The New Era of Business reports are focused on the future of important industries and include examples sourced from around the world.

How will we finance the future?

That’s the question driving the research behind this report on New Finance, as we take a deeper look at how finance is driving the New Era Business. As Finance is at the heart of the #NewEraBiz – no business can even get started without capital and not everybody is bullish on BitCoins – we wanted to scan the panorama and look at emerging ecosystems in the (new) financial landscape. The goal of next-gen finance platforms is to help entrepreneurs and small businesses (SMBs) avoid using credit cards to finance their entity; instead, they can source capital via these platforms that leverage technology to cut out middlemen and lower fees.

What is New Finance?

If traditional finance is a vertical, competitive and rigid hierarchy dominated by a small group of financiers and industrialists, then New Finance is the opposite. Horizontal, collaborative and fluid, it is an industry that is inclusive and takes advantage of collective actions to drive dealflow.

We’ve talked about New Finance before over the course of the last couple of years.

The first real research down this avenue happened with My Crowdfunding Stud in Latin America, as the advent crowdfunding was the catalyst for many of today’s New Finance platforms. That was followed up by a trip to see what Seedrs and other early movers in the crowdinvesting industry were up to in London.

+ Finance 2.0: Wall Street Meets the Web

Then at the end of 2012, we did a small case study on what’s happening in the UK to demonstrate how the SMB Finance ®evolution is in full effect.

+ The SMB Finance Revolution

More recently, we dissected how New Finance startups like Circle Up were helping to Redistribute Dealflow to the areas of the economy that need it the most; we used Food as an example of an industry that has been chronically underfunded at certain tiers.

+ The Redistribution of Dealflow

Now we are going to take a look at this from the bigger picture and see what the next step is in the evolution of Finance. To put it in perspective, we have embedded a video by Bridgestone founder Ray Dalio to outline ‘How the Economic Machine Works.’

To summarize, the economy is essentially governed by three forces acting simultaneously – the short-term debt cycle, the long-term debt cycle and productivity growth. Together, they work to drive the economic machine that powers the global economy.

Since the financial crisis, governments have resorted to printing money as the strategy to ‘stimulate’ the economy. This stimulus drives the short-term debt cycle, which usually lasts for about 5 – 8 years. When the Central Banks lower interest rates to rock-bottom levels and turn on the money-printing taps, they create an expansion of credit and we move up the short-term debt cycle curve.

The short-term debt cycle, the oscillating squiggly line, is a subset of the long-term debt cycle, the large oscillating line, which operates in periods of roughly 50 – 75 years. When the cumulative debt in an economy builds up to a point where it is no longer sustainable, the peak of the long-term debt cycle, then we begin to enter a period of deleveraging. If done correctly, and inflationary and deflationary measures are balanced, then we can have what Ray calls a ‘Beautiful Deleveraging,’ or an orderly unwinding of a debt bubble.

Thirdly, we have productivity growth, which is the straight line on the graph that increases steadily over time. Productivity is a function of how efficiently we utilize resources to achieve outcomes that boost the economy. The key to the long-term growth of any market economy is increasing productivity.

While the video doesn’t overlay our current economic environment into the model, it appears that we are entering a period of deleveraging when you take into account that:

  • Central Banks are printing money at an unrelenting pace;
  • Consumer Debt has reached unprecedented levels;
  • Underlying inflation remains low;
  • We have rock-bottom interest rates and sky-high sovereign debt.

The ‘stimulus strategy’ has been focused on expanding consumer credit, which is administered by the banks, who have made enormous post-Crisis profits off the spread between what it costs them to loan versus what they charge customers to borrow. Unfortunately, however, much of that cheap credit has failed to reach SMBs, creating a large chasm in the SMB Finance market.

The problem is that, as many studies have shown, it is only (or at least primarily) new firms who create long-term jobs in an economy; therefore, if the required capital is not reaching the SMBs who need it most at an early stage, then a full economic recovery cannot occur. In the UK, for example, the 2012 Breedon report showed that there will be a £84 – £191 Bn gap in SMB loans if significant changes were not made.

Thus, to restore the global economy to an era of robust (and sustainable) growth, the SHIFT should be to measures that boost productivity and increase businesses access to capital, rather than giving consumers credit for consumption. And that’s where New Finance comes in.

Because it’s the SMBs (small & medium businesses) who can reignite the economy in a sustainable fashion – delivering economic, social and environmental benefits to all tiers of society – and bring full-time jobs to their respective nations.

In this light, we have seen several trends emerge in the last few years to provide businesses with the access to capital they need to startup, grow and expand globally, including: crowdinvesting, P2B Lending and sustainable banking.

Crowd Investment

Crowdinvesting is an offshoot of crowdfunding, which was sparked by the launch of Kickstarter in 2009. The crowdfunding model is a donation-based model that uses technology to efficiently enable members of a given community to each contribute small amounts of money to fund a project.

+ Business Model Breakdown: Crowdfunding

With crowdinvesting, ‘the crowds’ are able to actually invest, or take an equity position, in a seed-stage enterprise, rather than simply donating for a reward. While it sounds conceptually simple, it is a complex to implement because it requires national/state security regulators to rewrite security laws to allow for ‘crowds’ of unaccredited investors to buy shares in companies that have not filed a prospectus.

Seedrs, based out of the UK, was the first regulator-approved crowdinvesting platform in the world and uses a nominee model to enable companies to raise up to £150,000. Countries like the US, on the other hand, are trying to roll out nationwide regulations (the JOBS Act) to enable multiple platforms to work within the same framework.

While each country, and the strategy of each platform, is different, the goal is the same – use technology, and the wisdom of the crowds, to capitalize upstart companies. According to Crowd Valley, the market for startup crowdinvesting was approximately $112 Million however, the market is only just beginning and the growth will ramp up exponentially as laws are changed to facilitate crowdinvesting globally.

P2B (SMB) Lending

P2B Lending, in a New-Finance context, is an offshoot of the P2P industry, which was estimated to be a $1.2 Billion industry in 2012 and growing fast.

P2B Lending happens when one business receives a loan from an individual, group or institutional ‘peer’ rather than a bank. In a similar vein to crowdinvesting, P2B Lending leverages technology to create an efficient debt market and remove the middleman, in this case the banks. Rates are typically set using an auction or bid system, and the industry is, similar to crowdinvesting, subject to regulatory laws within each country it is based out of.

Zopa, started in the UK back in 2005, was the pioneer of the P2P Lending market and has facilitated $400 million worth of personal loans since its inception.

Now, the P2B Lending marketplace is starting to get hot, with companies like Funding Circle stepping up to give businesses access to expansion and working capital, plugging the gap left by banks. Since the company’s launch in 2010, it has facilitated $158 Million worth of loans to SMBs at an average rate of 5.8% and loan size of £65,000.

Other sites are popping up globally as well, as the market starts to take shape to start the capital SHIFT to the companies that need it. While the market is only estimated to be worth about $120 M globally, expect rapid growth in the next 5 years.

Sustainable Banking

Sustainable banking is an offshoot of traditional investment banking, with one key difference – it matters how profits are made. Rather than being a black box that bankrolls dictators and unsustainable enterprises, the goal of sustainable banking is to foster a vibrant economy so that there are markets left to bank in the future.

The essence of sustainable banking is that these banks actively fund enterprises that generate a positive impact for society. While a bank like Goldman simply acts as a ‘market maker’ and don’t limit themselves with ethical concerns, sustainable banks look to loan to and bankroll businesses that play a real role in the creation of a flourishing society.

Recently, a few studies have been conducted to compare the performance of ‘sustainable banks’ to ‘too-big-to-fail’ banks. One such study, which analyzed data between 2003 and 2012, comparing Global Systemically Important Financial Institutions (GSIFIs) versus ‘sustainable banks,’ revealed some interesting insights.

While global return on equity was greater for the traditional banks, it’s clear that it comes at the risk of depositor’s savings and assets. A breakdown of individual CAGRs in different banking categories, however, showed that sustainable banks outperformed in all categories.

It goes to show that there is a business case for sustainable banks, and that it goes beyond just ‘ethical’ rhetoric. While traditional banks will be able to maintain immense profitability for the interim, the whole banking business model will need to evolve to become more sustainable in order to bankroll the #NewEraBiz to grow globally in the decades ahead.

Market Beacons


Seedrs, who we alluded to earlier in the ‘Crowdinvesting’ section and have talked about in several previous blog posts, continue to be the beacon of crowdinvesting in our opinion.

While they have not generated the same volume as their closest competitor CrowdCube, who had about a year head start, their nominee structure and everyday-investor attitude make them the model to study for long-term crowdinvesting success in our opinion.

In addition to offering everyday UK citizens the opportunity to invest as little as £10 in startups, they also have worked with the UK Government to create the SEIS program and other seed-investing schems.

With Seedrs ramping up growth, they recently broke the £2 Million pound mark and have started opening innovative fund mechanisms, such as the recently funded WebStart Bristol, which raised £150,000 on the platform to launch their incubator.

Funding Circle

Funding Circle, who we alluded to in the P2B SMB Lending section, is pioneering the loan market for SMBs. The company is ramping up growth, developing new partnerships, and has a bad-debt rate of only 1.4%.

Beyond the numbers, they are meeting their market’s demand. A study conducted by Nesta showed that 77% of businesses would return to Funding Circle as their source for future financing. 75% of lenders, on the other, stated their willingness to increase lending in the next 12 months.

The strength with Funding Circle, other than general satisfaction and lower interest rates, is the speed. New applications are reviewed with 48 hours, and the average funding period is 12 days, compared to 15 to 20 weeks with the banks.

The company just raised $37 Million and is expanding into the US.


Triodos is one of the best of the sustainable-banking bunch. Founded in 1980 and based out of the Netherlands, Triodos is gaining traction in a banking world for a characteristic not typically associated with financial institutions, transparency.

On one side, they offer their customers the unprecedented opportunity to see where their money is being invested by acting as a ‘sustainable fund manager.’ Beyond simply offering feel-good investment opportunity, these ‘sustainable funds’ also offer a solid return. As an example, they have setup the Triodos Microfinance Fund, which helps to develop financial services for low-income people in developing countries; it has achieved an average annual return of 7.1% over the last three years.

For business financing, they only ‘finance organizations working to build a sustainable future for individuals, the community and the environment.’ Their criteria enables both charities and businesses to borrow money, with loans ranging from £25,000 to £15,000,000 and up. They offer a range of business credit products, including working-capital loans, commercial mortgages and cashflow lending.

End to end, Triodos strategy is based on openness, as they show full transparency on their loan portfolio and banking fees across the gamut. And the results are there to back their strategy. In 2012, they grew their balance sheet by 23%, increased SMB Lending by 16%, upped their customer base by 23%, and reported a 31% increase in net profit (€22.6 Million) from the previous year.

Overall, the New Era of Finance is focused on building a balanced and sustainable economy around impact-driven SMBs. Rather than traditional banking, where profits are derived at all costs and very little money actually circulates into the real economy, the new frontier will be built on the bedrocks of technology, collective wisdom and transparency.

How do you see the future being financed?

+ Time For BMi

PLAN – the Business Model

The ®evolution in small business finance has begun. The shockwaves that emanated from the 2008 Credit Crisis have spawned an entirely new ecosystem for small businesses to access capital. Rather than being driven by the old boys at the top of the financial food chain, this ®evolution is being driven from the bottom up by the crowds, which is why today we are going to take a look at how crowd finance is reshaping small business financing – permanently.

Small businesses (SMBs), the backbone of our economy, have had a rough go since the credit markets collapsed in 2008. While governments have been pumping a seemingly* infinite supply of credit into the economy for the last several years, the banks have used the free* capital to ‘fortify’ their balance sheets rather than lend it into the economy. Consequently, SMBs have been left in the dark and forced to find alternative sources of financing from wherever they can get it.

The kicker for governments, and consequently the people, is that if the money doesn’t trickle down and SMBs can’t access credit, then the economy doesn’t get rebuilt. A unilateral study conducted in the US by Kauffman in 2010 found that all new jobs are created by new businesses. The governments’ initiative to stabilize the economy by injecting unlimited* supplies of free* capital into the banks has created a problem that can only be resolved with one outcome, a ®evolution.

Enter the crowds. Thanks to a whole new generation of crowd finance, including crowd funding / lending / investing / factoring, a new era of small business finance is upon us. Call it a revolution, an evolution, whatever you want, either way the shift is massive.

Recently we attended the Windows of Opportunity event in the UK to see first hand how the pieces are coming together in the emerging crowd finance landscape. Led by former Dragon Doug Richard, the event was sponsored by the UK government to share information about the new alternatives available to British companies and investors, and educate the audience about the transformational new SEIS (Seed Enterprise Investment Scheme) tax incentive program. Mr. Richard, an American-born entrepreneur with experience at every level of business, opened the event by explaining the causes of the current SMB financing shortfall and outlined why he sees the SEIS tax incentive as one of the biggest triggers for economic growth in the UK economy over the next decade.

We talked about SEIS a couple months back in our post ‘Crowd Finance + London …’, it incentivizes investors to invest in seed-stage enterprises (< £200,000 in assets) by reducing a majority of their risk. They get an instant 50% tax credit, a potential future capital gains exemption of 28.5% and the ability to write off an additional percentage of the investment if it becomes a loss. While there are a few details that need to be understood, the scheme gives investors the potential to receive 100.5% in tax writeoffs.

+ SEIS – How it Works

SEIS becomes important when talking about the concept of crowd finance because investors will have exponentially greater access to deal flow thanks to these new platforms, specifically crowd investing, one of several new alternatives discussed at the event:


Crowdinvesting platforms give entrepreneurs the opportunity to raise equity financing from ‘the crowd.’ These investors no longer need to be accredited or invest large amounts just to make it worth the fees.

Seedrs, a platform we have talked about a few times on the blog in previous months (see post Finance 2.0 …), allows entrepreneurs to raise up to £150,000 from a crowd of investors who can individually invest as little as £10. The platform is FSA regulated, an important qualification for crowdinvestment platforms in the UK, and investments made through the site are SEIS eligible. They launched in July and have closed 8 deals for a total of £337,000.

As an investor on Seedrs, you don’t have to worry about monitoring the companies you invest in every week. Seedrs acts as a nominee for the shareholders and plays an active role in ensuring that the company stays above board with all future financing. The company is also incentivized to see the startups it helps fund succeed, as they take 7.5% of any investor profits.

+ Investors Chronicle – The Wisdom of Crowds (PDF)

Crowd Lending

Crowd lending platforms allow businesses to borrow money directly from investors at competitive rates, thereby removing the middleman and providing an alternative to the banks.

To put the problem in context, the current Crowd Lending market for SMB loans represents less than 0.1% of loans being made by High-Street banks despite triple-digit growth rates in 2012.

Funding Circle is one UK company in the P2P lending landscape who is giving businesses access to the capital they need to grow. SMBs can go on the platform and borrow up to £500,000. Lenders can search for loans at terms they are comfortable with, with average returns currently sitting at 9.1%. Default rates have been low up to this point, but the company’s CEO expects them to rise to around 2.8% as their loan book gets bigger. The UK government has committed £100 million to help kickstart the industry.

Crowd Factoring

When a startup company signs a big contract and sends out its first invoice, the feeling can sometimes be bittersweet. That’s because many companies have payment terms of 30, 60 or 90 days, an eternity for a new company that is under the gun. Additionally, many SMBs may not have the working capital to produce the goods for the order. Enter crowd factoring.

Crowd factoring allows entrepreneurs to factor their invoices, or receive a large percentage (~95%) of the money in exchange for cash upfront.

Platform Black is a new invoice-trading platform that connects small businesses with investors looking for new ways to find returns. Sellers (the entrepreneur) post the invoice they are trying to finance on the auction platform, while Buyers (the investors) bid on the invoice using the Seller’s discount rate as the starting point. The rate of return is determined by the Seller’s credit score, length of the invoice and supporting documentation related to the strength of the invoice.

It’s a new way for investors to earn returns from short-term debt obligations while giving SMBs access to the capital they need to move forward.

Overall, the inception of crowd finance is redefining the way small businesses access capital. One presenter at the Windows of Opportunity event drew the analogy between Henry Ford’s Model T and today’s banks:

  • Henry Ford was said to have been quoted joking that “you can have any color you want as long as it’s black” when referring to the new Model T Ford; nowadays, you can buy a car in virtually whatever shape, size, colour you want;
  • The banks have always been the one-stop shop for everything related to financing; nowadays, the market is opening up, as an entirely new financing ecosystem is emerging to fill the gaps left by the banks.

For both investors and entrepreneurs, the shift to a more democratized ecosystem is opening up a whole new array of opportunities. The UK, in particular, is moving ahead to reinvent its capital markets through the creation and promotion of innovative platforms and groundbreaking tax incentives. While much work still needs to be done, the pieces are slowly coming together to give small businesses access to the capital they need to grow. In today’s world, that might be enough to be called a revolution.

+ Time For BMi

PLAN – the Business Model