Netflix. Apple. Amazon. How many regular investors ever pondered what the next big thing would be, only to think, “I would be sitting on a gold mine if I had picked one of those stellar companies to invest in back when they were tiny.”
A lot of businesses come and go without ever making the news, but it’s still exciting to think about investing in a start-up that eventually becomes global.
Over the last ten to fifteen years, there have been almost as many crowdfunding platforms as there are products and businesses to fill them. Crowdfunding was an early fintech trend that sought to open up some of this investment potential to regular people, not just so-called angel investors.
During this time, peer-to-peer lending also gained traction as a model that spares investors from the stock market but still has the potential to yield returns. It also provides SMEs with the funding they require to expand, eliminating the need for institutional or angel investment and, ideally, accelerating start-up growth.
These platforms may appear to offer a way for those who would like to invest in start-up companies but lack the influence of angel investors to do so at a rate of return that beats the market. The current interest rates offered by traditional banks are competitive for regular savers, but the risk is still higher.
As such, it may not be as clear-cut if this is a wise or even feasible investment plan in comparison to, say, broad-based index trackers. What does crowdfunding or peer-to-peer lending and investing look and feel like now, in light of the recent stock market crashes, COVID-related huge business disruption, and challenging circumstances facing small and medium-sized businesses? Does it withstand a more thorough, impartial business study, as demanded by investors, individual consumers, and entrepreneurs wishing to list their goods or services on a platform?
There are numerous platforms available for retail (individual) investors that allow them to select a firm they like the appearance of and make a financial commitment to it. Nevertheless, diversifying your investments is a smart move to avoid putting all of your eggs in one basket. One immediate issue with traditional crowdfunding is that you probably won’t see a return unless you spread your money across hundreds of small investments.
People often invest in small businesses or Kickstarter because they enjoy the concept, but the chances of any of these ventures becoming the next big thing are low. Think about venture capital firms that fund their investments in early-stage companies; by spreading the risk among hundreds of investments, they hope that one of them will cover the entire fund.
Planting the seeds of possibility
The good news is that you may still use a diversified fund to trade equity for cash investments in a variety of start-ups. Upon its introduction in 2012, Seedrs stood alone among crowdfunding platforms authorised by the Financial Conduct Authority of the United Kingdom. In 2017, the digital challenger bank Revolut raised £4 million through Seedrs, creating its own unicorn success story.
To foster growth for both small enterprises and small lenders, lending platforms first appeared several years ago. The platforms, which supply the technology, platforms, contacts, and marketing to support their lending model, are a part of the rapidly expanding fintech industry.
Established as one of the first five platforms to receive approval from the UK’s Financial Conduct Authority, the 36H group is subject to regulation. As a result, one of its objectives is to advocate for additional regulation of the nascent sector. By banding together, they were able to speak out for the nascent industry, interact directly with policymakers over regulations, and amplify their voices across the fintech and financial sectors.
During the COVID phase (2020-21), the UK government moved quickly to establish a system of financial assistance for companies that suffered from a series of lockdowns. This requirement led to the creation of the Coronavirus Business Interruption Loan Scheme and, subsequently, bounce-back loans. In favour of its sector, the 36H group contended that although fintech lenders received approval to provide these services sooner than traditional larger banks, they did it more slowly.
Regulation was undoubtedly necessary for P2P lending, which some have dubbed the “Wild West” of the financial sector. However, with the global disruption to businesses and industries brought about by the pandemic, fewer members of the original 36H group are standing in the same position as before.
Circle of funding
Founded in 2010, Funding Circle, one of the “Big Three” lending platforms, provided retail investment services for ten years until discontinuing the service in 2023. Before that, the company had put a two-year halt on this service because of the pandemic.
As investors’ loans matured, the platform went through a process to return their money. However, this didn’t sit well with all investors, who had to wait for their money to be paid back in chunks before they could move it to another platform and maintain its ISA status.
According to press releases from the time, Funding Circle concentrated on government-backed initiatives throughout the pandemic. They were the first platform of that kind to access and participate in the government’s small company support programmes and bounce-back loans. At some point, the businesses decided to close their P2P division permanently and stop employing ordinary investors to finance their commercial clients.
Establishing rates
One of the Big Three P2P lending platforms, RateSetter was a pioneer in the industry and operated nearly solely on its retail investment strategy. A news release from 2019 celebrated the introduction of stricter rules in the peer-to-peer (P2P) sector, asserting that the new laws would “decisively remove any sense that P2P is weakly regulated” by raising standards in risk management, governance, disclosure, marketing, and wind-down planning.
Ironically, RateSetter ended up becoming one of the big-boy banks they had initially aimed to challenge.
RateSetter CEO Rhydian Lewis said, “We will look back on this as a watershed moment for our industry – the moment that peer-to-peer investing came of age as an asset class, competing against other mainstream investment options and the banks as an attractive way to put money to work.”
The new restrictions are intended to lessen the negative reputation of the peer-to-peer lending industry. However, in 2020, RateSetter declared that Metro Bank had acquired them and that they, too, would cease making loans through crowdfunding, with all proceeds for new loans coming from their new parent firm.
Zopa
As the last of the original Big Three, Zopa was the first P2P lending platform in the UK. However, like the others, it was unable to survive its retail investment division due to a combination of factors, including growing regulation and investor mistrust, which CEO Jaidev Janardana cited.
In 2018, Zopa became a bank in its own right, but amid the pandemic, the company determined that its costs were too expensive to uphold its responsibilities to borrowers and provide retail investors with sufficient returns.
The distinction is that, as a bank, Zopa repurchased the investments of about 60,000 RI clients at face value, meaning that individuals who had an ISA with them could move their investment elsewhere without having to wait for loans to mature or for any other wind down.
How lending works
After eight years in the business, loan Works, another consumer loan company, ended its P2P structure in 2021. Established in 2014 with support from angel investors, the platform’s primary function was to offer personal loans. By 2023, the business has changed its name to Fluro and has institutional financial lines supporting it.
In addition to providing personal loans with the now-standard features of pre-approval, flexible payback plans, and decisions in minutes, the company also offers lending-as-a-service, which powers household names like GoCompare and Direct Line in the UK.
By diversifying its business and abandoning its loan crowdsourcing model, Lending Works has been able to weather the COVID-19 storm and create innovative new products for the fintech industry. But it also decided to use a progressive runoff strategy to repay its P2P loans until all of its lenders were satisfied.
CrowdProperty
Curated in 2014, CrowdProperty is a different company that has survived the epidemic by adhering to its initial business plan and continues to grow today. It was first established to address two issues: the difficulty SME real estate companies were having obtaining the funding they required, and the fact that investors had been receiving lower-than-average returns for years following the 2008 financial crisis. However, the platform surely profited from the pandemic’s movement toward property, not away from it.
While the tourism, leisure, and lifestyle industries suffered greatly, house prices skyrocketed as demand far outpaced supply. One of the company’s stated goals is to address the housing shortage in the UK. Despite millions of pounds being spent both through CrowdProperty and other channels, the housing crisis is still very much present, thus demand is expected to be high for some time to come.
Coping with COVID-19
Four of the five largest lending platforms have reduced or eliminated retail investment. Ironically, several of the platforms that challenged large banking models went under due to the coronavirus outbreak, which killed thousands of businesses.
SMEs have more fintech options and alternatives to institutional lending, and their growing size and power give them lending power and stability. However, platforms have mostly ignored retail investors.
The government-backed financing initiative for small business COVID recovery was one of the 36H group’s first actions in 2020. This achievement seems great and in line with these platforms’ goal of helping SMEs. COVID’s other feature and the relative ease of institutional lending may have compelled platforms to reconsider their crowdfunding approach.
The early 2020 stock market crash showed how investors worldwide became more hesitant to invest in crowdfunding. Retail investors may have had doubts about putting more money into it, and many more financially secure people were instead turning to savings or splurges.
This reduced retail investor interest and income, forcing P2P platforms to fund loans through institutional ways to meet their SME commitment.
Retail investors have likely moved on to other investments. CrowdProperty persists. It may be niche, offering investment only in the property sector rather than to SMEs or individuals.
Coronavirus helped its area, thankfully. However, that is only one issue in the considerably more complex UK property and financial system and the lack of traditional access to either. CrowdProperty’s magic sauce seems to be using its niche market to allow anyone with a few hundred pounds to invest in property.
It allows property investors to earn predictable but not guaranteed returns. It avoids stock market exposure and the difficulty and expense of buy-to-let properties and other financial and energetic burdens.
Property is still a popular investment class in the UK and worldwide, and the media shows numerous reasons why, from supply and demand to social media property stars influencing younger generations.
CrowdProperty lets ordinary individuals invest in a whole property portfolio without buying anything personally, providing extensive ISA diversification. You can invest enormous amounts of money in any one project, but it also features an auto-invest mechanism that protects you from overexposure and diversifies your money among all approved projects. The platform has offered higher rates of return than banks and building societies for years, even while they raise their interest rates post-COVID. No surprise many like this.
Index tracker funds dedicated to real estate investment trusts (REITs) and the property industry worldwide allow investors to participate in property on the open stock market. In the UK ISA or other tax-free wrappers, such as the Roth in the US, you can access funds that focus solely or mostly on property, from housing estate development to construction materials. It goes beyond residential property. Some REITs specialise in logistics, others in healthcare, real estate, or office buildings.
An investor seeking property exposure has solid diversification alternatives that incur risk. This is different because you are still investing in the free market and may get back less than you put in. Every page of CrowdProperty’s website warns against investing unless you understand the risk, but it’s confined to debtors who may default.
The platform’s rigorous due diligence process and several non-negotiable backups protect RI lenders from this risk, including ‘first charge security,’ which gives CrowdProperty the same rights as a mortgage lender to repossess a property if a borrower defaults for any reason. The platform appears to have solved the problem by simplifying, regulating, minimising risks, and presenting itself as a specialist investment vehicle. It started as a fintech start-up and raises funds through traditional and non-traditional channels. CrowdProperty raised funds to expand in the first half of 2023 from where? Seedrs.
Where the smart money is
When considering the possibility of picking the next unicorn through a P2P platform, remember that businesses that choose crowdfunding may do so because they are not confident in getting large investor backing or because they have tried and failed. Local pubs and hospitality firms in the US are increasingly using crowdfunding to launch their enterprises in exchange for beer tokens, goods, or other rewards, but not shares. This boosts engagement but not investment. It’s vital to distinguish between the low possibility of finding a start-up business with high growth potential through a crowdfunding platform and using P2P as part of a diversified portfolio.
Investing in small and rising enterprises is possible with ‘safer’ vehicles. Most internet brokers have unicorn funds and high-quality start-ups you can invest in. The old advice of investing most of your money in broad index trackers of stable markets like the FTSE 100 and maxing out rare investments like unicorn businesses at maybe one per cent of your investment capital to minimise risk remains.
Though more accessible than ever, most crowdfunding in individual start-ups may still be best for knowledgeable investors who know how to value a business, understand the dangers, and realise they may lose money. You may wish you had invested in Uber or Tesla when they were young, but for every unicorn success story, hundreds more fail before reaching that stage. Be practical, diversify your portfolio, and comprehend start-up investments.
The original goal of crowdsourcing and P2P lending was to give money-savvy investors who could invest but not afford the risks of these opportunities. This idea may have worked, but education and implementation are crucial.