I was listening to Startup Nation’s podcast yesterday, and they featured Prosper, a website that’s the “eBay for peer-to-peer funding.” The idea seemed interesting, especially to someone forming a startup.

The basic premise is that you can borrow money from a group of peers instead of through a bank. The peers are all investing, and then bidding each other down to the lowest agreed-upon percentage base. (Check out their site for a better explanation). So, in the end, you could have a need for $5000, and maybe 50 people will offer up $100 each, with a return rate of 7% or some such.

The benefit to borrowers is that the rate is competitive to banks, but the level of acceptible risk is determined by the people loaning money, and not some big formula. The benefit to lenders is that you feel good giving to specific projects (borrowers have to “pitch” their ideas), and have a strong sense of sharing the risk of loaning with fellow investors. Think of it as being micro-investors.

But there’s more to this idea for life hackers to consider.

Investing in Each Other- Are you a developer trying to launch a startup out of your bedroom? Maybe you’re at the point you need a few servers instead of trying to simulate a million users on a laptop. Prosper does the whole social networking thing to a neat end. You can join GROUPS of investors, so that there’s an added “peer effect” for the borrowers to want to give the money back. If you’re all in the “Firefox Developer Network” (I made that up), you as a borrower might feel worse about not paying back a loan given to you by your peers in the same community.

Borrowing to Start Up- You as a borrower can get some money from peers, build your infrastructure, make some money (because your business model has a way to make revenue, right?), and then pay that money back into a community of like-minded investors. When you’re done and making money, maybe you will choose to invest back into the community that helped you.

Because you can sign up to offer as little or as much of your own money as you’d like, you know the full level of your risk as an investor. Because borrowers must be approved by their peers, it’s a better sense of connectivity between the borrower and the community who gives the money out.

I’m saying that the beauty of this system is that it’s money towards specific projects with a lot of thinking and intent behind both parties, and that strikes me as a way to negotiate that’s more centered in the people involved. The “hack,” if there is one, is that this network might prove easier to use than a traditional funding source, and might return better rewards to those involved.

Prosper — [via Startup Nation]

–Chris Brogan writes about self-improvement at [chrisbrogan.com]. He just launched the New Media School project in beta. Check it out and give some thoughts and feedback.

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