Peer to Peer Lending and Investments, and how the Internet contributed to its growth

ImageWhat is said about the “Circle of Life” can easily apply to the world of business and technology, specifically, in Peer to Peer (P2) lending and investments.  At a recent San Francisco conference discussing financial technologies, a lead speaker, a Cornell MBA professor, commented on the growth of disruptive technologies enveloping the financial space.  He related that teenagers today rarely enter into a bank, while his generation would not do without a relationship banker.  Another important reference came from one of the co-founders of Square and Twitter, who remarked that those who comprehend the Internet for what it is – universal communications — will profit from it.  When one combines these two comments, then one realizes that the Internet has contributed to a nucleus of business interaction that goes back couple of centuries now transformed for newer generations.

The technical origin of the Internet had one purpose, and one purpose only: to communicate, no matter what. A couple of DARPA scientists were tasked to resolve one potential, violent scenario – if the U.S. were nuked and its telecommunications lines partially destroyed, how can branches of the military keep communicating with each other nationwide?

Plain Old Telephony Service (POTS) relies on “arresting” circuits.  For example, the caller initiated a call that arrived at a NOC (Network Operating Center), and then routed the signal continuously through the bandwidth, until the call would be terminated by either side. If the arrested line were severed between both points, the call would terminate.

The TCP/IP became the solution: it would packet-size the continuous call like a train car with each car marked sequentially, and routed to a final destination. If one node/router were destroyed or not available, it would be rerouted to another node/router until the train cars grouped sequentially at the final destination. In other words the Internet was designed for the communities to continue to communicate in spite of the destruction of infrastructure.

Investments and trading rely on continuous communications.  As far back as 1797, New York stockbrokers and businessmen would congregate underneath a Buttonwood tree in front of what is now 68 Wall Street. With only 24 brokers and businessmen, they were able to discuss among themselves information about opportunities.  It was that year that these men formalized the predecessor Wall Street institution, New York Stock Exchange.  The tree shade became the center of that community, with each member sharing information with each other. Stockbrokers on Wall Street were and still are a community of interest sharing bits of information on a trading floor.

But the 21st Century version of the Buttonwood tree is the Internet.  The very concept of Facebook and other social networks is no different from the Buttonwood tree scenarios – people communicating amongst themselves and sharing information of interest within a community.

The Internet has disrupted the financial world as newer generations treat the Internet as their forum to share information.  This development has led to the fast growing P2 lending market. Leader of the pack has been Lending Club, having facilitated over $2.6 billion in loans this year with over $100 million in revenues. Google Ventures invested $125 million with a post money valuation of $1.55 billion. The Lending Club “P2 investors” consist of well regarded institutional funds, accredited investors, and mutual funds – all in equal portions. Given the sophisticated investment base there seems to be a consensus that this P2 model is viable and underscores this new financing model. Even the Lending Club is preparing itself for an IPO in 2014. (“With IPO In Sight, Lending Club Looks To Upend Banking Industry” – Forbes,  The second largest P2 company is Prosper, which had distributed over $600 million in loans.  Its investors include hedge funds (50%), institutional investors (25%), and accredited investors (25%).

So the Buttonwood tree financial community has returned with a digital twist. The Internet allows investors to discuss amongst themselves their potential investments, without regard to geography. Anyone with a terminal and Internet access can look at deals. The Internet affords them the tools to evaluate the investment risks through online credit information and historic business trend to measure the lending risks.  The Internet also allows the investors to focus on the type of investments through narrow market sectors, markets which those investors recognize. Now I am witnessing P2 models to finance only SMBs relying on international exports.  The trend, as the financial technology conference observed, will accelerate as more P2 communities will congregate online and discuss and invest their portfolio with greater fragmentation and industry focus.


About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP,, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy.; For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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