WEEKLY COMMENT 11-12-2014
By Barry Edwards
Syndicate Room, Crowd Funding
Last Tuesday I attended a gathering for Syndicate Room (SR) sponsored by BDO, the accountants, which was an evening with Dr Andy Richards and four company presentations. It was a very interesting event and I am sure it is the way forward for equity investment and support for fast growing young companies.
The main difference between SR and other equity crowd funders is that every company has to have some finance in place before it can use the platform to raise the balance. This means that all the companies that use the platform have interested investors who make sure that the company implements the business plan and work with the directors to assist with the development of the business. This inspires reassurance and confidence for the follow on investors attracted by the proposal. You can have a look at the site if you click on the link below;
The talk given by Dr Andy Richards was all about his experience as an angel investor in life science companies; his successful investments include Chiroscience, Cambridge Biotechnology and Vectura. You can look at the history of SR and latest presentations if you go to the site.
The main reason for mentioning SR and how it works is to show that there are crowd funding entities out there that are following the more traditional path of investing but utilising the Internet advantageously. It has to be the way forward for equity investment especially for new young companies whether they are technology based or traditional new businesses. SR is based in Cambridge which is the centre for new technology and life science developments in the UK and most of their investments are these types of businesses.
What these crowd funding platforms do is speed up the financing process once the inventing, planning, development and due diligence stage is completed. Previously this took a long time but now, once the proposal is on the platform, it is a few weeks before you know whether your company is appealing enough to investors. The other advantage is that when the company needs further funding to finance expansion, you have a wide range of shareholders to approach to get a good feel for their agreement to proceed.
All in all, if the whole market moves this way it will make a real difference to the early stage funding of young companies which can only be beneficial for the UK economy. What we need is a similar approach to lending to SME’s which are finding some success from the peer-to-peer lenders. Most companies balance their financing between equity and loans to provide the long-term investment and the short term working capital finance. At the moment there are a few crowd funders doing both but clearly this is an area where the combination has to be the next stage of development for this market. I expect SR will eventually start to offer both and since the banks are making it clear they do not wish to provide loans to early stage businesses, it will become a necessity.
Since they have the expertise to analyse the equity side extending that to loans should not be a problem. It is the pure peer-to-peer sector that needs to develop the support and monitoring side of their lending platforms. This has never been one of the strengths within the banking environment which is the main reason they prefer to fund more established companies. The real potential for the crowd funding sector is to perfect this process within the early stage market which will mean they are in a good position to continue providing the finance as the companies expand and grow. This is where the banks will really start to see competition and they will find it hard to regain the market from the crowd funders.
As we saw from the Autumn Statement last week, the government is doing everything it can to encourage this market to evolve. They have devised a structure that allows losses to be offset against tax payable which is very beneficial for high income earners and it has brought many investors into the market. They are also trying to encourage financial institutions to become involved and we are seeing the beginning of their interest slowly developing but so far mainly in the peer-to-peer lending sector. In the USA, this kind of lending has certainly attracted many institutional lenders who prefer to use peer-to-peer since it is much more cost effective. We should begin to see a similar approach happening in the UK over the next few years.
There is a lot going on in this sector and as the lending market is moving onto the Internet platforms, we will see some large new companies evolving and competing aggressively. There will inevitably be some setbacks and problems but it should only improve the quality of the assessment process which is where the weakness is at the moment. We are about to see a new phase in the world of lending and it will have a big impact on the growth of the world economy encouraging many new businesses to start and grow.
That’s all for this week, more observations next week.