It’s all been very exciting so far, hasn’t it? Just six years after crowdfunding and peer-to-peer lending really took off, the UK Crowdfunding Association is home to more than 40 platforms specialising in everything from equity and rewards-based crowdfunding, to invoice finance and peer-to-peer lending. Today, small businesses and community projects can access finance easier and faster than ever before and investors can, when it works in their favour, earn returns on their cash by securing a fraction of a property deal or backing a start-up. Others can simply donate much-needed funds to not-for-profit schemes. It’s a triumph for Britain and our so-called fintech and alternative finance industries, without a doubt.
But for six years, the crowdfunding market has been fuelled by hype. And all the puff has meant newbies have continued to surface in hope for a slice of the rewards. According to research by innovation charity Nesta and Cambridge University, the industry grew by 84% last year and raised £3.2 billion in investments, loans and donations. Real estate crowdfunding has emerged as the new high-flyer; debt and equity-based funding in the sector reached £700m in 2015.
Fast-growing numbers do not mean there is room for more copy-cat platforms, however. The smaller players don’t stand much of chance of surviving, either. In a recent chat with Julia Groves, one of the industry’s experts who heads Downing Crowd (a new crowdfunding platform for bonds started by investment manager Downing) we discussed the flow of new market entrants with Groves concluding that this is the year for platforms to “go large, or go home”. She’s right. Other industry leaders think that by next year, the number of crowdfunding sites in Britain could have halved.
Why? For one, the savvy platforms are raising big to cover expensive marketing campaigns and expansion plans they hope will cement their positions as market leaders. Let’s take Property Partner, which launched just over a year ago and lets investors buy small stakes in buy-to-let properties. It recently raised £16m from the likes of Index Ventures, Octopus Investments and Dawn Capital. Days later LendInvest, a peer-to-peer platform for residential and commercial mortgage raises, completed a £17m investment from venture capital firm Atomico. “Forget tube advertising, they are going to buy eye-balls everywhere,” said Groves.
Moreover, the new tax-free ISA rules will open the door to a flurry of new peer-to-peer deals. It’s big news for the industry but platforms without products that do not qualify for ISA investments will be scrambling to keep and win customers.
More and more crowdfunding sites are partnering with corporates or other platforms to increase their deal-flow and reach a new set of investors. Peer-to-peer lender Ratesetter and equity crowdfunding platform SyndicateRoom recently announced their collaboration. This act of sharing and caring is not only about helping small and medium-sized businesses access the right type of finance, it’s about platforms trying to do something different at a time when competition is fiercer than ever. There will be more partnerships and perhaps mergers to come. But launching a crowdfunding site now, without a new or ready-made set of investors or deals lined up, is just silly. Unfortunately, only the fittest with the fattest bank accounts will survive this year.
Kiki Loizou is the Small Business Editor at The Sunday Times