The 2nd annual European Angel & P2P Summit was hosted last week by the European Association of Peer to Peer Lenders and Symfonie Capital. The event was held in Prague and brought together the European Peer to Peer Lending and Angel Investing communities for two days of panel discussions about these two dynamic asset classes and the risks and rewards they offer to investors. Several companies seeking peer to peer loans and equity investments presented themselves. These companies were selected by professional investors based on their overall business prospects, credit worthiness and quality of their corporate governance.
Panel discussions included leading angel investors from around Europe, a representative of EBAN, and executives of several European peer to peer platforms and crowdfunding platforms. Additionally, European crowdfunding expert Ronald Kleverlaan delivered a master class about how companies can exploit opportunities to attract capital using crowdfunding.
I chatted with Mike Sonenshine, the main organizer, who happened to work at the same traditional asset management company as me some time ago (ING Investment Management).
What is the current stage of alternative funding/investing in Europe?
Alternative funding in Europe – Peer to Peer Lending is one of the fastest growing areas of finance today. Peer to Peer Lenders seek to bridge a gap between investors and borrowers with a win-win solution. Credit worthy individuals and companies can borrow via peer to peer platforms at competitive rates. In an environment where Banks have tightened their lending policies, many credit worthy borrowers find peer to jpeer platforms represent an alternative and a complement to traditional bank loans. Investors can earn better rates in P2P loans than they can in banks and in the bond market, but with potentially less risk and lower volatility than the equity market. Peer to Peer lending as an asset class has grown to about € 5 billion, which is still just a small fraction of the overall European loan market. Angel investing is not particularly new. However, the rise of equity crowdfunding platforms and the advent of several angel investment funds and angel networks has made this asset class more readily available to individual investors. Nearly € 1bn has been invested via Europe’s crowdfunding platforms over the last few years and this number is expected to continue growing rapidly in the coming years.
When should young companies go for debt / equity?
Entrepreneurs with compelling business ideas usually get their seed finance from their own resources and from a close circle of family and friends. There are an increasing number of startup accelerators that provide capital to entrepreneuers and help them develop their business concept to the point where they can attract their first seed or angel finance. Raising capital for early stage companies is very difficult, however. Many angel investors prefer to work with companies that are on a path to becoming sustainable, which means actually generating revenues and operating with a team of experienced managers.
Startup and early stage companies that are founded by credit worthy individuals may find that it is wiser and easier to take a small loan than to seek a large amount of equity. Investors are more likely to put equity into a company that is growing and where the founders have capital at risk than when the company is starting out and has little or no financial backing from its owners. Many entrepreneurs make the mistake of building a long-run financial plan that calls for high capital expenditures and sets high sales and profitability targets. While investors clearly want to see understand the potential a company can offer, investors are more interested in how the company can get to its next achievable near term milestones and can be better positioned to attract further funding. For this reason, startup companies might be well advised to think in smaller, manageable steps, look for less capital rather than more capital and be flexible about the investment terms they seek. Every company should take advice from experienced angel investors and startup finance specialists in order to understand the full range of capital raising alternatives and to work on a strategy that can help them succeed.
What is your take on angel investing, crowdfunding, investment syndicates?
For investors there is an increasingly wide array of accessible investment opportunities. Direct angel investing is of course interesting and potentially lucrative. Industry research suggest angel investor achieve their best results when they invest in businesses they understand well and where they can add value. The angel investor is therefore more than a silent investor and closer to a business partner and mentor. Angel investors can also increase their chances of success by investing in groups or syndicates of angel investors who know each other well, share ideas and exchange opinions candidly. Of course this way of investing is time intensive. It also might be difficult to achieve portfolio diversification and invest smaller amounts of money into each company. Managed angel investing is becoming increasingly popular. Investors can achieve the benefits of diversification and professional management by selecting angel investment funds. Finally, there are many crowdfunding platforms where investors can select companies and invest small amounts of money. Investor may be disappointed with performance of crowdfunding platforms, however. Generally investors will have less access to information about the investee company and will have less control and influence over the company than if they invested directly. It’s also possible that the strongest potential investments fall into the hands of direct angel investors and investment funds so the pool of investments available on crowdfunding platforms can be inferior. On the other hand, crowdfunding platforms are becoming increasingly selective about which companies get listed so they provide a filtering mechanism.
What trends do you see in P2P lending?
P2P lending platforms come in many shapes and sizes. Some focus on consumer loans, some on business loans, some on asset backed transactions. In many cases investors select their investment portfolios line by line. However, many platforms offer automated solutions that enable investors to “buy the market” and invest in a diverse selection of loans according to a set of parameters such as estimated default rate, term or minimum credit score. This can be done also with computer driven filters that select a narrow subset of loans based on the investor’s proprietary screening models. Especially in consumer loan portfolios computer driven investing is likely to be increasingly popular, mainly due to time savings. However, it’s difficult to say that systematically filters will provide better overall results than a randomnly selected portfolio based on a single parameter, such as platform loan grade or minimum credit score. While investors can easily achieve diversification within many individual platforms, investing across several P2P platforms can be time consuming and costly. For this reason P2P funds that invest across several platforms and markets can be expected to be increasingly popular choices among investors.