As Bill Dobbie sat surfing the web one night, he came across an idea that would eventually turn into his next business venture. “I was on the internet and I saw high interest rates available via Zopa, and I thought ‘What the hell’s that?’” explains Dobbie, a serial entrepreneur who founded a series of technology businesses from Iomart and Teledata through to Cupid and Maximiser.
“I looked at it and experimented with it and put money on there. Then about a year or so later I came across another one, Funding Circle. Zopa was people offering loans to other people, while Funding Circle was people offering loans to small businesses.”
Dobbie had stumbled into the weird and wonderful world of “crowd funding”, where individuals or companies turn to the internet to raise the finance they need to start their business, expand overseas or build an extension to their house.
Crowd funding can take several different forms, from equity crowd funding, under which individuals follow the tried and tested model of buying shares in a business to fund its growth, through to rewards-based schemes, in which investors receive discounts, merchandise or even free beer in return for their cash.
The form that caught Dobbie’s eye was ‘crowd lending’, a form of peer-to-peer lending through which investors lend cash to companies and then receive interest as their capital is paid back over an agreed period. Dobbie could smell a business opportunity and teamed up with an experienced financier to make it happen.
Enter Stuart Lunn. The pair had met in April 2009 when Dobbie and his then business partner, Max Polyokov, were exploring options for floating Edinburgh-based dating website operator Cupid on the Alternative Investment Market (AIM) while Lunn was working for Cenkos Securities. Fast-forward to June 2010 and Cupid made its initial public offering (IPO), with Lunn leading negotiations with fund managers that brought in £8m of Cupid’s £15m total.
Lunn had set up Cenkos’ team in Edinburgh and later left to become a consultant, advising technology companies including Code Play. He and Dobbie had kept in touch, sharing coffee and lunches, and they began to discuss how they could work together.
“It’s a bit of a cliché that all equity analysts want to run their own businesses – but I guess for me it was true,” laughs Lunn. After Lunn had set about researching the opportunities in the peer-to-peer lending market, by January 2014 the pair were ready to push the button on their idea and LendingCrowd was born.
By that stage, Dobbie had stood down as chief executive of Cupid, which had been dogged by allegations that it had sent messages to its customers from fake dating accounts, despite
an inquiry by accountancy firm KPMG clearing the firm of any wrongdoing. Cupid has since sold its dating websites – many of them to Polyokov, who had already left the company – and turned itself into a cash shell called Castle Street Investments, which is developing its investment strategy.
Based at Dobbie’s offices in Edinburgh, LendingCrowd provides an online platform through which individuals can lend money to small businesses in return for interest payments of between about 6% and 12% per cent, depending on the level of risk involved.
Each of the business applying for a loan is assessed by LendingCrowd’s credit team, the members of which have more than 100 years of combined experience in the banking industry. The team is led by Ian Cunningham, who spent 40 years at Royal Bank of Scotland, latterly as its head of corporate and commercial lending in Scotland and a member of its global credit committee.
“Ian will be the first one to hold his hand up and say that some of the credit decisions that RBS made in the run-up to the financial crisis turned out to be wrong,” says Lunn. “But Ian was in charge of the Scottish loan book, which differed from the English loan book and wasn’t so heavily invested in commercial property or sectors like football clubs. It has all added to his experience of the ebbs and the flows in the economy.”
Since it began organising loans in October 2014, 26 companies have borrowed just under £1.5m from LendingCrowd’s users, with loans ranging from £10,000 up to £100,000. Repayment terms vary from six months through to five years, with a breadth of companies using the service, from those that turn over £150,000 a year through to larger businesses with revenues of £7m.
As well as varying in size, the borrowers also vary across a broad range of economic sectors, from IT repair business Sort My PC through to Fine Coffee Club, the coffee machine capsule maker founded by Andrew Veitch and Diet Chef boss Kevin Dorren. Around 900 investors have made £1.5m of funds available on the website.
While some borrowers will have been turned down for loans from the traditional high street banks, Lunn also points to a new generation of entrepreneurs who have founded their businesses following the 2008 financial crisis and who have never had a relationship with a bank. Or, as Lunn puts it: “They buy their groceries online, they book their holidays online, so why shouldn’t they go looking for lending for their business online too?”
As well as helping other companies to grow, Dobbie and Lunn also have their sights set on strengthening their own firm. LendingCrowd already has 11 staff and about seven contractors, with the firm gearing up for further growth. “We’re a small business too, so we understand what our customers are going through,” says Lunn.
The company is already in talks with potential investors, which could buy both an equity stake in the business and also put money onto its platform to lend to small businesses. Investing in the business and increasing the amount available to lend to borrowers could become a virtuous circle, satisfying more customers and also increasing the value of the firm.
LendingCrowd is also looking to attract wholesale funding – although Dobbie and Lunn will have to set up a separate vehicle to put money onto their platform. When it starts being regulated by the Financial Conduct Authority, LendingCrowd won’t be able to become a balance sheet lender itself, but Lunn is prepared to come up with clever ways of bringing in further cash.
That investment couldn’t come at a better time as the growth opportunities for LendingCrowd are mounting. As part of his summer Budget in July, Chancellor George Osborne unveiled the innovative finance individual savings account (ISA), a third type of ISA that will allow savers to spread money across a new range of investments, including peer-to-peer lending. While the rules are still to be fully announced, the ISA is due to be introduced in April 2016.
“This will be a game-changer for the crowd lending market,” explains Lunn. “At the moment, only around 200,000 people have lent money across all the crowd lending platforms. In comparison, there were 13.5 million ISAs used last year. If only a fraction of that number of people opened the new innovative finance ISA then it would make a huge difference.”
One of the ways in which Lunn and Dobbie could target this new market is by creating a product that independent financial advisors or wealth managers can offer to their clients. Customers could pick the return they want on their investment and select the level of risk that they’re prepared to stomach and then the company’s technology could match them up to a suite of appropriate borrowers.
“It wouldn’t be a fund in the traditional sense, but it would give lenders the chance to invest money without having to assess each individual company themselves if they don’t want to,” explains Lunn. While the changes being introduced by the Chancellor could clearly boost business for LendingCrowd, Dobbie is concerned about the burden of regulation facing the financial services sector.
“Clearly finance is an area dear to most people’s hearts but we should remember that the regulator is there to protect consumers and to encourage competition,” thunders Dobbie as he gets into his stride.
“I absolutely understand the overall benefits for the consumer of a regulated marketplace, but I think some of the professionals in the marketplace put the cart before the horse and talk too much about regulation before they talk about the consumers and what they can do for them. That’s going to be a hobbyhorse for me at LendingCrowd for as long as I’m involved with the business – consumers and customers must come first.”