Small businesses have been called the lifeblood of our economy, and today a financial services startup has picked up a significant round of funding to help it circulate better. Funding Circle, a UK-based peer-to-peer lending platform that lets individuals and institutions loan money to small businesses, has picked up a $37 million round of funding. Along with this, it’s announcing plans to take its business to the U.S., its second market, in a merger with San Francisco-based Endurance Lending Network. Its ambition, in the words of co-founder and CEO Samir Desai, is to become the “NYSE for small business lending.”
Going into the U.S. will also bring Funding Circle a fresh wave of competition. Today, by virtue of the JOBS Act, there are already a number of platforms for crowdfunding initiatives, with Kickstarter and Indiegogo among the more popular. Now, new, more relaxed crowdfunding rules being proposed by the SEC could see the number of companies increase.
Funding Circle’s Series C round was led by new investor Accel Partners, along with participation from Ribbit Capital (another new investor) and Union Square Ventures (also a Kickstarter supporter) and Index Ventures. The latter two also clubbed together in a $16 million Series B round in April 2012. It brings the total raised by Funding Circle to $58 million.
Samir Desai, the co-founder and CEO, tells me that as part of its merger deal, Endurance will be rebranding as Funding Circle USA. It’s a convenient union: Endurance will give Funding Circle regulatory and country-specific knowledge, while Funding Circle will come with experience-based risk modeling and the capital to take on the U.S. more aggressively. Desai estimates that today there is some £14 million ($23 million) lent each month in the UK, “and we think it’s three to four times as much in the U.S.”
“Like Funding Circle, Endurance Lending Network was created to help the millions of small businesses being starved of the money they need to grow,” said Alex Tonelli, the co-founder of the U.S. startup, in a statement. “As small business owners ourselves, we know how acute the need is for a viable alternative to bank loans.” (Tonelli, who co-founded the company with fellow Stanford grad Sam Hodges, says he was spurred to start it when he was turned down for a $75,000 loan to expand an existing fitness center business.)
The smaller U.S. company had raised some $1.5 million from angels, including Barry Silbert, the founder and CEO of Second Market.
Since 2009, Funding Circle says that it has facilitated over $250 million in loans in the UK, the only market where it has operated up to now. While it got its start as a platform for ordinary people to lend money, it has over time expanded to include accredited investors, institutional investors, the UK government (which put £20 million/$32 million into its marketplace in December 2012) and even the banks that it was originally set up to shake up and disrupt. That’s because it’s become financially unfeasable for banks to make small loans to small businesses, but they still want to keep those companies as larger customers.
“A lot has changed for banks since 2008. High capital requirements have led them to pull away from the low end of the market, and so £50 investments” — the average amount lended on Funding Circle — “are too expensive for them to do. But rather losing those businesses as customers altogether it’s good to partner with Funding Circle. It means they can still serve customers they can’t serve themselves.” Typical turnaround time for a loan is days from application, compared to 15-20 weeks if the same loan was requested from a bank.
In the U.S., the model will be modified somewhat: lending will only be open to accredited investors; unaccredited individuals will not be able to invest. Desai says that this is partly because of regulatory issues (although that can change, per today’s news from the SEC), but he also points out that this doesn’t mean a small pool of lenders, since there are some 10 million accredited investors in the U.S. today.
So far, the business model behind Funding Circle has been an effective one for getting money to businesses that need it to grow. It turns out that there are a lot of small businesses out there that need capital for projects that haven’t been able to raise it elsewhere. “These aren’t the types of small businesses that you read about on TechCrunch,” he told me, saying they are on average 10 year-old companies. “The market size in the UK alone has felt gigantic to us. That’s the reason why we haven’t had to go to other countries. We didn’t have to go to the U.S. but we felt it was a huge opportunity and are quite excited.” Indeed, figures from the Small Business Administration (provided by Funding Circle) estimate that there is a $100 billion funding shortfall in the U.S. economy with small businesses.
Desai says that typical loan periods for deals on its platform are around 48 months, but with a range of between six months and five years, with an average interest rate of 9%, small compared to traditional banks. He says that over 70% of the companies that have borrowed through the platform return for more.
“We have a lot of marketplace investments, and we see that you need one side working well to get the flywheel going,” says Kotting at Accel. “Here, we have it going on both sides, for the borrowers and the lenders. It’s a situation that is extremely advantageous.”
Indeed, on the lending side, it’s proven to be a success as well. Using the risk modeling and credit profiling algorithms created by Funding Circle, investors are able to invest directly in specific companies and projects, or can spread their bets across a range they select or choose Funding Circle to select on their behalf. In all, these investors are typically seeing returns of 6-10% per year. Not rock star returns but a steady and positive rate that comes with the knowledge that you’re doing something to help push along the wider economy in the right direction.
Longer term, the plan for Funding Circle will be to expand its platform to cover more lending services for businesses. That will start in part with this latest round of funding in the UK market, where the company will start to offer lending services specifically for asset finance and real estate.
As part of the investment, Harry Nelis, a partner at Accel, will be joining the board of Funding Circle.
Image: Flickr
Tags: wes welker Emmys 2013 Apple.com neil armstrong mila kunis
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.