The Crowd and the IPO
12th November 2018
Until recently, crowdfunding was led by the likes of Kickstarter, Indigogo, and Gofundme. These are all websites where early-stage businesses with an individual idea or prototype can be given donations by members of the public who want to see the product realised. But now, with the introduction of legislation and new players in the market, this innovative form of finance is evolving from consumer-led to funding business. As more SMEs opt for peer-to-peer lending, will the traditional stock market launch (IPO) fall behind?
In 2015, the government officially recognised the UK’s deep-seated problem of failing to deliver capital to growing SMEs by legislating the Bank Referral Scheme. This encouraged traditional banks to pass rejected business-loan applicants onto alternative finance providers. Following this in 2016, the Innovative Finance ISA was introduced, giving consumers a tax-free incentive to invest in these SMEs via crowdfunding platforms. It’s clear that peer-to-peer lending platforms are filling a gap in the market. Between the start-up funds for new ventures and IPOs for mature businesses, they are there for the “scale-ups”, and the demand for them is skyrocketing.
Previously, investment opportunities in businesses who were young but profitable were off limits to “the crowd”. Now, any member of the public can lend money to these new, disruptive companies, meaning the average investor can make significant returns. For example, at Crowd2Fund, 80% of investors make a return of at least 8.5% APR, compared to the 1-2% they might expect with a traditional savings account. Moreover, they can lend directly to the businesses they choose, rather than having to trust a fund manager with their portfolio.
Since the 1990s, there has been a decrease in the number of IPOs globally, which could be attributed to the rise in private capital markets. There are several advantages for the business owners likely contributing to this shift. For example, when “the crowd” lends finance to a company, they don’t take control over how the business is run or focus solely on the immediate dividends return. Without the “shareholder steerage” of a standard equity raise, the company is able to invest more in research and development, leading to greater innovation and advancement. Additionally, the cost of a crowdfunded loan is significantly less than that of an IPO or even other alternative finance options such as cash advances, invoice finance, revenue loans and working capital loans. However there are limits to what crowdfunding can offer to businesses further along in their lifecycle. For large-scale infrastructure projects and international expansion requiring millions of pounds, IPOs are still the only way to raise the necessary capital.
It remains to be seen if crowdfunding can grow into the large-scale investment space occupied by IPOs. Perhaps crowdfunding platforms themselves may even turn to IPOs to cater their burgeoning customer demand, combining two great forces as the sector continues to evolve.
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