The M&A Hokey Cokey
I’ve been writing or making TV programmes about all sorts of up and coming business sectors for getting on for 25 years now (God that long!) and I can always sense the moment when a nascent industry has to get real and grow up. Alternative finance is at that point with the long awaited M&A great dance about to kick off following Funding Circle’s deal with Zencap.
My colleagues on news will no doubt keep AltFi readers abreast of the next parts of this thrilling narrative – but for me the more interesting story is what happens next in the dance of deals. Put simply who’ll be pairing with whom as the corporate advisers start to work their magic.
In my experience there are three interrelated dances to watch out for.
The first one is what I call the race to scale dance. Funding Circle are clearly charging ahead with their master plan to be Number One globally and I suspect that Lending Club may now be forced to accelerate their M&A plans to keep up. The end goal here is obvious. Biggest equals best valuation. It's a scale game! Back in the consumer field I would hazard a guess that Zopa or Ratesetter now need to bulk up much faster. I hear all the reassuring talk about building organically…blah…blah…but corporate advisers and VC investors aren’t patient. They’ll roll their eyes and say “hurry up and build scale fast”. And while we are on the subject of scale I would say that having three big crowdfunding platforms in the UK is at least one too many. Someone from the short list of Crowdcube, Seedrs and Syndicate Room needs to move first.
Next up is what I call Caught in the middle. These are the second division players in each segment who realise that they aren’t possibly big enough to compete with the big guy. In SME funding I think we can all guess who these players are and my message to them is to either move first or be gobbled up. The middle of the road is no place to be when you have big men global players on the prowl.
My own favourite is something called the Long Tail Thinning. Again this is a simple dance and consists of a brutal mopping up campaign (apologies for the switch from dancing to military similes) where the smaller long tail of businesses in a sector are taken out by the second tier guys looking to bulk up against the scale players. My only comment here is that the long tail in crowdfunding is bloody long and someone's needs to do us all a favour and build a smaller bunch of more viable players.
Last but by no means least what out for the pivot strategy. This comes in two forms. The most enjoyable one is in effect a form of corporate venturing where a giant corporate decides to buy something in a new space as a form of internal venturing. They see an opportunity to share their IP in a new marketplace and like buying quirky transformative outfits. Google is a past master when it comes to this strategy but even old-fashioned outfits like GE or high street banks have done his stuff before. Their target is usually a player with something genuinely radical like SoFi where you can say, ”no one saw that coming, boy this will be huge!”
The second variation is the forced pivot where a successful niche player decides that the M&A game is threatening and decides that their space is too small to get to scale, forcing them to opportunistically buy into a new space.
A good candidate here could be MarketInvoice which is a great business but must be feeling the need to climb out of the invoice box and become an integrated supply chain financier. That ambition will require a series of big moves and I would bet there might be some opportunistic pivots along the way.
So, who will be leading the dance in these various scenarios? If I were a betting man I would be keeping a beady eye on Lending Club, Market Invoice, Zopa, and Crowdcube with Syndicate Room, Ratesetter, and Assetz as potential surprises. And then there’s LendInvest who will always benefit from an incredible niche, solid profitability and a good management team. Might they do a pivot to bulk up ahead of an IPO?