Part 1: Entrepreneurs
The Alternative Finance world is young and vivacious. The platforms are almost universally beneath five years in age. But the actual users of those platforms are (by my estimation) rather less bright-eyed and spritely. And that got me to thinking – how is the younger generation of fundraisers and investors, say 18 to 25 year olds, to approach the alternative finance space?
I first decided to approach a few leading platforms in order to confirm my suspicions that the majority of alternative finance users are middle-aged…
Borrowers – 40 years old on average – borrow on average £7,000
Lenders – 47 years old on average – lend on average £5,500
Entrepreneurs – 40 years old on average
Investors – between 41 and 50 years old on average
Savers - 55 years old on average – c.£15k average investment
Borrowers - 41 years old on average – £6k average loan
It is of course to be expected that those falling within the age range of 18-25 are not the primary users of the many platforms. But are there opportunities for younger people to take advantage of the alternative finance movement? And, if so, where do those opportunities lie?
I thought I’d start by assessing the options available to young people looking to fundraise - as opposed to those looking invest. The possibilities here are varied and vast. The fundraising half of the alternative finance equation represents by far the more relevant portion of the industry for youthful sorts.
Young entrepreneurs – for all their ideas and their dynamism – will typically struggle to secure credit from a traditional finance provider. Enter the rapidly growing and swiftly diversifying world of crowdfunding. At the risk of telling you what you already know – there are three main forms of crowdfunding: equity-based, rewards-based and pledge-based. All three could be relevant for those with an early-stage business or business idea. I use the phrase “could be” very deliberately. Platforms belonging to all three branches of the crowdfunding tree are heavily reliant on the quality of their reputations. It is not only the equity-based platforms that take a very serious approach to vetting prospective projects. That said, if you’re serious about starting a business and have hit a funding roadblock – crowdfunding could be for you.
Equity crowdfunding – which in the UK has now channeled over £50 million into young businesses – is the process by which you effectively sell a slice of your business to a crowd of investors (usually a mixture of retail and sophisticated) in exchange for money. The money you raise depends on the valuation that you apply to your business and the amount of equity that you’re willing to offer up.
The downside here is that you’re giving up a significant portion of your business and losing autonomy in a move that may prove costly should your project flourish down the line. The upside is that the short-term monetary cost of raising equity-finance is negligible. Unlike taking out a loan, you won’t be burdened with making principle and interest repayments at an early stage in the company’s lifecycle. By going down the equity crowdfunding route you might not gain the benefit of shareholder expertise (with the exception of, say, Syndicate Room) – but equally you won’t have to cater as carefully to shareholder voting rights.
Rewards-based crowdfunding is another enticing opportunity for a young entrepreneur with a good idea. The primary benefit of course is that if you’re able to raise money via a Kickstarter or an Indiegogo you don’t have to pay it back, you don’t pay any interest, you don’t give up any equity – you are essentially raising funding that is free of financial obligations. That is an extremely attractive prospect for a young person embarking on the highly difficult task of kicking off a business from scratch. You will, however, be obligated to stick to your promises of offering “rewards” for specific pledge amounts – i.e. an exclusive screening of your film in exchange for £100.
It’s not just small amounts that can be raised through this method. The Pebble E-Paper Watch raised an astounding $10,266,845 through Kickstarter – 10,266% of its original fundraising target. Extreme example, granted, but the point stands. Crowdfunding of this kind, or indeed any kind, can also serve as an invaluable marketing tool for a developing businesses – particularly for projects that manage to go “viral” on social media.
So what’s the catch? None, really, other than that it is immensely tricky, time-consuming and fairly costly to craft a really persuasive crowdfunding campaign. You only tend to hear about the hyper successful projects – whilst all the while a slew of campaigns are flying under the radar and underfunding. And that usually means they receive no funding at all, as most platforms operate an all-or-nothing funding policy. But this route is absolutely worth a try for anyone with a bright idea and a mind for digital marketing.
The same can be said for any selfless young souls out there wishing to create a charity or some kind of organization/product/entity for social benefit. The challenges and benefits are much the same as those within the rewards variety of securing finance. The major difference, of course, is that you needn’t even offer rewards – but that facet of pledge-based crowdfunding cuts both ways. Yes, you’re not going to have to offer any kind of tangible return – but that means it’s going to be even more difficult to secure financial backing. You’ll need a really powerful proposition in order to sway the minds of altruistic supporters.
If you’re already running a startup company, various options exist within the alternative finance space that can aid in the day-to-day running of that business. You could get that all-important working/growth capital injection in the form of a peer-to-peer funded loan – with terms typically ranging from 6 months to 5 years. The peer-to-business sector should be your first port of call, but the consumer facing space may also be of use. Platforms like Zopa and RateSetter could arrange, by way of example, a “personal” loan that might be used to purchase a van – which may in turn be used as part of your business operations.
But to focus on the business lending platforms – the important thing for intrepid young business owners to understand is that the platforms vary enormously in terms of the types of businesses that they want to lend to. Some platforms, like LendInvest, exclusively look to make secured loans for the purpose of property development. The property side of P2P is likely somewhat irrelevant for those aged between 18 and 25. In fact, secured lending in general is probably not what young entrepreneurs are after. Emerging businesses are unlikely to have much in the way of assets to offer as security on loans anyway. That eliminates a few other platforms that focus solely on secured lending – like ThinCats.
Funding Circle – the largest P2B lending platform – can provide unsecured loans, as can a number of other platforms. Again, Funding Circle won’t just lend to any business. You have to have been in operation for more than 2 years, and you have to boast an annual turnover of at least £100,000. And there are of course many more boxes that prospective borrowers have to tick. Some young businesses will fit the bill, but the point to understand is that there’s never a guarantee of securing finance through a P2P platform and it’s going to be all the more challenging for a particularly young business. If you can take out a loan, however, you’ll find that the interest rates are generally much more attractive than the rates attached to mainstream financial products. What’s more – the process of application, confirmation, listing and receiving funding is incredibly speedy – and that’s welcome news for any businesses in dire need of capital.
Startup companies will almost always have to wrestle with cash flow issues at one point or another. The online invoice finance platforms might be able to help – under the right circumstances. MarketInvoice and Platform Black will help you to sell your invoices to a crowd of sophisticated investors. These investors can put up anywhere between 80-90% of your unpaid invoice in immediate cash, and the platforms allow you to sell your invoices selectively (aka. You don’t have to trade away the entirety of your accounts receivable). Whilst it’s a relatively costly form of short-term funding, invoice finance could be the key to weathering a cash flow storm in the early stages of your business lifecycle.
The catch is that MarketInvoice is understandably picky about the types of invoices that it accepts. There are many requirements, but perhaps the most important of these is that the unpaid invoice has to be owed by a “blue-chip” debtor in order to be sold via one of the platforms. Such debtors typically turnover upwards of £100 million annually and are often household names – such as Tesco or the Carphone Warehouse. The blue-chip requirement is worth flagging simply because not a huge amount of young entrepreneurs, with correspondingly young businesses, will be supplying these kind of megalith companies.
This is not the case for Platform Black - upon which a broader range of invoices may be listed. As a seller on Platform Black, you will list your invoice accompanied with as much supporting information (purchase orders, acceptance notes, etc.) as you see fit. The platform's investors will then set the price attached to the sale of that invoice (in terms of a percentage of its value). The price is based on investor demand; if lots of investors pile in to fund your invoice, the price will be driven down. The borrower can place caps on this auction process to prevent the cost of finance from spiralling out of control.
Finally, there are a number of more specialized providers out there that can provide personal finance to certain youthful individuals. The first two that spring to mind are Pave and Upstart. These unique US platforms allow backers to invest in the future of highly promising young individuals. You could list yourself on one of these platforms in order to raise the money to fund an MBA, refinance student debt or even to launch your own business. Previously, these platforms allowed a crowd of investors to front you the cash – and in exchange you would return to them a set percentage of your future earnings over an agreed period of time. But by the looks of things both platforms have now rejigged their focus onto more traditional, but affordable, loan structures. Still – the target borrowers remain the same – and they slot nicely into our 18-25 year-old age range.
Many UK options exist to help struggling students finance their education – like StudentFunder. The advent of such sites couldn’t be timelier, with the shadow of massive fees now hanging over prospective students. The UK space is also home to a particularly creative platform by the name of hubbub. Hubbub forges white-label, institution-branded crowdfunding websites – usually for universities or charities. Let’s take the university example. Once the platform is in place (as they are for York and Oxford Brookes already), a university can then appeal directly to its alumni base in pursuit of funding for a range of listed campaigns. This could be a powerful method of gaining traction for your initiative. The one drawback is that this relatively new site is still in the process of building momentum – and doesn’t yet attract the same level of fanfare as the more established crowdfunding sites.
Clearly there are a great many ways that younger folk could and perhaps should look to get involved in the alternative finance movement as borrowers/fundraisers. Admittedly, the industry will not be able to cater to all-comers. But the alternative finance platforms are famous for finding credit-worthy customers in whom the banks saw no value. Some young entrepreneurs will fall within that category – and those individuals need to be made aware of the full range of their funding options.
Look out for Part 2 tomorrow, in which I’ll be sizing up alternative finance as an opportunity for young investors.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.