Displacing the VCs? Crowdfunding and P2P lending snuggle up.
Alt finance on alt finance… It gets meta.
P2P lending and equity crowdfunding appear to be the darlings of the financial press these days, in part because most of us (journalists included) are gleefully rubbing our hands at the thought of the banks finally regretting their lack of customer care (ie. facing stiff competition in the loans and the savings market), and in part because the concepts are actually game-changers, with potentially profound implications for business in general.
But more on that later. What has caught my attention recently is the apparent increase in financing campaigns carried out on crowdfunding platforms, by P2P lenders. Just last month P2P lending platform Assetz Capital (which channels loans to property developers and SMEs) raised £3.2 million onSeedrs, one of the main UK crowdlending platforms. P2P lending platformLandbay (which lends to buy-to-rent entrepreneurs) recently raised £270,000 on Seedrs, bringing total financing through crowdfunding to over £500,000.Crowdlords, Trillion Fund… The list is growing. And the relationships are not just limited to investment. CircleUp, an equity crowdfunding platform in the US, recently hired Lending Club’s COO to its board of directors.
It totally makes sense, right? Practice what you preach, no? If you are an advocate for alternative finance, obviously it makes sense to turn to alternative finance for your funding. So why aren’t more doing it? Just last week it was announced that UK-based Funding Circle closed a $150m financing round with Russian VC firm DST Global. Also last week German P2P lending platform Smava raised $16 million from Phenomen Ventures, Earlybird and Neuhaus Partners. Earlier this month crowdfunding platformRealtyShares raised $10 million from Menlo Partners.
The obvious answer is: connections, advice, mentors, etc. But, as anyone who has experience with VC investors knows, you need to be pretty lucky for that arrangement to work well. It can, of course, there are many, many examples of that. But, often, the VCs’ and the founders’ priorities end up diverging, and the VCs usually have the power to force a close. There are many examples of that, too.
As for the connections: if they’re already working with other big players in the sector, is it worth giving up managerial independence to gain a few more introductions? I would have thought that they could probably get the introductions anyway, without VC funding. Advice? They probably know their sector better than the VCs. Mentors? They’re always useful, yes. And, it’s possible that the conditions offered by the VCs are more favourable than those achievable on a public platform.
And crowdfunding is still relatively new and untested. Never mind that the concept has been operating since 2001. It is relatively new, and while the growth rates are exciting, the alternative finance startups could well have felt more comfortable with solid, stable VC funding.
Also, VC funding is like a “badge” of respectability. It’s a statement that you have solid financial backing, and that some tough and astute judges believe that you’re around to stay. The only way I managed to convince my husband to start using Transferwise was by showing him the company’s list of investors. Significant funding by a reputable investment firm signals to the sector that you’re a player.
But, to state the obvious, things are changing. The “big guys” have competition, and a sullied reputation due to public airings of extravagant frivolities and entrenched prejudice. As far as the public is concerned, they don’t sound like nice people. As with the banks, seeing them brought down a peg or two would be quite satisfying for most. Even prominent venture capitalists have been hinting at strategic problems within their own sector. The sector that preaches disruption is itself now threatened with disruption.
And yet, VC investment and VC investors aren’t going anywhere. The sector will reorganize and regroup, and continue to support innovation and help big ideas reach the success stratosphere. Meanwhile, crowdfunding and crowdlending will continue to expand, and the cross-financing activity among alternative finance cousins will intensify. The use of alternative finance platforms by alternative finance platforms is exciting in that it adds an extra layer of validation to the sector, strengthening relationships and enhancing profiles. New platforms and new ways of doing business will give rise to new ecosystems, new expertise and new relationships. But to become a completely integrated funding solution means also playing with the big guys, the ones who have been around longer. More financing opportunities leads to more financing opportunities. A win-win for everyone.