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The Alternative Finance Frontier

BY JIMMY MCLOUGHLIN, 25/03/2016

When I graduated in 2009, it was not a good time to be an ambitious twenty-something trying to get a foot on the career ladder. Big graduate recruiters were shedding staff and not taking on many graduates. Banks, law firms, accountants, ad agencies, IT companies, retailers – everybody was cutting back. The only employer among the top 100 which actually increased the number of graduates it took on that year was the armed forces (BBC, 2009).

Six months after graduation ceremonies, almost one in ten of the ‘Class of 2009’ were still out of work – a near-doubling of the graduate unemployment rate in just two years (BBC, 2010).

Of course, the financial crash hit plenty of people worse than newly-minted graduates. Youth unemployment overall spiked, passing 20% for the first time in a generation (ONS, 2009). Mortgage lending plummeted as the number of households that could secure a loan fell by two-thirds (BoE, 2015).

For the businesses which determine the success or failure of the British economy, the picture was also bleak. Lending to small companies fell in every single month between June 2009 and the end of 2011 (BoE, 2015). Starved of finance, and with demand contracting, the total number of businesses in the country actually shrunk, with more old firms going bust in both 2009 and 2010 than new ones being created.

But necessity, as they say, is the mother of invention. The recession kick-started two big disruptions in the business world which have transformed the landscape for today’s graduates along with businesses old and new across the country. Both, the way businesses raise money for themselves and the way employees view the world of work, have changed beyond all recognition.

 

The alternative finance boom

As the banks licked their wounds in the aftermath of the financial crisis, weighed down by write-offs and extra layers of regulation, alternative finance providers started popping up. RateSetter, a peer-to-peer lender was launched in 2010, equity crowdfunding platform Seedrs became the first regulated crowdfunder when it launched in summer 2012, and was quickly followed by Crowdcube a few months later. Reward-based crowdfunding, like the kind offered by Kickstarter, which sees investors given a ‘reward’ for investing in new projects, have also taken off. Rewards are decided by the company and vary from token t-shirts or key chains, to event invitations, meetings with the founders, product prototypes and lifetime subscriptions.

Even the ‘traditional’ sector got in on the act. Metro Bank became the first new high-street lender in more than a century when it opened its first branch in July 2010. Virgin Money also expanded rapidly after it bought the rump of Northern Rock in 2012. The recession and stinginess of the banks spurred a rush to create a genuinely competitive marketplace for business finance in the UK.

It’s worked. Last year 116,000 people invested through Crowdcube alone. More than £100 million has been invested in companies through the platform since it launched. A quick scan of Seedrs reveals the variety of companies using alternative finance to get ideas off the ground, or take their company to the next stage. From the exotic, niche and pioneering, like Mishergas Green Energy, which is after £60,000 to convert old tyres into electricity, to the basic, like Free Agent, which makes accounting software and just sold 3% of their firm in a round of funding which valued it at £30 million.

Success stories in this space are becoming more and more common. In December 2015, Star Citizen, a video game, became the first project to raise more than $100 million through crowdfunding after advertising on Kickstarter. In the same month, to the ire of bearded folk across London, the Camden Town Brewery, already a poster-child for crowdfunding success, sold to brewing giant AB InBev in an £85 million deal. Investors raised a glass to a 70% return.

Encouragingly, the UK is at the heart of the European alternative finance space. Around three-quarters of all money raised in Europe are raised in Britain. The root of the industry’s success has been the simplicity of its products. Not only are platforms advertised heavily, but they are easy to use. Once somebody has done their research and decided where to invest, everything is done online – a far cry from the days of putting on your Sunday best and sweating your way through a meeting with the bank manager as he poured over your business plan.

 

The entrepreneurial shift

Unsurprisingly, alternative finance providers, young, tech upstarts themselves, have proved popular with the swathe of start-ups storming pockets of the UK. The IoD 99, a network of high-growth young entrepreneurs, are big fans of alternative finance. Two-thirds say they are going to tap into equity crowdfunding and/or peer-to-peer loans over the ten years to get the growth capital they need to scale-up. This compares to around one-third of all IoD members.

The way millennials are raising finance isn’t the only thing which is different from them from the business leaders of years gone by. They have well and truly caught the entrepreneurial bug. Businesses are being started at record pace, with more people than ever working for themselves. Despite a slowdown during the crisis, the number of companies in the UK has ballooned from 4.3 million to 5.2 million. Last year, 586,000 individual firms were started. The business ‘birth rate’ is also at its highest level since the crisis, with the ‘death rate’ at its lowest. What may have started in the depths of the recession as an answer to a jobs shortage has remained a feature of the recovery.

This is down to a shift in working patterns. Starting a business used to be a fairly large gamble. You either won big or you went home empty-handed. But this high-stakes winner-takes-all approach to business is over. Launching your own business is still a risk, but it’s certainly not a blind gamble. The ‘gig economy’ has democratised the world of entrepreneurship thanks to rise of portfolio careers, where people hop between employers and projects, with stints in and out of work with an array of different suitors.

More than nine in ten members of the IoD 99 were either in work or students when they launched their own business. Two-thirds of those were in full-time employment. They didn’t have to chuck in their potential careers in order to have a go at launching their own company. They spent evenings doing research, weekends dealing with suppliers, days off meeting potential investors. This is how businesses are formed in 2016. More than half of them stay with their previous employer while they get their idea off the ground – dipping their toe into the water, rather than taking a leap into the unknown. For the rest, the flexibility and opportunity to pick up freelance work or find a zero-hours contract was a nice comfort blanket. It’s not inaccurate to say that it is easier than ever to start a business in the UK.

 

The future’s bright

But of course, not everybody can be an entrepreneur and not everybody wants to be one. Nevertheless, the opportunities to take part in this new economy go far beyond launching your own business. For a start, alternative finance providers give everybody the chance to invest in one and are helping to forge an ‘equity economy.’ The success of innovative ideas from the outspoken Scottish beer-makers, BrewDog to the Pebble smartwatch on these platforms show they are pitched squarely at Generation Y.

And it isn’t all about investing or taking a direct stake in a company. Young people may also have become ‘accidental entrepreneurs’ through the use of websites like Airbnb, Task Rabbit and Fiver. These websites act as intermediaries between individuals who have something to offer, and those who have something to buy – be it a room for a few nights or a few hours of their time. They work on the most basic of economic principles, supply-and-demand, often cutting costs for both parties by linking buyer and seller in the most direct manner possible.

alternative finance providers give everybody the chance to invest in one and are helping to forge an ‘equity economy’

Established companies, too, are making use of the dynamism, energy and entrepreneurialism which characterises Generation Y. Schemes like reverse mentoring, first popularised at General Electric are taking off at big firms that need to stay in touch with rapidly-changing consumer trends – i.e. all of them. Advertising giant, Ogilvy & Mather, matches up senior executives with their graduate intake to make sure the forty-something learn as much as they can from those they recruit, but then might otherwise forget about. Fresh faces are also becoming a more popular sight around the board table of smaller companies, as they respond to the need to look outside the usual grey-haired, bespectacled and pinstriped pool of candidates.

Being young doesn’t mean you instinctively understand new challenges like cyber security, and the rise of fickle consumers, but there is something to be said for having grown up around this technology and being cut from the same cloth as your business’s employees and customers.

It may only be seven years, but the class of 2016 has much brighter prospects in front of it than that of 2009. The world of work has changed beyond recognition in just a few decades, disruption is something that is sought after, rather than feared, and those with an idea for a new product or service can get to market quicker and easier than ever before.

Jimmy McLoughlin

JIMMY MCLOUGHLIN joined the Institute of Directors in August 2014 as Deputy Head of Policy. His role covers the ‘new’ economy, specifically disruptive technologies, the sharing economy and start-ups. Prior to this, was Associate Partner at Bell Pottinger where his team focused on a wide range of technology clients. He has over six years’ experience in political communication and policy making, having also worked for Fleishman Hillard and Boris Johnson. Jimmy read Political Science at the University of Birmingham, achieving a first class honours.

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