2017 marked another year of growth for the Alternative Finance industry – a sector that now not only includes crowdfunding and platform lending, but arguably a whole new fund-raising category in the shape of initial coin offerings (ICOs).
But what do last year’s figures tell us about the industry’s prospects in 2018. And perhaps more importantly what can we expect in terms of demand from small and medium sized enterprises for loans and equity funding from non-traditional, but arguably increasingly mainstream ‘Altfi’ sources.
There is Momentum in the Market
When the Peer to Peer Finance Association tallied up lending by its members in 2017, the total came to £3,145, 098,842, with £836m of new lending recorded in the last quarter alone. As the P2PFA pointed out in a statement, its members (and by extension the wider industry) were seeing real momentum in terms of growing demand. Or to put it another way, platform lending is providing not only an alternative to traditional lenders, it is also (cumulatively) delivering significant sums, both to private individuals and businesses. During 2017, cumulative lending by P2PFA members over the years since the organisation was formed, passed the £8bn mark.
It’s important to stress that the P2PFA figures do not represent the whole picture as the published figures only reflect the activities of its own members.
Crowdfunding Remains Buoyant
There was momentum in the crowdfunding sector too. According to Off3r, a comparison site that enables companies to assess opportunities to attract investors,
£229m was raised via crowdfunding in 2017, around £12m up from the previous year.
And perhaps the most important continuing trend of 2017 was the ability of crowdfunding platforms to facilitate campaigns that raised sums amounting to millions rather than thousands.
Among the biggest deals last year was the £6m raised by pioneering crowdfunding platform, Seedrs for itself. However, not all the activity was quite so incestuous. Other deals included Hibergene Diagnostics, which raised £5.7m via Syndicate Room and Hopster, which secured 4.8m via Venture Founders. According to Off3r, around 20 companies raised £2m or more.
All of which points to another trend. Crowdfunding still attracts armchair dragons who put in a few hundred pounds, but it is also supported by VCs and High Net Worth Individuals and large fundraising events are often hybrids, mixing ‘crowd’ and professional investors.
Crowdfunding investment has to be seen in a larger context. According to analyst Beauhurst, 2017 saw the highest ever investment in fast growth companies, with deals totalling £8.27bn. The average investment size was more than £6m.
As Beauhurst sees it, crowdfunding is playing a hugely important role in the wider investment ecosystem. In fact, crowdfunding ranks second after VC and Private Equity money in terms of the sums made available to small businesses.
The UK is still the biggest alternative finance market in Europe, but there is rapid growth elsewhere on the continent. In a report published in January, the Cambridge Judge Business School’s Centre for Alternative Finance, estimated that the European market (not including Britain) grew by 101% to a value of 2063m euro in 2016.
And looking at the world as a whole, initial coin offerings (ICOs) based on virtual currencies are shaking up the global finance market for startups, particularly in the technology sector. Figures released by Fabric Ventures and Token Data suggest startups raised over $5bn in 2017 by selling blockchain powered tokens ( which also function as virtual currencies) to investors.
In theory at least, ICOs should become more common, but it remains to be seen how regulators will respond. In early March, Bank of England Governor Mark Carney sent a strong signal that regulation of virtual currency trading would be introduced in the UK to protect investors.
So what does all this tell us about the future? Well, platform lending remains the most popular alternative fund-raising source, not least because only a small subset of SMEs are suitable for equity investment. Nevertheless, businesses with growth potential can raise transformational sums through crowdfunding.
But above all, the continued growth of alternative finance is an indicator of demand. SMEs and entrepreneurs need funding to grow and their finance requirements are still not being met by traditional lenders and investors. AltFi is occupying an ever-larger space in the market.
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