This story first appeared in the November 2015 issue of Entrepreneur. To receive the magazine, click here to subscribe.
From Facebook to LinkedIn to Tinder, much of the power of social networks comes from personal recommendations. Vouch, a direct-to-consumer lending company, is taking this concept a step further, having colleagues and loved ones vouch for borrowers’ credibility. The San Francisco-based company, which calls itself the first social network for credit, launched in April and has raised $9.6 million in funding.
CEO Yee Lee is an engineer and serial entrepreneur who was an early PayPal employee and co-founded fast-growing startups such as Katango, a social algorithm site acquired by Google in its first year. He says his inspiration for Vouch came nearly 10 years ago while at PayPal, where executives were struggling to reconcile discrepancies between individuals’ actual worth and reputation vs. self-reports on their accounts.
“It turns out that it’s easy to falsify one person’s data, but it’s harder to fake more than one,” Lee explains. To verify information and underwrite transactions, he realized, loan agents needed to look at an individual’s wider network.
Less Facebook and more Kiva, Vouch is akin to microfinance platforms that create social networks around each borrower. The service offers one- to three-year installment loans of $500 to $15,000. Sponsors agree to repay a small portion of the loan if the borrower defaults; their recommendations can also increase the loan amount or lower the annual percentage rate (APR), which ranges from 5 to 30 percent.
There are no application, annual or prepayment fees on Vouch loans, but there is an origination fee of 1 to 5 percent (compared to 5 percent at most major banks). Late fees are 5 percent of the payment amount with a minimum of $15; credit card companies typically charge $25. As of September, Vouch had provided more than 1,000 loans and worked with thousands of sponsors.
Even Vouch’s internal workings are based on endorsement. The company recruits employees through referrals or existing relationships. Lee notes that every Vouch executive has at least 20 years of experience in finance, consumer lending or engineering.
Vouch raised $3.5 million in seed money and in January closed a $6 million Series A round with investors including Core Innovation Capital, Stanford StartX Fund and IDG Ventures USA.
“I think Vouch has the potential to fundamentally lower the cost of capital for all consumers,” says Alex Rosen, managing director at San Francisco-based IDG. “Vouch offers a unique consumer product that safely gives people much better rates on loans than they’ve ever had access to before.”
Adding cash to the company coffers enables Vouch to continue to hire top talent and to offer “many more loan originations,” Lee promises. You might call it a different kind of network effect.