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Will Brexit Affect the UK’s Dominance in Alternative Finance?

Following on from the momentous EU Referendum outcome in June of this year many of the dire predictions of imminent and immediate economic meltdown seem to have been somewhat overstated. That is not to say there may not be a bumpy ride ahead but clearly some of the more catastrophic and alarmist predictions seem to have not been much more than a chimera.

I have been very open about the fact that I was an advocate for the Leave Campaign, and as a person regularly contacted by financial journalists for a view on crowdfunding and alternative funding generally I have had the question What does Brexit mean for the alternative finance sector?” posed to me many times both before and after the vote. At a recent major European Crowdeconomy event it was an abiding subject of conversation, all the more so after I publicly declared my position on the Referendum, and the conversations have largely been thoughtful and cordial when I spoke with my colleagues from across the channel but occasionally acid and bitter from UK colleagues.

The reason the question is posed is, in large part, because most analysis suggests that the UK has a very dominant position in the European alternative finance sector. One of the more comprehensive reviews suggest that UK accounts for more than 70% of the European sector by value.

The implicit question when looking ahead is will this dominant position be threatened by Brexit?

I don’t believe it will be significantly so and here is why.

The UK’s dominance in the sector is not a function of its membership of the EU. In fact I would say that it thrives in spite of the EU. The position enjoyed by the UK in this sector is a function of a number of factors most of which will not be affected by Brexit.

One of the reasons that the UK enjoys a leadership position in the crowdfunding sector is because we have embraced all of the forms of crowdfunding, forever. In the main this is a result of our common law heritage as distinct from the civic codes of much of Continental Europe. Here in the UK the principle is that if you can satisfy existing regulations then you can get on with whatever it is you plan to do – hence equity crowdfunding and crowd lending just got on with it under existing regulations. In much of the rest of Europe the legal and regulatory tradition is that one needs to be explicitly permitted to undertake activities in order to do them and in the absence of that permission there is significant caution about proceeding to operate fearing that prosecution may follow. Hence innovation in finance in much of Europe requires additional regulation to be passed before it can take place and the usual can of worms, bun fight, – choose the your prefered metaphor – begins.

This advantage in being able to establish our platforms and explore and innovate in a much more enabling environment has given the UK a significant lead.

But there are other reasons why we thrive in this sector. The UK’s historical tradition as a trading nation has given us an extraordinarily robust and well recognised set of laws to build contracts, start companies and to do business. Our linguistic advantages are well known, our legal and tax systems, for all their faults, are manifestly better and more highly regarded than pretty much any other jurisdictions, and this familiarity, the cannon of case law and trust all play a part in making the UK the place of choice for many to do business.

This can be hugely frustrating to Commission regulators and has caused them to try to challenge or erode that advantage. This was well evidenced by the shameful VATMOSS debacle. Originally presented as a mechanism to challenge the practice of large online retailers from exploiting low VAT jurisdictions to compete against smaller nationally bound retailers it shifted the point of VAT from the retailer’s location to the purchasers location. Clumsily applied and badly thought through it not only singularly failed to address the corporate abuse it intended to challenge it actually had the effect of driving smaller retailers into the big retailers arms to simply avoid the cost of compliance. However a more unspoken aim of the regulation was to specifically implement it in a manner to take aim at the zero VAT registration option for small business enjoyed in the UK, a facility hated by many EU bureaucrats who wish to introduce common TAX rates across the UK be as bad a place for startups as the rest of Europe.

As for the impact of “no access to a single market”, the promise of a single financial market is simply bogus. It doesn’t exist and frankly has practically no chance of existing. The much vaunted “passporting rights” in the EU are undoubtedly relevant to some existing city activities and to the existing old world capital markets but have little or no impact in the crowding and alternative finance space. For example the MIFID permissions should, in theory, provide great opportunity for cross border offerings on crowdfunding platforms. This should be possible now and there are MIFID authorised platforms able to “passport” their offers. But the reality is that because of the huge range of local regulations relating to company formation, and diverse interpretation of “Pan European” directives like the Portfolio Directive, it means that it simply isn’t practical for platforms with MIFID clearance to undertake wide pan national offerings. This is particularly so in crowdfunding as low transactional costs are a key component of the model and complex compliance is just anathema to that.

So, in sum do I think the imminent exit for the EU will affect the UK’s dominance in the alternative finance space? In a word – No.

I am sure that other countries will grow and claim back some share of the market as it matures, but most have a way to go to put in place as good a framework of circumstances that exist in the UK to do that in any aggressive way. Besides the pie is a growing for the foreseeable future so there is plenty to go around. Of course the FCA could make a total hash of the UK’s regulatory position but that is for another day.

So, no I don’t believe Brexit is a significant challenge to the UK’s dominance of the European alternative finance sector and I welcome our opportunity to more readily embrace a global share in an unconstrained way free from the dullards and luddites of the Commission. We can venture in the the true promise of the crowd economy which is open and global and not constrained by the artificial walls of an EU block.

Crowdfunder Launches Community Shares Service – podcast

This week the UK’s biggest reward crowdfunding platform, Crowdfunder, announced a partnership with the Community Shares Company so that they can offer Community Share project through their site.

We have spoken to Jamie Veitch of the Sheffield Live Community Shares Campaign in a previous post and so if you follow our podcasts you will already have some knowledge of what is involved.

But, this initiative is likely to bring greater awareness and visibility to the amazing possibilities for communities to build or take ownership of assets to the benefit of their area.

In this podcast we speak to Dave Boyle of the Community Shares Company and he explains how he has been involved in these share issues for some time, what is distinctive about these crowdfunding campaigns and how the new partnership with Crowdfunder is a real expansion of the market.

Download this episode (right click and save)

The incidental music used in the podcast is
“Beach Bum” Kevin MacLeod (incompetech.com)
Licensed under Creative Commons: By Attribution 3.0
http://creativecommons.org/licenses/by/3.0/

Heresy – The Reformation of finance

Many people refer to crowdfunding as the democratisation of finance, I am one of them. But speaking in the Netherlands recently I realised that in fact we are experiencing a much more profound change. It is in fact the Reformation of Finance and I am a heretic.

Very recently I had the pleasure of visiting Utrecht in the Netherlands to speak at the launch of a new crowdfunding platform into the Dutch market. Tailwind Crowd is a lending and reward platform founded by a suitably international group of Spanish, Mexican and Dutch entrepreneurs.

Being an economic historian by training I couldn’t help but acknowledge the historical links between Spain and the Netherlands, and the history of Dutch financial innovation through the origins of the VOC and the Amsterdam Bourse. In a nod towards that period I introduced my words at the Cervantes Institute by displaying an image of “The Fight Between Carnival and Lent” by Peter Bruegel the Elder.
The Fight between Canival and Lent
Bruegel, a Dutch painter, chose the crowd in all its diversity and complexity as the subject of the picture. This was a distinctive approach in the 1560’s when he painted it, given most art till that time had been commissioned and focused on wealthy or privileged individuals or drew on classical themes in the Renaissance style. But here the focus is spread cross the average late medieval man and woman in the street in all their rich colour. A suitable metaphor for a crowdfunding presentation I thought. But slowly it seemed to me that we can extend the metaphor further.

Bruegel was also a print maker, consorting with map makers dangerously marking out and sharing the known world. Print makers, the revolutionary technologists of the time were also ,unusually, not organised in the early days into Guilds and so were not an exclusive or restrictive “caste”. Their activity and skills were at the heart of spreading and popularising what had till then been the exclusive domain of the rich and privileged namely books and art.

Access to this type of technology put the Low Counties at the centre of the Reformation. Tired with the corruption and monopoly of the established Roman church, alternatives were being proposed. People were seeking to take institutions out of their route to salvation and commune with their God more directly. Courageous speakers articulated these views at great personal risk and others took incendiary steps to make these ideas a reality. Tyndale Bible, for example, was translating the bible into English making it more widely available and setting the path for taking religion out of the hands of being mediated through and interpreted solely by an anointed elite of the priesthood.

This then was the disintermediation of religion. This was the broadening of the faith. It became possible to imagine owning your own conscience and faith.

An historic and monumental schism with an accepted and enforced orthodoxy that has cost much blood, pain and death down the centuries. But that orthodoxy was challenged, and broken, even though it had seemed so stifling and entrenched and unshakeable in its power and permanence to the contemporaries of Bruegel.

And so it seems to me the simple metaphor I began with rang ever more true to the profound changes we are experiencing in the crowd economy. It seems appropriate that the self proclaimed “masters of the universe” and the self styled “sophisticated investors” are no longer the sole orthodoxy, no longer the only faith to financial salvation. They have been shown to be untrustworthy, corrupt, self serving and fallible.

And so I declare that I do not think that what is happening in alternative finance is any less significant, profound or any less enduring than that which happened in religion back in the 16th century. In the same way that those changes ripple down through the years touching and launching so many developments and changes in progressive emancipation we take for granted today, so too I think we are at the beginning of changing radically the way we imagine the business of commerce and finance. We are at the birth of many new approaches which, whilst recognising that finance has a role to play in our lives, are no longer reliant on an established model or one cadre of anointed intermediaries in order to access and use it.

But just like the Reformation there are those that will say this is heresy. They will say there is only one true faith that to desert it leads only to damnation. They are wrong.

As an unapologetic up heretic and dissenter I am hoping nevertheless that the practice of burning at the stake has passed into history!

Alternative Finance Is Coming of Age

Alternative Finance is coming of age and becoming mainstream in the UK as Governments begin to actively embrace and legislate for its effective use.

Earlier this month we had the privilege of organising a Parliamentary Reception at Holyrood entitled “Crowdfunding in Scotland – The Way Forward”

Hosted and initiated by Chic Brodie MSP the event brought together a wide range of interested and engaged parties alongside Parliamentarians exploring the opportunity presented by crowdfunding. It was great to see real interest and leadership at a Governmental level exploring and recognising that crowdfunding represents a real change in the way businesses and organisations across all sectors can find novel approaches to funding, and recognising this is more than a passing fad. The assembled participants heard stories of active and successful use of crowdfunding from a number of perspectives. This included Stuart Patrick CEO of the Glasgow Chamber of Commerce and their engagement with Funding Circle to help Glasgow business. Kevin Miller of RunRev who have recently closed a second crowdfunding round this time a DIY campaign for £250,000, explained why crowdfunding works for them. Warren Bader of Plan Bee who have successfully run a an overfunded round on Crowdcube set out the importance of this type of funding for such an innovative startup, and Neil Simpson if Brewdog revisiting their extraordinary successful fourth equity raise.

On the same day the Chancellor, George Osborne made further announcements that underpins the UK Government’s support for FinTech and alternative finance in particular. One of the key points was the promise to introduce legislation that mandates that Banks who turn down a business loan application will become obliged to offer to pass their details onto alternative finance providers. This builds upon the existing Alternative Business Funding website that provides a simple traffic light approach to assess the high level suitability of an firm to alternative finance.

All this is demonstrating a growing maturity in the alternative finance sector and how it is increasingly important for businesses, and all the groups and services that deal with them, to understand what is on offer. Our expertise in crowdfunding has already proven invaluable to many organisations wanting to understand, use, engage and succeed with crowdfunding.

We will continue to offer the sort of unbiased and balanced advice to clients from all areas as the sector progressively innovates and develops.
So, alternative finance is rapidly becoming part of the mainstream and part of your finance mix, do you know enough to maximise this opportunity? If not then be sure to contact us.

Bank To The Future – Interview with Simon Dixon, CEO

Bank To The Future – Interview with Simon Dixon, CEO

Last week I had the opportunity to interview Simon Dixon, CEO and founder of BankToTheFuture.com, a new online finance company launching next week. The new platform represents a perfect union of all the alternative finance models that we’ve seen emerging in the past couple of years, i.e. crowdfunding, crowdinvesting, crowdlending. 

Simon, thanks for taking the time to speak to us about Bank to the Future, can you tell me a bit more about the origins of the project?

We are essentially a team of ex financiers who left the banking world when we got a little bit fed up         with it. I came from investment banking and six years ago I left in order to do two things, one to set up in business and secondly to work with a not-for-profit that was working on reforming the banking system because we were forecasting the crash ahead. That was in 2006 and we formed a training company for investment bankers, we were looking at helping students to become more social bankers and we ended up becoming one of the largest online training companies. We raised finance for that company through angels, through high net worth individuals.

 

Are you talking about Benedix?

That’s correct. I was also working on the banking reform stuff and I was presenting across the world on that, then in 2007 it happened that they asked me to go on TV and write books on the problem. Up until about two years ago we built this huge following of entrepreneurs and business people. The environment for raising finance became harder & harder & banks stopped lending to businesses.  In the UK we have a very small VC market and they only invest in growth. Not everyone knows rich angels, so it’s a little bit challenging and they don’t know the process to get investment ready for angels. We found ourselves in this environment and at the same time we watched the emergence of alternative finance with P2P lending and crowdfunding. About two years ago we decided that with this following with the contacts that I built working with a lot of venture capitalist in my career as an investment banker, I financed all my own businesses and got a lot of good contacts in the angel environment in the UK, we should try and help businesses raise more finance. So we put together a great team of people who had worked in alternative investment, finance and retail banking, investment banking, technology people, social media people, and started working on what we could do in order to sort the problem of access to finance for people that are looking to do something in this world, and the result was BanktotheFuture.com

When are you launching?

We’re launching in one week’s time, we’re going into beta. We’re working with about 10 entrepreneurs and businesses at the moment, helping them get fully investment ready, helping them to put together their video pitches and make sure they’ve got every chance to be successful at raising finance.

What is distinct about BankToTheFuture.com? There are a lot of other crowdfunding platforms out there that allow you to fund a business, what is that makes BankToTheFuture.com different from them?

There are so we’ve attempted to do a few things differently. Firstly, because we all come from a finance background, we’ve all owned businesses, we’ve all raised finance, we’ve all worked in the banking industry, we’ve raised billions for companies, either our own or other companies, we have tried to simulate the exact process that we know works very well to raise billions for large companies, but for small companies. So we understand that at different stages of your business you will need different types of funding. So if you’re very early on and you’ve got an idea then you’re probably not quite investment ready to take on external investors, you probably need to validate that idea first, and the best way we think of doing that is crowdfunding, which is offering rewards to people who want to donate to your project, it helps you validate your product. It helps you understand whether you can pitch, it gives you the foundations of what might be a successful business.

We spend a lot of time helping people get investment ready, we have membership levels where we’ve taken some of the best people that have raised significant sums of money and also understand the crowdfunding alternative space, to create online training to help people with every single aspect to get investment ready. Once businesses actually validate their idea and get investment ready, they’ll be ready to offer shares to the crowd. If you’ve already done a crowdfunding round, then you can probably raise more money by offering shares in what we call crowdinvesting. Later in your life, you might be ready to borrow the money from the crowd, what we call crowdlending. In order to do that you need to have trading history, you need to have good credit record because you have a duty to our lenders to make sure you’ve got a good credit history. We want to walk you through the lifecycle of your business from idea to the point that you’re credit worthy enough to grow the business.

What type of business are you targeting, if any?

The market will tell us where we’re going to fit best, at the moment we want to serve people that want to create new value in the world. If they’re either employing people right now and they want to grow or one day they have the potential to grow a business which is contributing to our economy, they are creating new value, they are doing disruptive things, then we want to serve those people, we want people that are going to be able to create new value in this world.

 The equity model presents a lot of legislative barriers. Was it challenging for you to overcome those barriers?

Extremely challenging, we spent two years in the making to overcome those hurdles and barriers. The legislative framework has been very challenging but I appreciate that because crowdfunding is getting a lot of attention right now and there’s a lot of people out there that are launching CF platforms and think it’s just technology. It is not really, the technology is the easiest part of it, behind the scenes there are a lot of processes, we have a tightrope to walk and that tightrope is between making it easy for people to invest, bringing in new sources of funding, not just promoting to the same old angels, VC and sophisticated investors.  At the same time it’s doing this in a responsible way whereby people understand what they’re investing in and they understand the risks involved. This is a big challenge but we’ve been working on that process of making sure people understand what they’re doing with creating lots of video, lots of training, lots of procedures whereby if you’re not right to be investing in this then you wait. We’re the only platform that I know of that integrates with credit agencies and we integrate with Equifax, so everybody needs to have a real identity. We have a social capital scoring where you have to add your social media profiles, and we’re doing a lot to make sure that people are who they say they are, they invest in the right types of things for them, and as a business and entrepreneur you don’t get people you don’t want to invest in you. And the regulatory framework helps with that, it makes everything a lot more responsible, it just makes it harder and more challenging but they’re there for a reason.

Can you expand a bit on the social capital score?

Everyone who creates their profile in BankToTheFuture.com has the opportunity to build a social capital score. We believe that in the future your credit rating will be important but how you behave online will be a big indication of your success in this new world. We believe that online influence is really important for crowdfunding and crowdinvesting, so we have an online influence score. We also believe that if you’re going to be borrowing money from the crowd, you need to be in the right
credit situation, so we integrate with traditional credit scoring, but we also use the crowd to validate or verify your identity, combining the traditional way of verifying ID with the crowd. We want you to have your real photo, we want you to have your real name, we don’t want you to be doing things under anonymous user names and pitch as Fred Flintstone, you’ll get bonuses for open, transparent and honest behaviour, you’ll get better terms, you’ll be finding it easier to raise
finance
. We recognise that there are people out there who are perfectly good for crowdfunding and crowdinvesting, but they may not have any credit cards or something may have happened to them in the past and it’s not the full picture. One seventh of the world has given a lot of their data to social networks, so we want to use those data in order to create a more open and transparent environment where people understand the relationship between investors and people raising finance.

At the end of the day crowdfunding and crowdinvesting are not for everybody, we do serve a niche, but the people who are going to be successful at this type of funding are people that have really integrated and embraced social media, and therefore to us it’s really important that people behave online and they only say things they would say under their real identity.

 

Image credit: GEF Forums

With the latest legislative changes in the US, what are the implications for equity-based crowdfunding in general?

It’s raising the bar. From what I know there’s a load of people that are going to be entering the equity crowdfunding space in the States. I think the legislation is going to help provide a framework for how people should do this, I think we’re going to see a few players win most of the volume just like Amazon has most of the volume and Ebay has most of the volume but there’s room for lots of niches too. However there’s a network effecting crowdfunding where whoever owns most of the people and the investors will attract most of the attention. At the same time everybody crowdfunding can bring their own crowds in, so the platforms in the niche can be a tool. The legislative framework is brilliant, it has validated our market, it’s taken us away from “are we doing something that we shouldn’t be doing?” to “actually this is a very serious product that presidents are talking about”.

Do you think this will be an obstacle in Europe, where there is a lot of diversity among countries in terms of legislation? For example, could people from another country invest in a project on BankToTheFuture.com?

No, our first version of the platform is only open to UK investors, and in order to launch a pitch you need to be a UK resident, however if you want to donate to a project as long as you’re donating in pounds you can do it. But no, unfortunately the environment is not enough of a union in my opinion, there aren’t crowdfunding platforms that can go Europe-wide yet.

Do you see crowdfunding as a sustainable change in the way we’ll be investing in the future?

I think crowdfunding is less disruptive, more complementary to our existing system, I think there is no real way of getting finance for ideas outside your friends and family and people that just happen to give you the money. Crowdfunding solves that problem beautifully. If you can’t put together a nice video pitch and pitch your vision, then there’s two things wrong.  Either you don’t have someone in your team who can pitch it, or the market just isn’t interested in what you’re doing. Crowdfunding gives you the opportunity to test your skills as an entrepreneur or project creator to see whether you can take what you want to create and put it out in the world.

Crowdinvesting is going to be very complementary to angels.  As we get better and more sophisticated in valuing companies and doing due diligence, I think the angels are going to embrace it,  they’re very resistant at the moment because they don’t like to put themselves in the same category as the crowd, they’re still resisting Facebook, but that will change with time.

VCs have a big problem, they see far too many pitches which are not investment ready proven with proven teams and in the UK they only invest in those. So if we do things right with the whole crowdfunding/crowdinvesting model, as you need more finance you can go to a venture capitalist and be investment ready and that’s what we’re focusing on, getting people investment ready, and – who knows – our dream is that one day we’ll get the traction where we can do the level of VC funding on our platform.

We mentioned that there’s been an explosion of CF platforms in the past few months. What are the implications of this?

I think just like in social networking there’s room for a social network for every niche, with crowdfunding there’s room for a crowdfunding platform for every niche. I really do think there’s merit in having people with a finance background when you’re doing crowdinvesting, I’m a little bit apprehensive when I see people without a finance background setting up in crowdinvesting. I think it is our duty to protect this industry, to make sure we all work together to implement the best processes, and we should work together as in the true nature of crowdsourcing and crowdinvesting and funding to really make sure that we protect this industry because we are presented with the most beautiful opportunity today, it’s the perfect environment for change. We have a completely corrupt banking system, but we also have a massive amount of talents that can’t get job. They can work from home. The costs of starting a business have significantly reduced to a smart phone, a laptop and an internet connection, and almost everybody has those. Today we’ve been brought this beautiful thing called crowdfunding which gives the opportunity for people to fund the lives they want to live by creating new value. We need to protect that and we need to do this well, it’s going to be an amazing opportunity to see this industry flourish and an absolute opportunity to turn this economy around into a more transparent environment.

Thanks again, Simon. And good luck with BankToTheFuture.com

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