Canadians aim to leverage London's leading role in crowd funding, alternative financing
November 2, 2015
RE$EARCH MONEY London FinTech Conference
Policies contributing to the United Kingdom's globe-leading expertise in crowdfunding and other forms of alternative financing is gaining a lot of attention. The opportunity to benefit from the UK experience attracted high-level Canadians from government and the private sector to London last month as part of the first FinTech RE$EARCH MONEY Conference.
Entitled Facing the Future: How FinTech and Alternative Financing are Transforming the World, the two-day event –—designed to explore collaborative opportunities as the new field of financial technologies gathers momentum — helped to demonstrate how targeted policies and tax incentives have grown the fintech sector while achieving significant buy-in from the British angel investment community. This includes family offices — private companies that manage investments and trusts for a ultra-high net worth families.
Alternative financing — particularly crowdfunding — has become something of a sensation globally, with retail investors, financiers and financing syndicates flocking to take advantage of the speed and relative low cost of fundraising compared to traditional forms of financing. In the UK, generous tax breaks and a "light" regulatory touch have fuelled the sector's rapid growth. According to a recent Ernst and Young report, the London fintech sector attracted more than $600 million in the first six months of 2015, compared to $48 million for all of 2010.
Rapidly growing asset class
The report attributed the rapid growth of fintech to several factors:
• A large and sophisticated customer base;
• Availability of capital;
• A supportive regulatory approach;
• Strong financial services infrastructure; and,
• London's status as a global trading hub.
Those factors, combined with the government's strategic decision to encourage fintech, have led to the emergence of several incubators and accelerators such as Techstars, Level 39 and Startupbootcamp. Syndicates and platforms are also forming such as Syndicate Room to pool crowdfunding, drawing largely from the well-organized angel investment community attracted by a generous tax credit from the Enterprise Investment Scheme (EIS).
"Crowdfunding helps to complete the supply chain of money … It has gotten money into companies that probably wouldn't get it any other way," says Dr Alan Barrell, entrepreneur-in-residence at Cambridge Univ and a key driver behind the RE$EARCH MONEY Conference. "Once a company has gotten money (through crowdfunding) and is seen to have enough money to live for a year, investors like the angels will come in much more regularly."
Growing research interest
Barrell says a key generator behind the explosive growth in crowdfunding is the EIS tax credit, which provides an upfront 30% tax credit up to $2 million. But he adds that its staying power rests on the professionals who run most of the crowdfunding platforms, many of whom are entrepreneurs and have run companies in the past. Barrell points to the new Cambridge Centre for Alternative Financing — the first centre of its kind in the world — as an indication of the interest crowdfunding has attracted from the research community. The centre conducts empirical research into alternative financing to inform and assist the growing sector.
Another Cambridge initiative — Angels in MedCity — targets medical research expertise resident in London, Cambridge and Oxford. Comprised primarily of business angels, the special interest group recently made its first investments in two startups — Desktop Genetics ($2.8 million) to further develop software for genome editing and StepJockey ($1.2 million) for an app to gauge calorie burning through various day-to-day activities.
Barrell says the UK offers important lessons to Canada for growing its nascent crowd funding sector and securing the participation of business angels. When asked what advice he would give to Finance Canada, he says the primary role for government is to establish a conducive investment environment where people are attracted to considering the emerging asset class.
"Create the environment where people are much more prepared to put their money into early stage companies … Don't over regulate but do regulate," he says. "Also make sure you have a favourable tax incentive and private sector investors will invest. In the UK, if I invest in a company and make a profit, then I take it out and put it in another company. My capital gains can go all the way down to 10% over three years. Or if the company goes belly up, sometimes I can get 50% of my money back through the government scheme (EIS)."
The importance of crowdfunding and the UK's global leadership was highlighted in a keynote presentation by Dr Hermann Hauser, co-founder of Amadeus Capital, veteran entrepreneur and one-time member of the UK Council for Science and Technology. He included it in a list of trends that he said are helping to transform the world of enterprise finance – crowdfunding, business angels, e-commerce, healthcare, machine learning and artificial intelligence.
"Crowdfunding is a new addition to the field and it's badly needed. It gets a lot of people interested in high-tech," says Hauser. "Business angels invest more in the UK than venture capital (while) e-commerce is still emerging. Healthcare is also a big emerging field … The cost of sequencing has dropped 10,000 times in seven years."
Changing the VC Model
The rapid emergence of crowdfunding has had a dramatic impact on venture capital (VC) investment behaviour. Robert Wardrop, a Canadian ex-pat, sociologist at the Cambridge Judge Business School and an expert in alternative financing channels, says VC can no longer sit back and wait for local deals to come to them.
"Look at what crowdfunding is offering. It's providing a platform for knowledgeable, talented, networked angel investors who are often former successful entrepreneurs. At some point, they may have decided to form a VC fund. Now why bother?," says Wardrop, who sits on the advisory boards of the business schools at Queen's Univ and the Univ of Chicago. "If I can set up a syndicated vehicle ... and make money, I don't need to go to an administratively cumbersome, complicated VC structure."