P2P lending

Posted on March 31, 2006
Filed Under Companies, Innovation |

I collect woodworking tools (and know a few things about using them) and like most collectors of things I subscribe to a number of forums that represent “enthusiast communities”. Before I get to that I want to give you a little background on vintage woodworking tools. Sandpaper is a relatively new invention, I believe it was invented in the 1930’s, wood that was milled and smoothed before that was likely done with a cutting tool like a hand plane, spokeshave, chisel, or scraper.

In the 19h century there was a vibrant tool making community of literally thousands of companies across America and Europe and that existed largely up until the turn of the century when the mechanization of so many trades relegated hand tools to shop shelves and worse, the trash pile.

There has always been an interest in vintage handtools and an appreciation of the skill required to produce them. You can buy vintage tools at auctions or Ebay, everything from tired Bedrock planes and Stanley 750 chisels that probably were found in a garage after decades of sitting around to rare specialty tools that have not been made in decades (think about all the trim in those beautiful Victorian homes in SF… all made by hand at one time). They fetch good money, as an example, some of the mass produced Bailey and Bedrock hand planes from the pre-WWII era that can still be found at garage sales for a few dollars can command up to $1,000 and more, depending on the rarity, from a collector. It’s not uncommon to see rare tools, like coachmakers plough planes, sell at auction for tens of thousands of dollars.

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There are manufacturers of new tools that still make them from generations old techniques, they represent the best of the current era and no doubt will be the collectibles of tomorrow. They can command premium prices, such as the $2,000 is will cost you to buy a new set of Nishiki twisted neck chisels that are made from iron salvaged from pre-1890 ship anchors, chains, and boilers. Companies like Lie-Nielsen, Adria, and Bridge City Toolworks produce meticulously crafted handtools that are not only worthy of a display case but also a workbench.

There is a vibrant forum community consisting of professional furniture makers, “pro-sumers”, and collectors who invest (tens) thousands of dollars in these tools and track the companies with a precision that would make Wall St. analysts envious. The collectors and craftsman also covet not only true vintage tools but also the new tools made with attention to detail and utilizing modern materials like cryogenically treated A2 steel for the cutting edges, and they are willing to spend a lot of $$ and even wait months to get them. In short, this is a great space to start a business in insofar as demand is concerned.

Unfortunately, the economics of starting a business in this space are pretty tough because of the investment required in machinery, often high tech, and materials is significant. Precision machining is an expensive proposition and just like in high tech the community of professionals that can produce at this level are hard to find and expensive to employ.

What got me thinking about all this is the demise of a toolmaker called Sherpherd Tools, who offered an impressive selection of hand planes but by most accounts this company was undercapitalized and as a result was unable to invest in adequate inventory, a customer support function, and adequate demand generation.

Recently I was reading about Chris Larsen’s latest venture, Prosper and I e-mailed of my best friends who has worked for Chris from the days when e-Loan was run out of the backoffice of a mortgage broker on University Ave., and asked him what he thought of it. In typical Danny fashion he simply said “looks like Larsen is onto something big again.” The failure of Shepherd Tool sparked the thought about how to link up this kind of lending marketplace with enthusiast communities similar to a co-op to fund businesses that are outside the scope of what banks will finance (not much these days) and venture capital, which is not interested in financing companies without a clear path to exit. Zopa is another P2P lender, and was recently funded by Bessemer.

Clearly peer to peer lending is not for the faint of heart and many of the hurdles and regulations that exist in private equity are reasonable measures intended to protect the non-professional investors experiencing financial damage because they didn’t get adequate or accurate information about the risks of the investments they may be considering.

P2P lending in the area of small business finance also imposes additional risks above those associated with home mortgage lending in that there are inconsistent credit rating systems for businesses (outside of the corporate debt finance side) and the debt is collateralized with assets that may not be as liquid as a property. I can assume the regulatory and risk issues could be addressed in a fashion that protects individuals while not imposing unrealistic hurdles for companies seeking financing.

Linking up P2P financing with online enthusiast communities could result in some interesting possibilities, along the lines of what co-operatives like REI have achieved in retail. Whether it be through debt or equity, it is possible to conceive a scenario under which enthusiast communities, through Zopa or Prosper, would support businesses that not only are beneficial to the community but can achieve a level of economic success at the same time in the broader marketplace.

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