When crowdfunders first stepped out on the financial block in the mid-noughties, banks were fairly indifferent to their presence – if they noticed them at all.
This new rabble of alternative financiers were certainly nothing to worry the world’s banking empires as they went full tilt into their game of risk, reward and subprime trading. Then came the crash, corporate bloodshed and the widespread cleaning up of acts on City Street and everything changed.
Suddenly banks wanted to learn from the new wave of lenders, according to one of the rising stars of crowdfunding, Dan Rajkumar.
Dan is the young entrepreneur behind Leeds-based peer-to-peer lending platform Rebuilding Society which, after a sterling first two years in business, is now in active discussions with a number of major banks.
While they seek an entry point into the transparent world of crowdfunding, Dan believes the future growth of his business could be driven by collaborating with banks. Not that the business hasn’t already found its feet. The company enables individuals to lend varying amounts of money – starting from just £10 – to established UK businesses.
To date it has enabled around £4m to be lent to over 80 ventures via hundreds of investors. Its own books are healthy too, with annual turnover expected to double by the end of next year beyond the £1m mark, putting the firm and its 11 staff well into the black. But working with banks is an attractive proposition.
“I’m in discussions with three of the five biggest UK banks about how they can reinvent themselves,” says Dan. “The banks are in a difficult position because they need to decide to what extent they are prepared to reinvent themselves, and that involves a significant amount of self-sabotage.
“They have traditionally made lots of money by being really selective about the opportunities they want to lend to, and that’s got them into a lot of trouble. They cream the market, choose the best opportunities, and make huge margins on them.”
Dan believes the relationship between traditional financial institutions and crowdfunders could play out like that between record companies and internet downloads. After fiercely opposing the rise of music via the web, record label moguls accepted the new dynamic and either adapted to it, or died.
“There is a generation that has embraced the internet,” he says. “We use it to download music and e-books or to book flights. All of these things are available online. But finance and banking have been slow to embrace online. It just makes a huge amount of sense to go online and use a website to deploy your capital into a local business.
“It would be great to partner up with one of the big banks. Our growth could come from building a relationship with one of them.”
According to Nesta and the University of Cambridge’s UK Alternative Finance Industry Report, an estimated £1.7bn will be lent or invested through alternative finance platforms by the end of the year, up from £0.7bn in 2013. Next year it is expected to hit £4.4bn. Such a growth trajectory, and the growing body of evidence to suggest the UK is nearing a revolution in alternative finance, has swayed Dan to believe that the more competition, the better, in the sector.
Alongside its own lending platform, his company generates significant revenues through its White Label Crowdfunding software division, which enables new players across the globe to enter the crowdfunding market.
“We’ve had interest in that part of the business from all over the world,” says Dan. “We’ve built two platforms in Australia, we’ve just had an order to build one in Vietnam and we’ve also got Norwegian and domestic clients. “The UK is really a beacon for the rest of the world in terms of new finance and there is a real opportunity for the UK to evangelise this industry and show people how it’s done.
“In terms of competition, the industry is growing so fast that there’s room for lots of players. Whilst we operate our own platform, we know there isn’t going to be one dominant company. The banking industry has five big banks but there are still lots of small niche banks operating with different customer bases. It’s the same with any industry. The nature of capitalism thrives when competition keeps you at the forefront of what you do.”
Rebuilding Society is 34-year-old Dan’s second success as an entrepreneur. The first, launched in 2003 out of days studying computer science at Leeds University, is Web Translations. It provides translation services for websites and continues to trade today, with seven staff plus a network of freelancers, an international client base and annual turnover of around £600,000.
“I launched just after the dotcom crash and at the time it was difficult to get things going. But a lot of people were starting to use the web commercially and we were ahead of the curve in a way. I was trying to sell website translation to people before they really had a good ecommerce capability.”
Eventually that business took off and it was several years down the line – when he sought the finance to accelerate its growth – that he found the inspiration for Rebuilding Society.
“I pushed quite hard to grow Web Translations but didn’t really have any assets to put behind it and it was a lack of finance from banks that got me interested in peer-to-peer lending.”
Dan’s software background enabled him to develop the platform himself and “it has progressed really rapidly because I can do a lot of the work. When I see something that needs changing, I can get involved quite actively,” he says. Perhaps being born into a business-focused family – with a bookkeeping mother and software entrepreneur dad – also aided his success. Living in Spain as a child for four years, and a year each in New Zealand and Australia as a young adult, gave him a global perspective that he has applied to business.
Looking back to Rebuilding Society’s breakthrough moments, he cites winning the support of an unnamed “godfather of peer-to-peer lending” as crucial. His well-appointed team of senior staff and influential non-exec backers have also been pivotal in enabling the Yorkshire firm to stand out in the market.
“What’s different about us is that we really try to encourage lenders to be as active in the business they are supporting as possible. When you lend to businesses you obviously have an interest in them and you want them to succeed. But a lot of the other platforms and financial institutions don’t make use of that connection, with no real engagement.
“But with our community it can get quite involved. Questions go back and forward pretty actively and many of the lenders will have advice or contacts that might help.”
Of course, there are risks with peer-to-peer lending and Rebuilding Society is not immune, with three out of the 80+ businesses supported via the site defaulting on their loans. The site uses a strict rating system which businesses must adhere to in order to lessen the risk to investors where possible. The company is also lobbying for changes to the Financial Services Compensation Scheme to cover capital for compensation in the event of a loss.
In the meantime, the firm’s base of investors continues to grow, while the types of businesses supported vary wildly, from sweet retailers and beauty products firms to professional services practices.
Dan believes his and other platforms will play an increasingly important role in supporting entrepreneurial UK. He says: “One of the key things for entrepreneurs is that they should be really motivated. But so many have just shelved their business plans because they think ‘if the banks won’t take a risk, then I can’t take that risk’. We need to motivate people to dust off business plans, revisit their aspirations and really have a go at growing their business.
“The whole de-risking of banks should not mean the de-risking of entrepreneurs.
“A lot of entrepreneurs have lost their motivation, enthusiasm and passion for their business, and three or four years in have ended up serving their business instead of the business serving their life.
“The returns are there to be had and many of the businesses we are supporting are growing. They’ve got the demand and the working capital they need. The economy can really strengthen with hard-working entrepreneurs getting the support that they are due.”
If peer-to-peer lending does continue on its steep growth curve and become a go-to place for entrepreneurs, how might the financial sector look in years to come?
“We certainly won’t have these big traditional ‘too big to fail’ banks. They are just carcasses at the moment, being propped up by the government, while legislation changes continue to make it easier to introduce competition in the sector.”
Such rule changes in the future could include the opening up of crowdfunding platforms to ISA holdings. The Treasury is consulting on the plan which, if introduced, could provide a massive shot in the arm to the industry.
“We’re going to see an uplift in the amount of money coming into the sector,” says Dan.
But even before the change, peer-to-peer business lending is forecast to hit £749m this year and accelerate in the New Year.
He fully intends to capitalise on what is shaping up to be a pivotal 12 months ahead.But first he has snowboarding in Europe and kite surfing in South Africa planned, reminding BQ that “businesses should work for you, not the other way round”. Hopefully the platform he built will help other Yorkshire entrepreneurs find a similarly fruitful work / life balance.