Advice, insight and predictions on alternative finance from 4 big firms in the FinTech industry.
Angus Dent
CEO, CITY AM – Alternative Finance Expert Panel Questions
What would be the first advice you would offer to individuals looking to become alternative finance investors?
Consider the security provided. Alternative finance covers a wide range of investment opportunities and, as with any investment, balancing the security and the reward to suit your portfolio is essential. Equity crowdfunding provides the least security and the highest potential returns, though arguably some losses are inevitable with funding focused on start-ups and early stage businesses. Conversely marketplace lending has low default rates but returns start from a more modest 4%.
How do you see alternative finance changing the funding landscape for new businesses?
The big change has already taken place with disintermediation having opened up multiple sources of funding. As the sector grows it will be interesting to see if the ‘hidden experts’ within the crowd are motivated to support young business in other ways; perhaps providing sector expertise, business acumen or even introducing business opportunities. Platforms will need to encourage and foster communication.
What has been the biggest development in the alternative finance space in the last year?
Growth and diversification; the phenomenal growth of the sector and the increase in institutional investment has led to alternative finance lending appearing in the UK Government quarterly figures for the first time. What really excites us is the diversification of offerings from innovative platforms challenging pre-existing finance models.
Is alternative finance a truly global phenomenon and to what degree are alternative finance providers bound to their national/ local areas?
From Moscow to Brazil and a thousand platforms in-between crowdfunding is already truly global. However, it is not yet globalised, as legislation is still playing catch-up in many markets which means that platforms are often contained within their jurisdiction. As legislation develops it is inevitable that platforms will expand their operations and become more multinational.
In the coming years, do you see forms of alternative finance and investment becoming more diverse?
Yes. Both investor demand and the desire to be noticed by fundraisers will see many new ‘splinter’ platforms developing away from behemoth catch all crowd sites that were first to market. Already specialist investment sites in technology, pharma and education appealing to specialist crowds are upon us and new lending models suited to specific businesses are cropping up constantly.
Jeff Lynn
CEO and co-founder Seedrs
What would be the first advice you would offer to individuals looking to become alternative finance investors?
Investing in businesses can be enjoyable, and backing “the next big thing” has the potential to produce life-changing returns.However, it’s important to create a diverse portfolio when looking at equity crowdfunding. Investing in small and early-stage businesses is high risk, and the majority will likely fail. Those that do succeed will potentially deliver spectacular returns—which can far more than make up for the losses—but that only helps if you’ve invested in the winners. This is why diversification is crucial. Invest across a large number of businesses to ensure that your portfolio as a whole has the best prospects for producing market-beating returns.
How do you see alternative finance changing the funding landscape for new businesses?
Traditionally, banks don’t lend to young businesses with little collateral, venture capital requires traction, and angel investment is scattered and inefficient. Without wealthy friends or family able to invest large amounts of high-risk capital, entrepreneurs have had few options.Equity crowdfunding changes that. By making it simple for anyone to invest online, ambitious businesses can access capital from a wider range of investors than ever before. And they can receive more than just investment, like: mentorship and advice from a broad investor base; long-term engagement with existing and potential customers; and international exposure and product validation.
What has been the biggest development in the alternative finance space in the last year?
As the market matures and investors start to anticipate successful exits, investors are assigning greater importance to investor protection.We believe that all investors, however small their investment, should be able to realise maximum returns on their investments. We’ve always prided ourselves on leading the way on this, which is why we operate a nominee structure for each deal, include professional protections and rights in all investment agreements, and ensure that each investee company keeps their investors up-to-date.It’s no longer about making introductions but sharing in success.Put simply, investors increasingly want equity crowdfunding done properly.
Is alternative finance a truly global phenomenon and to what degree are alternative finance providers bound to their national/ local areas?
Our vision is to build a platform that allows businesses with international aspirations to raise capital from investors anywhere; to be a global platform.Business finance has been rather slow to adapt to globalisation, and outdated regulations in certain jurisdictions have hampered the rate of globalisation, to an extent. However, we have a bright team, and we have been very successful at developing a model that is increasingly global.After launching in the UK in 2012, we opened across Europe in 2013. In 2014 we acquired a US business and will be opening to accredited US investors in 2015. We’re determined to make Seedrs a truly global platform and are well on our way to achieving it.
In the coming years, do you see forms of alternative finance and investment becoming more diverse?
As the industry has matured, so, too, have product offerings. We believe we’ll see more innovation as the space grows. Some of our recent innovations include:
- Funds, which make it possible for investors to spread a single investment across multiple businesses chosen by an accelerator or through a competition.
- Convertible equity, which offers a way to raise and invest money now, while deferring the need to place a value on the company until the future.
- Funding publicly-traded companies through equity crowdfunding, which we believe will become increasingly popular as later-stage businesses see how efficient, cost-effective and engaging this kind of fundraising can be.