The generation of innovative alternative finance platforms that have emerged in the UK since the start of the decade are a product of a much wider digital revolution that has changed the relationship between providers and customers in just about every sector.
And given that one of the key trends in the digital transformation of commerce has been a progressive cutting out of the intermediary, it’s tempting to think that as the importance of AltFi increases, so the role of brokers or introducers will, over time, diminish as platforms do the heavy lifting associated with introducing those seeking to raise capital with interested and appropriate investors. In fact, the opposite is true.
The Platform Effect
Those who are keen to see AltFi in a wider context might characterise it at as part of the burgeoning Fintech (financial technology) industry. Equally, crowdfunding and peer to peer lending platforms might be seen as part of the ‘sharing’ or ‘collaborative’ economy, in which hitherto unused or underused assets are monetised via a platform. In both of these sectors technology has undoubtedly been reducing the role of the middle man.
Arguably AltFi providers have – either explicitly or implicitly – tended to downplay the role of intermediaries.
After all, one of the early claims made about equity crowdfunding, in particular, was that it democratised investment. An individual with ambitions to invest in startup or early stage companies no longer had to be a High Net Worth individual or fall into the category of family and friends. Instead, he or she could simply join a crowdfunding platform, review the pitches on offer and pledge an affordable sum. Equally, a business no longer had to do the rounds of bank relationship managers, angels or VCs. The simpler alternative was to join a platform, make a video and wait for investors to show interest. There was no need for a broker. And when the first of the new peer-to-peer lenders appeared shortly afterwards, the principle was much the same. The platform was the intermediary.
A Partial Picture
Of course, that’s only a partial picture of the reality of raising capital in the age of multiple platforms.
Brokers and other introducers play a key role wider corporate finance ecosystem because company founders – for the most part – lack the kind of market knowledge that is essential to getting the most appropriate deal when the time comes to raise capital. And nor should they necessarily take time out to acquire that knowledge. A founder who spends several weeks or months researching the most suitable finance options, probably isn’t keeping his eye on the operational ball.
So, the broker is there to provide advice and an overview of the market. For instance, what are the options in terms of cost of capital? Who are the lenders most likely to back a growth programme? The VCs with an interest in the sector. Or to put it another way, a good broker will identify sources of finance that align with the requirements of the business.
No Longer A Simple Market
Arguably, when it comes to AltFi, many businesses will select a platform themselves and successfully raise capital.
But many others will require guidance. The AltFi marketplace is no longer simple. In the Crowdfunding market, the choice of platform will have implications for the amount of money that can be raised, the type of shareholders agreement that will be in place and the profile of the investors. In the debt market, investors on the various platforms will have differing appetites for risk and also different repayment timetables.
Hard-pressed business owners or managers cannot be expected to be aware of the subtle – and not so subtle – variations in the business models and lending/investment criteria that characterise the numerous platforms now available. Thus, as platforms proliferate, brokers and introducers arguably have not just a role to play, but a bigger role in mapping out the territory and advising clients.
That is why is is vital for those who work in the Alternative Finance industry to forge ever deeper links with brokers. Brokers must be fully conversant with the way the platforms operate. Equally AltFi platforms can gain a huge amount of valuable insights from brokers about the requirements of their business clients.
That knowledge, will help the Alternative Finance providers to hone their services further. Meanwhile, by keeping abreast of developments in the industry, brokers will be better equipped to ensure that they can indeed offer the best possible advice to business owners.
To help introducers find out more about Alternative Finance, The Route – Finance has published The Alternative Finance Guide – 2017. Download here.