Gearing up for the Lead Investor

Luke Davis – CEO of IW Capital, Co-Founder & Chairman of Crowdfinders and Co-Founder of Money&Co.

Luke Davis

You can’t ignore equity crowdfunding. The industry’s growth over the past five years has been phenomenal, successfully granting the armchair investor access to a domain that was traditionally reserved for the institutions. In doing so, the industry has paved the way for some of the most successful business case studies of the past decade. In the past five years we’ve witnessed the rise of some of the most fantastic platforms to exist globally and facilitated much-needed capital for the UK’s rising SME population. Without these platforms the new generation of social investors may not be inexistence today. However, as with the rise of any industry, more players have now entered the market with a similar formula, in a bid to emulate the success of the early adopters. So where else can the industry go from here and are we in danger of exhausting the crowd?

Nesta’s ‘Pushing Boundaries: the 2015 UK Alternative Finance Industry Report’ was an indication of the incredible rise of alternative finance and its contribution towards the democratisation of SME investment. The industry grew by £3.2 billion in 2015, with equity-based crowdfunding cited as one of the fastest growing models on the market, expanding by 295% since 2014. As these figures suggest, more funding is being generated for UK businesses on an annual basis.However, what we can also take from this is that the market is getting busier as platforms are assuming a greater number of companies – last year alone, 254,721 businesses and individuals turned to the crowd for support.

As with any saturated market challenges start to emerge, and for the crowdfunding industry,it is the risk of inflated valuations. As more companies turn tocrowdfunding this is something that we should be mindful of as an industry. To counteract this and safeguard the market in the long-term, we have to implement preemptive measures. This will involve far greater levels of due diligence to ensure that these valuations do not prove detrimental for investors in the long run and dilute returns post-exit. Moreover, should these returns prove lack lustre, it is of paramount importance that we avoid the risk of investors becoming reticent in the future.

Beyond valuations, the higher volume of companies that have turned to crowdfunding and succeeded has created additional challenges that need to be addressed. As crowdfunding has evolved and generated a legacy of exceptional start-up case studies that have continued to develop and grow their brand, these businesses are now outgrowing the crowd. Moreover, the platforms that initially supported these growing companies are not geared to receive the scale of finance that is required to push them from promising start-up to thriving SME. However, many of these companies are still too small to receive full backing from the institutions, so reside in a state of financial limbo as a result.

At the investment end of the SME landscape, the profile of the crowd has changed considerably from what we knew five years ago. Now, investors have typically built up a portfolio of around 8-10 companies, with many of themawaiting returns from the investments made in the early stages of the crowdfunding era.

UK crowdfunding has created exceptional case studies,demonstrated a remarkable growth trajectory and set a benchmark for the global alternative finance industry. That said, as with any industry of such momentum, we must be prepared for challenges ahead to deflect from the risk of an inhibited crowd and stages of SME growth that we as a sector will struggle to support financially. For me, the lead investor model could be the answerand this is an area largely championed by debt crowdfunding platforms.

Although some equity-based platforms are embracing the lead investor, it’s more common amongst debt providers. The lead investor model simply taps into humans’ herd mentality. If a sophisticated investor withmore experienced funding capabilities is willing to invest in a companythat hasa fair and accurate valuation, this creates a stamp of approval, instilling a ripple effect of confidence amongst the crowd. This sophisticated investor – whether a high-net-worth individual, a hedge fund or a family office – could therefore help catalyse the industry into movement. In no way should we institutionalise an industry built on the values ofdemocratic investment.However, as a means of stimulating the crowd and evolving a burgeoning start-up population into a community of mid-sized enterprises, theindustry’s infrastructureneeds to recalibrate andgear up fora higher level of investment.

To do this, platforms need to lay the groundwork for cash from the serious investor, which can only be achieved by generating quality deal flow and not relying on quantity. A renewed focus on deal origination will require platforms to have credit analysis experts on board to fully vet new opportunities without depending on a blackbox algorithm to do the due diligence for them. This way, with some support from a lead investor, we can empower the crowd again and help them to feel confident enough to back the brilliant businesses that Britain has to offer.

For both equity crowdfunding and debt, it all boils down to scalability, for the companies that seek funding and for investors. The platforms need more investors and rejuvenated investor interest to back businesses; the businesses that are in this state of limbo need capital; and the investors themselves need the confidence to support these companies. So in order to ensure that crowdfunding does stay democratised and is able to keep pace with the growth of the businesses it created, institutional injections could be a transitional solution until we as an industry establish the infrastructure to sustain this thriving sector long-term.

Luke Davis – CEO of IW Capital, Co-Founder & Chairman of Crowdfinders and Co-Founder of Money&Co.

Luke Davis

You can’t ignore equity crowdfunding. The industry’s growth over the past five years has been phenomenal, successfully granting the armchair investor access to a domain that was traditionally reserved for the institutions. In doing so, the industry has paved the way for some of the most successful business case studies of the past decade. In the past five years we’ve witnessed the rise of some of the most fantastic platforms to exist globally and facilitated much-needed capital for the UK’s rising SME population. Without these platforms the new generation of social investors may not be inexistence today. However, as with the rise of any industry, more players have now entered the market with a similar formula, in a bid to emulate the success of the early adopters. So where else can the industry go from here and are we in danger of exhausting the crowd?

Nesta’s ‘Pushing Boundaries: the 2015 UK Alternative Finance Industry Report’ was an indication of the incredible rise of alternative finance and its contribution towards the democratisation of SME investment. The industry grew by £3.2 billion in 2015, with equity-based crowdfunding cited as one of the fastest growing models on the market, expanding by 295% since 2014. As these figures suggest, more funding is being generated for UK businesses on an annual basis.However, what we can also take from this is that the market is getting busier as platforms are assuming a greater number of companies – last year alone, 254,721 businesses and individuals turned to the crowd for support.

As with any saturated market challenges start to emerge, and for the crowdfunding industry,it is the risk of inflated valuations. As more companies turn tocrowdfunding this is something that we should be mindful of as an industry. To counteract this and safeguard the market in the long-term, we have to implement preemptive measures. This will involve far greater levels of due diligence to ensure that these valuations do not prove detrimental for investors in the long run and dilute returns post-exit. Moreover, should these returns prove lack lustre, it is of paramount importance that we avoid the risk of investors becoming reticent in the future.

Beyond valuations, the higher volume of companies that have turned to crowdfunding and succeeded has created additional challenges that need to be addressed. As crowdfunding has evolved and generated a legacy of exceptional start-up case studies that have continued to develop and grow their brand, these businesses are now outgrowing the crowd. Moreover, the platforms that initially supported these growing companies are not geared to receive the scale of finance that is required to push them from promising start-up to thriving SME. However, many of these companies are still too small to receive full backing from the institutions, so reside in a state of financial limbo as a result.

At the investment end of the SME landscape, the profile of the crowd has changed considerably from what we knew five years ago. Now, investors have typically built up a portfolio of around 8-10 companies, with many of themawaiting returns from the investments made in the early stages of the crowdfunding era.

UK crowdfunding has created exceptional case studies,demonstrated a remarkable growth trajectory and set a benchmark for the global alternative finance industry. That said, as with any industry of such momentum, we must be prepared for challenges ahead to deflect from the risk of an inhibited crowd and stages of SME growth that we as a sector will struggle to support financially. For me, the lead investor model could be the answerand this is an area largely championed by debt crowdfunding platforms.

Although some equity-based platforms are embracing the lead investor, it’s more common amongst debt providers. The lead investor model simply taps into humans’ herd mentality. If a sophisticated investor withmore experienced funding capabilities is willing to invest in a companythat hasa fair and accurate valuation, this creates a stamp of approval, instilling a ripple effect of confidence amongst the crowd. This sophisticated investor – whether a high-net-worth individual, a hedge fund or a family office – could therefore help catalyse the industry into movement. In no way should we institutionalise an industry built on the values ofdemocratic investment.However, as a means of stimulating the crowd and evolving a burgeoning start-up population into a community of mid-sized enterprises, theindustry’s infrastructureneeds to recalibrate andgear up fora higher level of investment.

To do this, platforms need to lay the groundwork for cash from the serious investor, which can only be achieved by generating quality deal flow and not relying on quantity. A renewed focus on deal origination will require platforms to have credit analysis experts on board to fully vet new opportunities without depending on a blackbox algorithm to do the due diligence for them. This way, with some support from a lead investor, we can empower the crowd again and help them to feel confident enough to back the brilliant businesses that Britain has to offer.

For both equity crowdfunding and debt, it all boils down to scalability, for the companies that seek funding and for investors. The platforms need more investors and rejuvenated investor interest to back businesses; the businesses that are in this state of limbo need capital; and the investors themselves need the confidence to support these companies. So in order to ensure that crowdfunding does stay democratised and is able to keep pace with the growth of the businesses it created, institutional injections could be a transitional solution until we as an industry establish the infrastructure to sustain this thriving sector long-term.