Prosper, which bought Israeli BillGuard, sees riches in startup struggles
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Aaron Vermut, CEO of Prosper, on his first visit to BillGuard, which Prosper acquired for a somewhat low $50 million in September. Photo credit: Laura Rosbrow / Geektime

Aaron Vermut, CEO of Prosper, on his first visit to BillGuard, which Prosper acquired for a somewhat low $50 million in September. Photo credit: Laura Rosbrow / Geektime

In his first visit to Israel after buying BillGuard, Prosper CEO Aaron Vermut says BillGuard staff will double. It’s also not his first time turning around a startup

When leading peer-to-peer lender Prosper Marketplace acquired BillGuard for $50 million in September, many in the Israeli startup community were shocked. BillGuard was a financial and personal security app operating in two lucrative sectors. It was also a darling of top 10 lists from publications such as Fast Company and Business Insider.

Yet, despite all this hype, the more than 5-year-old company couldn’t even manage a $100 million buyout.

When we asked Prosper CEO Aaron Vermut on his first visit to BillGuard’s Tel Aviv headquarters about what really happened, he replied, “With all due respect to BillGuard, it is a hugely capable tech organization that didn’t really have a strong business model.” He claimed they were not doing a lot of revenue and even though he wasn’t directly involved in the acquisition, he said the price was reasonable when accounting for their profits and number of users. 

“If you’re too much of a darling, you start to believe your own bullsh*t.”

Regarding their press, Vermut said something somewhat surprising. “I think getting into one of those magazines is kind of a curse. It’s like an omen. If you’re too much of a darling, you start to believe your own bullsh*t.”

In the end, he didn’t care about their hype. Rather, he “cared about the stuff they built.”

Doubling BillGuard’s staff

On the little model tree in BillGuard's waiting area, it reads, "Founded in Israel". Photo credit: Laura Rosbrow / Geektime

On the little model tree in BillGuard’s waiting area, it reads, “Founded in Israel”. Photo credit: Laura Rosbrow / Geektime

Specifically, BillGuard will oversee a large part of San Francisco-based Prosper’s mobile strategy. To do so, they will double BillGuard’s staff in Tel Aviv and soon, will probably move offices to accommodate the rise in employees. They also didn’t restructure any BillGuard staff as part of the deal.

Vermut admitted, “Honestly before we acquired BillGuard, we didn’t have a mobile strategy. We had some responsive web pages. There was no Prosper in the App Store, we were so focused on iterating, fixing the doors and cr*p on the site. The BillGuard acquisition solves a lot of problems for us.”

Among BillGuard’s advantages is its world class engineering team. Vermut noted that, “I do think that the engineering here is as good or better than San Francisco. That’s really meaningful. It’s great risk mitigation,” for Prosper to have engineering staff in Israel. He also appreciated that all the engineers were full-stack, and hoped that “some of that DNA goes back into the San Francisco culture.”

Prosper users will benefit from BillGuard’s services, which will be offered for free, such as credit scores and security monitoring. In the future, Vermut aims to use the data to help users make better financial decisions. For example, he said that if a user had a considerable amount of debt, Prosper could approach them with targeted loans. He also noted that eventually, they will rebrand BillGuard’s name with Prosper in some constellation, such as potentially Prosper Money.

“We wouldn’t be here at Prosper if he didn’t literally make me do it.”

Donning a Patagonia vest with a buttoned up shirt and jeans, it was hard to tell if Vermut’s calm demeanor came from living in the San Francisco Bay Area, a sense of confidence, or that he was on a 5-day trip to Israel, a place he hadn’t travelled to since his post-bar mitzvah trip at 13. Preferring one-on-one conversations over public appearances, he told us that, “As far as CEOs go, I’m a very pragmatic, execution-oriented CEO. We just like to get work done.”

Still, he mentioned the heated nature of his relationship with his main business partner: his father, Wall Street veteran Stephan Vermut.

In 2012, they sold Merlin Securities LLC, a brokerage services startup they founded together, to Wells Fargo for an undisclosed sum. Instead of resting on their laurels as members of Wells Fargo’s management, Vermut Sr. pushed his son and Ron Suber, their senior partner from Merlin, to invest heavily in Prosper. At the time, Prosper was worth about $20 million and facing both bankruptcy and a class action lawsuit.

He recalled, “We wouldn’t be here at Prosper if he didn’t literally make me do it. He got really mad, [saying] ‘I’ve been in business a long time, this is the single best one I’ve ever seen.’ The price was right, there was a lot of work to be done, but if you could clean it up it could be really great.” Although he and Suber weren’t sure at first, particularly since they had recently finished selling Merlin, “Ron and I were like, ‘Okay, you’re the boss, let’s do it.’ He saw something we didn’t quite see all the way.”

How they turned Prosper from bankrupt to raising $279.1 million in investment in 3 years

His father saw that Prosper had a strong business model driving the technology, when in Silicon Valley, it’s usually the opposite. He thought if they could get an institutional funder to invest alongside them, heavily restructure the company’s staff and operations, and settle the lawsuit, that it could work. And he was right.

In Jan. 2013, they raised $20 million in a round led by Sequoia Capital and appointed Stephan Vermut as CEO and member of the board (Aaron Vermut was appointed CEO in 2014). They fired all of the senior management, keeping only 20 out of the original 80 Prosper staff members. And in July 2013, they successfully mediated the lawsuit, allowing people who bought debt from Prosper between 2006-2008 (before they registered as a seller of investments under the Securities Act) to claim up to $10 million in damages.

Since then, Prosper has simply skyrocketed in terms of growth. In 2014, they administered $1.6 billion in loans and made $81 million in revenue, and in 2015, they provided $3.7 billion in loans and generated $204 million in revenue. This recent infographic shows the enormous amount of revenue, activity, and investment that has increased since the Vermuts took control of Prosper, growing the company from 20 to more than 520 employees.

Image credit: Prosper

Image credit: Prosper

The 20 employees that did stay with Prosper helped them figure out how to fix what was broken. They recommended four key actions: changing the tool they were using to calculate credit scores, lowering prices to buyers, rewriting the website, and putting in a new credit model.

How did Prosper get into such a bad situation?

Vermut lamented that when they started at Prosper, “It was really messed up. Kind of a sad company with a great and innovative business model.” He thought that after a series of bad decisions, which compounded the negative outcomes, the hardest part about the takeover was “the cultural change, teaching this organization how to win.”

When asked what he thought characterized organizations that win, he said simply, “Setting a goal and doing it. At first, people were like ‘No way that’s possible, we’re never going to do that much business.’ When they did after the first month, I took the whole company out to beers. They were literally like this is so amazing. We’ve never set a goal and hit it before. The only other time they all came together was to say goodbye to people.”

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Laura Rosbrow-Telem

About Laura Rosbrow-Telem

I am a social entrepreneurship enthusiast: This is what happens when a former social worker becomes a tech journalist. I mostly write about startups, technology, peace and justice issues, cultural topics, and personal stuff. Before Geektime, I was an editor at the Jerusalem Post and Mic.

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