Member Article

Crowdfunding - getting more sophisticated

Banks in the UK are cutting rates for SMEs while crowdfunding caravan goes on. Who is to become entrepreneurs bank? Interview with Simon Dixon about a new crowdfunding platform.

The finance of crowds through online platforms, known as crowdfunding, is becoming more familiar to entrepreneurs and venture investors. Crowdfunding market day by day is getting more sophisticated. There is no one and right way for crowdfunding, therefore new online platforms are adding new flavors into the market.

Social capital score is one of the novelties to be brought into the market by Bank to the Future platform that just launched in the UK. Also instead of choosing either reward or equity based crowdfunding, the platform is providing both options plus crowdlending. Bank to the Future CEO and banking reformer Simon Dixon forecasts that eventually banks will exit investing in start-ups and SME’s business and therefore Bank to the Future aims to become an “entrepreneurs’ bank”.

Social capital score

Alternative finance apparently will pave the way to capturing our social capital. Bank to the Future is going to calculate social capital score based on four main things, explains Simon Dixon: “Firstly, everyone will have an influence score and that influence is online only. We integrate with other platforms, that’s connected to the service called cloud. Cloud measures your performance: gives you a score up to 100, based upon how engaged you’re online. If you’ve got lots of followers and you just spam people, that doesn’t really help your score. If you have lots of followers and people respond, comment and like what you’re doing, then you have a higher score.”

“The second aspect is the social score based upon you being visible on different social networks, the main ones such as LinkedIn, Twitter, Facebook, Google+. If you’re with a real photo and real name on other social networks that helps to verify that you are who you say you are. Also it includes ratings based on your behavior on the platform: whether you deliver what you have promised, whether you repaid your loans, how you treated your investors in terms of reporting.”

Third and fourth aspects are traditional credit and identity score, which are the same processes the banks would use to assess credit score and verify who the person is. “Put those four scores together, and we’ve got the social capital score, which people can use as a measure to figure out how trustworthy the person is”, concludes Simon Dixon.

Rebels against any scoring system could get away without filling in their social details and have a zero score. However, there is no place for anonymity on the Bank to the Future, says Dixon: “A lot of our competitors allow people to invest under a user name, anonymous identity. We hold the belief that no one should want anyone to invest into their business without knowing who they are. They could be competitors, they could be anyone. So we’re going an extra mile to make sure that everyone, who is investing and launching pitches and comes into a legal relationship, is who they say they are.”

Trilogy

“Anyone not familiar with crowdfunding, see it as one product and it’s called raising finance”, explains Simon Dixon. “Anyone that follows crowdfunding, would see that these are three different models.” For the first time three financing models - crowdfunding, crowdinvesting and crowdlending - are going to be merged by the Bank to the Future.

For example, crowdfunding, according to Dixon is the best to test business ideas: “If you’re very early stage, you’re creating an app, a movie, or a website, the best way, is crowdfunding, where you offer rewards. Crowdinvesting allows to scale your ideas. If you have a good management team, a good business case, a good financial model then you may be able to raise more by offering equity to investors. Finally, if you have a good credit rating, cash flow, you’ve got trading history, you’ve been around for a couple years, then it might be appropriate to borrow from the crowd, so we call it a crowdloan. Crowdlending allows you to get some more working capital as you need to expand and grow. And by the time you’ve done that, you’re ready for venture capital.”

“In the UK market we don’t really have a venture capital market that wants to invest in risk. They typically invest in growing companies that tick all the boxes: have the perfect management team, have the perfect experience and turnover forecast from £100 million to £500 million in 3 to 5 years. Hardly any businesses tick those boxes. We think, this gives you an opportunity to actually become a venture capital.”

However, the supply and demand might not quite match yet. Out of three models, Simon Dixon sees a great need for businesses to raise equity finance at the moment. On the other hand, crowd sourced debt financial providers through such platforms have funded more loans than any equity crowdfunding platform. Dixon sees this is the case in the banking sector as well: “If you’re looking at the bank lending market - it’s worth £44 billion to the small and medium size enterprises right now - which is larger than equity finance. The reason is because everybody understands debt. The lending market is larger at the moment, but maybe with more education equity could be as big.”

When it comes to education, Bank to the Future will try to introduce crowd investors to the rules of what venture capital and angel investing is. “Maybe people aren’t aware that the best way of investing in startups is a diversified approach, so rather than putting your money into one, you invest in ten and one of them might work,” says Dixon.

Bank to the Future platform seems to be designed for a long stay: from launching your idea to borrowing from the crowd to expand the business with a help of an established social capital score; from educating investors to providing more tools to manage portfolios.

Entrepreneurs’ bank

“Our big game, our business plan is to become an entrepreneurs’ bank”, says Dixon. “We looked at all the banks in the UK, and about 92 per cent of all money that they lend either goes to property investing, speculation and casino banking, or personal loans. Because of the regulations, only 8 per cent of the money goes to small and medium size enterprise. On the flip side, crowdfunding is growing about 361 per cent a year.”

“I think banks are going to exit SME’s market. We don’t need to pretend, banks clearly don’t want limited liability when they can make loans on property and things with security. What we want to achieve: we would like to serve a productive economy, people creating things and leave the rest for the banks to do all the speculative stuff.” Dixon believes that the banking flaws can be only fixed by the government, but such alternative financing platforms can be a painkiller by taking as much money into productive use, such as creating businesses and jobs, and leaving less for banks’ speculative activities.

It is expected, that in 2012 crowdfunding will raise about £1.8 billion globally, almost twice as much as last year, according to Massolution, research firm. While in the US equity based crowdfunding is still waiting for its turn, after the Securities and Exchange commission will define the rules to implement the JOBS Act; UK is pioneering equity based crowdfunding.

Bank to the Future is launching without Financial Services Authority approval, but Dixon adds that it’s platforms’ responsibility to protect the image of non-regulatory crowdfunding market. “This non-banking market is growing fast, it is being promoted by the government. But we’re a new market, so we are going to have lots of challenges in growing and making this compliant and responsible; and that’s a collective challenge between all of us operating in this market to work together to achieve it.”

This was posted in Bdaily's Members' News section by Simona Strimaityte .