Who ya gonna call? GrowthFunders

Who ya gonna call? GrowthFunders

Turbulent times have thrown up different funding platforms and one in County Durham is making an impact, as Peter Jackson reports

An investment revolution is underway with new players breaking new ground in a changing landscape.

A number of factors have come together to create a perfect storm in funding and investment.

The Lehman Brothers collapse in 2008 and the subsequent banking crisis and credit crunch meant that traditional sources of finance dried up for businesses seeking funding. Then, in the wake of the crisis, low interest rates meant punishingly low yields on many established investment vehicles.

Just as businesses were seeking new sources of funding and investors were looking for alternative means of investment, in 2012, the Retail Distribution Review, RDR, made it uneconomic for IFAs to advise small investors.

All this has been coupled with an accelerating digital revolution which has made easier a coming together of the business seeking funding and the investor, without the intermediaries, mystique and expense which might have got in the way in the past.

It is against this background that we have seen the rise of crowdfunding and co-investment funding. Among the new players in this emerging market is the County Durham based GrowthFunders, the online investment brand of Growth Capital Ventures, an FCA regulated company, launched in early 2015.

Chief operating officer Craig Peterson explains: “The online investment platform was launched for two reasons: firstly to help entrepreneurs and people developing projects to raise capital to deliver growth and impact in terms of job creation and wider social value.

“On the flip side it was also developed to allow investors – retail investors and professional investors like business angels or venture capital funds – to co-invest to support the delivery and growth of those businesses and projects.’’

Growth Capital Ventures grew out of specialist regeneration consultancy Carlton and Co as an investment company and the online platform GrowthFunders was set up to widen participation.

So far, Carlton and Co and Growth Capital Ventures online and offline has helped raise around £20m and, of this, in the 12 months of its existence, GrowthFunders has been responsible for some £700,000.

“There are some sizeable deals in the pipeline which will take that up significantly,’’ says Peterson.

Funds have been raised for sectors including housing, software, finance, energy and property and sums raised range from £20,000 to £250,000 and now Growth Funders has some 15 people working for it, of whom six are directly employed at its Aycliffe Business Park base.

One of its most notable successes has been Hive.HR, which was spun out of Stockton-based Visualsoft last December, as a Cloud-based application to allow businesses to understand, measure and improve employee engagement through the use of a weekly anonymous feedback system.

The investment target was £150,000 but, through Growth Funders, £297,900 was raised from two professional investors and 37 online investors.

This is a good illustration of the way Growth Funders works.

Peterson says: “Visualsoft came to us with their business, Hive HR. We sat down with them and we looked at what the business was and asked them to take us through the business plan and business model.

“We wanted to assess: what’s the growth potential and what’s the potential for positive impact? If it ticks those two boxes then what we do is start to work with that company to develop their investment pitch, to take it online. With Hive we worked closely with the founder John Ryder to develop the investment memorandum, the investment business plan and financial forecasts. That was done by Carlton in association with John Ryder.

“Then we check it all through for accuracy, fairness and transparency. Anything that’s going onto a platform like ours, because of the FCA authorisations, we have to check out thoroughly, and only when we are happy with everything the investment can go on the platform. So you have a video pitch, downloadable business plans, financials, the whole lot, which allows investors to go onto our platform and assess the investment and make an informed investment decision.’’

The platform gives the investor exposure to new asset classes and allows them potentially to earn greater returns than would be available elsewhere.

Growth Funders operates a nominee structure so that a nominee company holds the shares on behalf of the shareholders to avoid a company having the difficulty of managing a large and cumbersome shareholders’ register. This also makes future funding rounds easier.

But is the shareholder’s investment safe in this nominee structure?

“Yes, because it’s a separate legal entity,’’ says Peterson. “No matter what happens, their shareholding is essentially safe within that nominee structure and they have full investor protection.’’

Once an investor has registered on the Growth Funders’ website they are regularly notified of any forthcoming investment opportunities.

Growth Funders’ next development will be to add secured bonds to its equity investments. These will allow lending to established businesses and asset backed projects with the loans secured on assets, giving a regular and predictable income return rather than the prospect of a capital gain. The bonds will be secured against commercial or residential property, sectors in which Carlton has long operated. Peterson predicts a likely annual return of between 6% and 10%.

“We have been asked by investors to bring forward more deals like that and that’s something we’ve got in the pipeline,’’ he adds.

Co-investment and crowd funding are currently proving popular for reasons already outlined, but is that popularity contingent on present circumstances and low rates of return from conventional investment routes? Will it prove a short-lived phenomenon?

“The alternative finance sector is growing at such a substantial rate and it has been enabled by technology and people’s different approach to investing,’’ says Peterson. “In our view it’s here to stay.

“Crowd funding is starting to come of age and our platform is very much a co-investment platform and it’s there to facilitate co-investment between more investors, professional investors and venture capitalists and bring them together under one banner. What that means is that they can direct access to investment opportunities that might be outside of their reach. It provides a real opportunity to raise finance directly from those investors.

“It’s that general marketplace model like eBay and it works very well.’’

There is an ethical dimension to Growth Funders’ investments.

The website says: “We proactively engage with management teams on social and environmental issues, not just to mitigate risks but to identify impact investment opportunities that can create additional value and drive investment growth.’’

In the case of Newcastle-based Hive HR the issue was employee engagement. Visualsoft recognised the importance of retaining high quality staff and therefore of employee engagement, which is how Hive.HR was developed. It saw then that the platform was scalable and could be commercialised.

Hive.HR founder and managing director John Ryder says: “Employee disengagement is such a problem in the UK – a third of the workforce is disengaged. There’s a growing body of demonstrable evidence that all points to the fact that companies that are able to engage their workforces more effectively are more profitable. Companies with strong engagement score a total return to shareholders of 64%, compared with just 21% for companies with low levels of engagement. Engagement reduces absenteeism and sickness and increases innovation.

“Your employees are one of your most important assets within the business. Hive gives you the opportunity to understand and measure engagement levels within your workforce and it does so in a common-sense agile way.’’

Hive HR believed the problem of disengagement was so widespread and would be so widely recognised that GrowthFunders would be a particularly appropriate way of raising funding.

“We felt that we would be able to raise funding and be able to help create evangelists though the different people who got involved through GrowthFunders,’’ says Ryder. “We’ve got 39 investors and I consider each one of those investors as having the capability of being a route to market for us. They can evangelise and talk about Hive HR to their contacts.’’

Raising funds can be a traumatic and arduous process. How was it with GrowthFunders?

“I’m not sure raising funds is ever going to be easy,’’ says Ryder. “But the support and input and the connections that GrowthFunders have made have been massively critical to the whole process. The help they gave to get us investor ready was fantastic.’’