At Which4U, we’ve had an interesting inside-view of the complexities of crowdfunding over the last 12 months. We’ve seen models that have been successful and some that have fallen away.
But there’s still a considerable funding gap for businesses – more than the government can expect to cover alone. And while the Funding for Lending Scheme has improved the availability and affordability of residential mortgages, it has failed to tempt banks into higher-risk lending to new and small businesses.
This is where initiatives such as FundTheGap come in. FundTheGap is a newly-launched equity fundraising platform for UK start-ups and small businesses that enables entrepreneurs to raise up to £2 million in capital while allowing qualified investors to support businesses and potentially benefit from tax reliefs.
Companies are charged a fee to feature on the platform. The benefits of this include an assessment of the business plan, a screening process, and a pledge of investment from FundTheGap itself. FundTheGap insists on meeting the management teams behind each company face-to-face if they are to be accepted. For investors, the platform is free of charge.
Which4U put 10 questions to the company’s CEO, Derek Uittenbroek.
1. What is the company’s main goal?
Our goal is to ensure that every great business has access to funding. Small businesses are the life-blood of our economy and account for the majority of both employment and GDP. People are more willing than ever to support small businesses, and we’re excited about providing businesses with a new, professional fundraising channel.
2. What is the most important thing you look for an in entrepreneurial investment opportunity?
Small businesses are always about people. When an investor invests in a small business, he or she is actually investing in a number of people, and their ability to execute. This is always number one on our agenda – we look for a strong management team with a clear track record. We also consider how much they have personally invested into the business – in cash or “sweat equity” – and how much they have put “at risk”, to ensure that their interests are fully aligned with investors. There is no point having a strong management team if they are only spending a few hours a week on the business!
Businesses also need a strong value proposition and a clear revenue model. Too often entrepreneurs have a great idea for a product or service, but with no clear strategy to monetise it. How will investors get a return if there is no strategy in place to monetise the product?
Equally as important is the valuation, which can quite often be a sticking point. No entrepreneur wants to give away too much of their company. Equally, it is better to have 50% of something than 100% of nothing. Valuations should be fair, justifiable and a reflection of the risk in the business. If an investor invests at an inflated valuation, then it will be harder for them to get a return on their investment – and naturally they will be less dedicated to making the business a success or helping the entrepreneur.
3. It’s encouraging that FundTheGap invests alongside potential investors. Are there any set parameters by which you calculate your own investment level?
We are relatively flexible about how much we invest in each business, and don’t use any specific parameters at the moment. For now, we have committed just over £20k to the businesses on the platform, with the smallest investment being £1,500. We will increase this over time as we welcome new businesses onto the platform.
Investing in the businesses is a key part of what we do. It makes our due diligence process easy, as we treat each investment as if it were our own, and it makes sure that our long-term interests are aligned with the company, and its investors.
Investors should always do their own due diligence though and not construe our investments as advice or an endorsement!
4. Existing schemes for SMEs include the Regional Growth Fund. Do you see FundTheGap as operating in competition with these schemes or alongside them?
We very much see FundTheGap as a complementary fundraising channel. Ultimately we all share the same goal – getting smaller businesses funded. I think initiatives like the Regional Growth Fund, StartUp Loans, and the Angel Co-Fund are excellent and they play a huge role in educating the public about the importance of smaller businesses, and more specifically, funding.
Last year a government-led taskforce found that small businesses in Britain will face a funding gap of up to £191 billion over the next four years. Banks, government and private sector initiatives all need to work together to provide smaller businesses with the funding they require, through a healthier, more balanced and more competitive mix of channels!
Historically, I think there has been over-reliance on bank funding, which is likely to remain subdued for some time to come, so there is huge opportunity for alternative funding platforms like FundTheGap to step in and “positively disrupt” this space.
5. What is the FSA’s approach to this type of operation? How scrupulous is your license to operate?
Interestingly enough, the FSA recently acknowledged the arrival of the alternative funding space, and it has been suggested that the incoming FCA will oversee the peer to peer lending platforms currently operating in the UK, which is great news.
What we are witnessing here is the natural evolution of business funding. Provided the various platforms operate within the rules and regulations, there is no reason why their approach should be any different to that of a City firm.
Regulation and compliance is actually something that we take seriously. We have invested a lot of time and money to put together a structure that we believe is compliant with the rules and regulations. For example, funds are always kept in a segregated client money account, and we undertake similar checks on businesses and investors that a City firm would. Our extensive experience means we are quite used to operating in a regulated environment.Investing in start-ups and small businesses is inherently high risk, and we make this unashamedly clear. If an investor is unsure, it is best that they seek professional advice from a financial adviser or tax specialist.
6. The site lists itself as a no-advice operation. Does it completely abstain from all protection or guidance for investors?
The focus of FundTheGap is on the businesses and for that reason, we do not provide investors with any advice or guidance as to how to invest or what to invest in. In fact, we always encourage investors to seek professional advice if they are unsure of the risks, or are not comfortable in making their own investment decisions.
7. How does FundTheGap differ from other crowdsourcing operations currently running in the UK?
Our management team has over 50 years’ experience in raising funds for smaller businesses, having raised over £500m during that period, so we bring a professional edge to the online funding market.
As you know, we invest in every single business we accept onto the platform, and as small businesses are all about people, we always meet the management teams behind the companies – usually two to three times – until we are comfortable to move forward.
8. Some organisations have attempted to raise funding for projects through retail deposits – some successfully and others unsuccessfully. Given the drastic collapse in savings accounts due to the Funding for Lending Scheme, might this ever become an option for FundTheGap if the FSA approved?
At the moment we are focused on raising equity investment for smaller companies – that is to say, investors get shares in the company in return for their investment. In fact, we believe the companies hit hardest by the funding gap are those looking for between £50k to £2m in investment. Later stage or more established businesses tend to have better access to equity funding through venture capital firms or other channels.
As investing in small businesses is high risk, it is difficult to compare it to retail deposits, and at the moment we have no intention of entering into this space. Investing in smaller businesses is about more than just financial returns – it can be fun and quite satisfying, especially for investors who like to become involved with or become ambassadors for the business.
We are really excited about the alternative funding market and curious to see how it will develop over time!
9. Given the recent controversies surrounding tax, how does the company intend to paint a positive picture of the tax reliefs available through the investment opportunities?
The two main tax incentives that are available through FundTheGap are the Enterprise Investment Scheme (EIS) and its little sister, the Seed Enterprise Investment Scheme (SEIS) – which, depending on an individual’s circumstances, means investors may get back up to £780 per £1000 invested from the government!
Both schemes were setup by the government to encourage private investment into high risk smaller businesses. In fact, the schemes are administered by HMRC – so it does not get closer to government than that!
The biggest issue with the schemes is lack of awareness about them. Sometimes people have the misconception that such schemes are only available to wealthy investors or those with tax advisers, when in fact, the schemes are available to almost anyone investing in EIS or SEIS qualifying companies.
We are a proud member of the Enterprise Investment Scheme Association (EISA), who play a huge role in increasing awareness of the schemes and lobbying for their improvement. Over time, we will look to paint a positive picture of the schemes by generating more awareness and providing useful guidance to users of the platform – watch this space!
10. How would you describe Fund the Gap in one sentence?
We thank Mr Uittenbroek for the interview.