I had a professor in college who explained financial markets by saying the that world was full of those looking to receive and those looking to provide certain cash flows with very specific parameters, such as timing, size, yield, currency, etc. The role of the financial markets and their facilitators, he said, is simply to match these cash flows.
Much of what we have done as financial technology investors has been to back entrepreneurs using a formula of one part technology to two parts groundbreaking business models to do a better job of matching these cash flows than the incumbent players. Way back in 2000, Betfair used the web to build the first true betting exchange that allowed anyone to be a punter or a bookmaker. Since then, our investments in Oanda and TrialPay have all reinforced our conviction that this formula makes sense.
By effectively creating a bond market for small businesses, Funding Circle provides an alternative source of funding for small businesses that are unable to obtain loans on attractive terms or an acceptable timeline from the banks. It also enables individual investors to earn very attractive rates of return on their investments by supporting local businesses.
Last week, the UK government, which my more affected partners colloquially refer to as Number 10, announced it would invest £100 million in small businesses via non-traditional funding sources including peer-to-peer lending platforms. This is very good news for Britain’s small businesses. It’s also great news for Funding Circle, the London-based start-up who came up with the idea of a peer-to-peer lending platform targeting small businesses and remains the largest player in this market. This move reinforces other positive steps the UK government has taken of late (startup visa, favorable capital gains tax treatment for founders, further incentives for seed investment and the TechCity initiative) toward making London a very attractive hub for entrepreneurs.
Today, just 18 months after launching, Funding Circle is enabling individual investors to lend around £1 million a week to businesses across the UK and earn average gross yields above 8%. The platform allows investors to choose which businesses they lend to, set the rate at which they are prepared to lend and even trade their loan parts in a secondary market. The massive funding gap between the demand for credit to businesses and what is expected to be supplied by banks over the next several years provides a tremendous market opportunity for Funding Circle to address.
Samir Desai, James Meekings and Andrew Mullinger who founded the business have appended their names to the list of highly versatile and talented first-time entrepreneurs I have had the pleasure of backing who have come to London to start their businesses. Our commitment, announced today to lead Funding Circle’s £10 million round with our friends at Union Square Ventures reflects our belief in the power of a visionary, disciplined team to transform an industry and our excitement about what this transformation will bring to British businesses and to society.