- Expand funding for post-secondary education with additional incentives for degrees and certifications in construction, engineering and information technologies; health, physical and social sciences; as well as accounting, finance, marketing and management.

We need an equitable, humane process to welcome foreign workers of all skill levels into the United States. Existing workers and their children need the skills to remain competitive in the global market place. Finally, we need a rational border security plan.

These steps will accelerate the country's long-term economic growth and ensure national security.

This term often evokes images of ideas incubating in garages, dorm rooms, coffee shops and meeting rooms along Sand Hill Road. It fuels many of the comforts we cherish: from $4 mochas to the technology powering this site. We realize it creates tremendous wealth for the lucky and dedicated few that push innovation forward.

I studied the history, theory and practice of innovation and entrepreneurship from leading universities, consulting firms, authors and practitioners in the field. These studies often focus on revolutionary concepts capable of creating tremendous wealth for its creators, investors and executive leaders. Until recently, entrepreneurship as a personal wealth strategy was relegated to the charlatans of late night infomercials and volumes of "how to" manuals on the book store shelves.

Increasingly, thought leaders are harnessing the entrepreneurial spirit to eradicate extreme poverty in developing countries. They focus on appropriate allocation and structure of donor aid, improving access to education and economic information, and reducing the costs of capital for micro-businesses. Jeffery Sacs End of Poverty, Grameen Bank's 2006 Nobel Peace Prize, and C.K. Prahalad's The Fortune at the Bottom of the Pyramid have introduced the broader public to the benefits for micro finance. Pierre Omidyar, founder of Ebay, has created an online community and investment fund to support additional innovations in this field.

This has lead others  - like me - to apply web 2.0 innovations to solve help socially responsible risk takers build wealth in impoverished urban communities in the developed world. Their are both concerns and accolades for this new type of charitable and commerical activity. Entries on this site and links to other information will access the strengths, weaknesses, opportunities and threats entreprenuership and innovation as a tool for positive social change.