The launch of Informed Funding last month meant that the issues facing new and growing companies when raising finance were firmly put on the agenda.
The market intelligence unit of Informed Funding, the Alternative Funding Network (AFN), have already prepared a series of reports around the topic and their analysis of the changing investor landscape in the P2P and crowdfunding arena was particularly salient for small business owners. New and growing companies looking to maximise their chances at investment should familiarise themselves with how the investor environment is changing.
MORE INSTITUTIONS ARE LENDING VIA ALTERNATIVE FINANCE
According to the AFN, P2P lending and crowdfunding sites which have been around the longest, are the platforms which are seeing the greatest change in investors. In particular, it’s institutions (local/national government, Chambers of Commerce and a range of financial institutions) which are investing increasingly via these platforms. Both lenders and institutions are attracted by the ability inherent to P2P lending to mechanise the evaluating processes, providing a fast turnaround and thus greater flexibility.
When it comes to crowdfunding, there is also change. Luke Lang, co-founder of Crowdcube, reflected “We are seeing the model mature and that is reflected in the types of investors [crowdfunding] attract[s], predominantly retail with a mix of some cornerstone angels, to moving right up to getting institutions involved, who come to us through their own volition.” Read our profile with Luke Lang here.
MORE MONEY, LOWER RATES
More institutional lending has meant that crowdfunding and P2P lending platforms have a greater ability to service far more businesses. Indeed, Rebuildingsociety CEO, Daniel Rajkumar, said that greater participation from institutions has meant larger deal sizes and an ability to grow their loan book. Read our profile with Daniel here.
More people wanting to put in money also means that rates will go down for small businesses. This can only be good news given continued poor bank lending.
However there have been checks and balances put in place to ensure that institutions don’t crowd out retail investors. Continued encouragement of retail investors means that, should significant institution funding be withdrawn, there will still be a steady stream of finance.
MORE RISK, MORE DILIGENCE
Rob Roscoe is responsible for Strategic Partnerships and Investor Relations at incumbent Invoice Trading platform, PlatformBlack. He explained that “an institution’s ability to invest greater sums to a platform allows not only for increased deal sizes, but also the ability to test new finance products that we want to introduce on the platform. Since they have different risk bands than those typically sought by retail customers, they do not have the same constraints and are able to provide funds to products that would not be suitable for the retail consumer.” This is good for businesses that perhaps can not offer the same level of security typically expected by retail investors. It also allows for terms and timescales that are atypical to the retail investor.
Read our profile with Rob here.
Given that institutional investors typically have different and stricter requirements when looking at a potential business, equity platforms have had to conduct enhanced due diligence. This means that some businesses won't pass the grade if they supply insufficient information. This has had a positive impact for all investors as the crowd is given the same economic terms and rights as a business angel.
A NOVEL WAY TO ATTRACT ANGELS
Initially raising money via crowdfunding could be a good way of attracting VC or Angel investment.
These investors often use crowdfunding sites to identify or track prospective businesses for funding or to complete existing funding rounds that would otherwise go unfunded or take too long to finalise.
A good example would be SyndicateRoom, which allows Angels to lead funding rounds and raise the last tricky 10% to 20% via retail investors.
Crowdfunding is thus a good way of ‘warming up’ Angels and VCs. It also gives new and growing businesses control for that little longer which could prove crucial.
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