In the wake of the credit crunch gripping the world, peer-to-peer lending startups are displaying signs of trouble.

Developed to broker lending between regular people like you and I, such companies as Prosper, Lending Club, Zopa and Loanio were on track to broker around $150 million in loans in 2008, 50 percent more than in 2007. But while some considered peer-to-peer lending to prosper in the current economic climate, it appears this nascent industry is not immune from the financial crisis after all.

According to The New York Times, Prosper, the largest peer-to-peer lending site in the U.S., recently stopped allowing lenders to make new loans. Apparently it’s waiting for the Securities and Exchange Commission to evaluate its regulatory filings. This follows a decline in monthly loan volumes that began in the first quarter.

Since Prosper has never been profitable – it’s lifeline being $40 million in venture capital - its future remains uncertain. Meanwhile, another peer-to-peer lender, Zopa, shut down its U.S. website due to “extremely difficult consumer credit circumstances.” It’s still operating in Britain, Italy and Japan.

Source: Brad Stone, “Lending Alternative Hits Hurdle”, The New York Times, October 15, 2008

According to the MoneyTree Report released by PricewaterhouseCoopers and the National Venture Capital Association last week, United States venture capital funding declined 7 percent between the second and third quarters of 2008.

U.S. venture capitalists invested $7.7 billion in 1,033 deals in the last quarter, with 14 percent more funding going to clean energy companies, 10 percent more going to biotech and medical device companies, and 36 percent LESS going to Internet companies, compared with second quarter funding.

According to analysts behind the report, the numbers do NOT reflect the economic crisis. Apparently this has not yet manifested itself in lower VC funding. The third quarter of the year is generally slower for venture investing, and the reason why web companies attracted less funding is because
they generally require less investment, being relatively capital efficient.

However, there are ominous signs that startups will start to feel the pinch. The number of startups getting investment for the first time dropped by 20 percent to 259 in the last quarter - the lowest level since the first quarter of 2004.

Source: Claire Cain Miller, “Venture Capital Investment Down 7 Percent in Third Quarter”, The New York Times, October 18, 2008

In 2000 it was the dot-com crash. Right now it’s the death of Web 2.0.

According to Michael Arrington, writing in TechCrunch, the recent crisis on financial markets has ended not just easy credit, but more importantly for many startups, easy capital.

Just as occurred following the dot-com crash, it seems that venture capital firms will have less capital to invest in startups, be much more choosy about which companies they do invest in, and will be more actively involved in how the capital they have invested in startups is used.

With less money available, Michael Arrington predicts startups will start laying off people, with the ‘bulging marketing and communications departments’ the first to go.

Apparently that’s not such a bad thing since these are not only ‘the very people who make Silicon Valley such a nasty place to be in the boom times’, but as ‘the number of startups dwindle, it won’t be so hard for them to get attention from press and users, so those marketing and PR flaks won’t be missed all that much.’

Of course, it’s my view that tough times call for more marketing and selling - and less techie perfectionism – so I’m not sure that slashing and burning in the marketing department is the best idea.

Then again, we’re talking about people who equate ‘marketing’ with fluffy, irrelevant, non-direct response advertising and PR. Hardly real marketing, is it?

Meanwhile, this quote from Michael Arrington is priceless:

“We’ll look back in later years and think of this most recent boom as the Web 2.0 period, when we were wowed by the magic of user generated content, copyright violations on a massive scale, and neat little widgety things that used Javascript and Flash to turn web pages into pretty close equivalents to the old desktop apps. Of course there were other evolutions as well. Advertising technology has advanced steadily, particularly in tailoring ads to an individuals needs, and tracking them properly. This is the period that social networking as we think of it today was born, and we’ll never be rid of it in our lifetimes.”

Dot-com. Web 2.0. Boom. Bust. At the end of the day, no business survives without… marketing.

Source: Michael Arrington, “An Ignoble But Much Needed End To Web 2.0, Marked By A Party In Cyprus”, TechCrunch, October 10, 2008

Amidst the carnage occurring on global financial markets… the depletion of venture capital… the current / looming economic recession… at least some are focusing on the positives.

In his recent article in TechCrunch, Dan Kimerling points out that Google was in its infancy during the dot-com crash and has gone on to survive, thrive and dominate.

He also makes the point that it’s often during times when there isn’t much money around – e.g. whether for marketing, investing in new technologies, or investing in startups – that people get creative. Put it this way, if you don’t have the money for traditional solutions (e.g. expensive advertising), you have no choice but to think up more creative ways to achieve what you want.

“One thing that is really excites me about the moment is seeing all innovation that is coming,” writes Mr Kimerling, “If advertising dollars dry up, and there is some early suggestion that they might, then you will see startups experiment with new revenue streams. Some of them will fail, but some of them will work, and when the start-up community finds those that do work, start-ups will evolve to incorporate these new revenue models… As funding because tighter and tighter, it means that the rate of technological innovation will likely speed up, out of necessity to find new ways to make internet companies profitable quickly.”

Now that’s exciting… and a much more positive spin on the current economic situation.

I have lots more thoughts on why – and how – we can turn these general economic woes to our advantage. I’ll share them with you in upcoming issues of the newsletter.

Source: Dan Kimerling, “The Seeds of the Next Big Thing Are Being Planted Now”, TechCrunch, October 4, 2008

Last Tuesday, Angelsoft released version 3.0 of its angel funding platform, which aims to connect startup entrepreneurs with over 400 angel investment groups and 11,000 investors from around the world.

To avoid investors being overwhelmed with the 2,000 monthly start up applications that go through Angelsoft, Version 3.0 lets entrepreneurs present their business idea to three investment groups at a time. Meanwhile Angelsoft 3.0 also has a ‘Digg-like’ feature which allows investors to rate existing portfolio companies.

On the basis that highly rated companies will rise to the top of the list, this allows second and third-round investors to focus on the more viable companies. Startups cannot, however, rate investors.

For all the apparent popularity and functionality of the platform, few deals have actually been completed via Angelsoft. Evidently, only 1.32 percent of startups have been funded and just 24.72 percent have been screened using the site.

Source: Don Reisinger, “Angelsoft 3.0 Launches With 400 Angel Investment Groups In Tow”, TechCrunch, September 2, 2008, Angelsoft

Two technology conferences will be going head to head this September.

It’s the 17 year old conference, Demo - the franchise owned by technology publisher IDG - up against the 1 year old upstart TechCrunch50, the conference co-organised by Michael Arrington, founder of blogging media company TechCrunch.

While Demo is credited with being the springboard for such hit products as the Palm Pilot and the TiVo digital video recorder, Michael Arrington created his conference as an alternative conference where, unlike Demo, startups won’t have to pay to pitch.

At Demo, the 70 participating startup companies must pay $18,500 to make their six-minute presentation to a crowd of investors, journalists and others. Meanwhile, at TechCrunch50, the 50 participant startups - all chosen by the TechCrunch50 organizers out of a field of 1,038 applicants – will be able to pitch for free. The conference will be funded by selling sponsorships and tickets to the event, and charging companies to demonstrate their products on tables outside the main conference hall.

Demo will take place September 7-9 in San Diego, while TechCrunch will run September 8-10 in San Francisco.

Source: Brad Stone, “Amid Conference Halls and Keynote Speakers, a Rivalry Forms”, The New York Times, August 18, 2008, Michael Arrington, “Pouring Our Heart Into TechCrunch50″, TechCrunch, TechCrunch, Demo

Can’t say too much, but let’s just say I have had some exposure to venture capital firms. At one time, I wanted to RUN a venture capital firm. Might still do that one day. But, interestingly, what I have discovered through this “exposure” is that what you think their business model is… and what their business model really is… may be two different things.

Here’s what I mean. A venture capital firm seemingly raises funds from various kinds of investors - private investors, fund managers, etc - for specific investment funds. Those funds are invested in high potential, start-up companies. Within a given period of time e.g. 5 years, the venture capitalists (VCs) typically expect to sell their shares to an acquiring company (known as a “trade sale”) or to the public via an initial public offering (IPO). As such, they only seek to invest in companies that are likely to provide a big payout via such a trade sale or IPO.

That’s the apparent VC business model. But here’s where it gets a little complicated. You see, if you’re one of the investee companies you could be forgiven for thinking that the VCs do in fact seek to make money from selling their shares in your company via a trade sale or IPO.

But guess what? That may NOT be how they seek to cash out at all. They may, in fact, be using your company in other ways… not necessarily to make money from selling your shares. They may want to sell or merge you with another entity, or “back door” you into a public entity, or use you in a host of ways that doesn’t necessitate that your company makes any money or that the sale of your company makes any money. They may be quite happy skimming off “management fees” and “finder fees” regardless of how much your company makes in sales or profits, or is worth.

Don’t get me wrong. The main game for VCs is to cash out, make an enormous profit, and reinvest in other startups. But they have a holistic perspective. They think in terms of making money for the fund as a whole, not individual companies.

Why am I speaking about this? Because it’s important for investee companies not be deluded into thinking that their interests are necessarily aligned with those of their investors, particularly venture capital firms. I am NOT saying that VCs are “bad” - I’m just saying that their agenda is to make money for their investors.

For VCs this can actually create a conflict of interest - especially if they sit on investee company boards. How do they fulfil their duties to the company… and their duties to their investors? An interesting question for legal minds.

But for companies seeking venture capital - and again, I’m totally SUPPORTIVE of this - be aware of the “real game” that the VCs are in. That way, you can better protect yourself and avoid being disappointed.

Yesterday, Yahoo owned Del.icio.us - or simply “Delicious” - relaunched with a complete revamp of its features and design.

Yahoo, which bought the site in 2005, has been promising to upgrade Delicious for the last year or so. Now, finally, the service has been renewed with a cleaner design and enhanced social features, speed, and search capabilities.

Del.icio.us can now also be accessed at delicious.com, which will become its standard URL.

Sources: Frederic Lardinois, “Delicious Finally Launches Version 2.0: Easier, Prettier, Faster”, Read Write Web, July 31, 2008, Delicious: http://www.delicious.com

Word is that Google plans to launch a venture capital (VC) fund to allow the company to invest in startups.

Google has traditionally bought startups and other companies it wanted and integrated them into the Google fold. Presumably its new VC fund will allow Google to invest in companies it’s not sure about, or companies it doesn’t want to wholly subsume for financial, marketing, cultural or legal reasons. I’m just guessing of course.

The fund will be managed by David Drummond, Google’s senior vice president of corporate development, and Bill Maris, a tech entrepreneur and old business friend of Anne Wojcicki, Google founder Sergey Brin’s wife.

So maybe you have a fledgling company Google might want to invest in?

Sources: Michael Arrington, “Google To Launch Venture Fund”, Tech Crunch, July 30, 2008

If you’re a small, startup etailer and offer your customers the ability to create a wish list… you may just qualify to be sued by Channel Intelligence.

Tech Crunch reports that on Tuesday, Florida-based company, Channel Intelligence, filed a lawsuit for patent infringement against a long list of startups and others who offer “wish lists” for products people may want others to buy for them.

Notably, Channel Intelligence seems to be suing everyone EXCEPT the major online retailers such as Amazon, eBay, Walmart and others, who are likely to be the biggest “offenders” (if the lawsuit is to be taken seriously).

Presumably, Channel Intelligence has chosen not to battle those with substantial legal budgets, who could potentially drag out the litigation and kill Channel Intelligence with legal fees before it’s even able to bring its case! A more cynical view, however, is that Channel Intelligence is choosing easy targets for a lawsuit that has little substance.

Of course, I shouldn’t say that. The lawsuit may well be justified based on U.S. patent law. But how the online version of a wish list - which has surely been used by everyone from kids who have left out notes out for Father Christmas to large off-line department stores - meets the criteria of a patent (unique, innovative, etc) I don’t know…

Source: Michael Arrington, “Channel Intelligence Sues Just About Everyone Who Offers Wishlists”, Tech Crunch, July 17, 2008