The benefits of peer-to-peer lending
Tom Woolf has thought a lot about funding for small businesses. He founded JustGiving in the Middle East and Africa and has now set up a peer-to-peer lending platform for students to raise money to pay for their education. It’s called EdAid and it launched this year in the UK, with plans to roll it out internationally in 2016, including the UAE, where he has other business interests.
The concept makes perfect sense given Woolf’s background as a social entrepreneur. The cost of higher education means a young person has to think in terms of being a small business that requires investment. EdAid allows individuals and companies to contribute to that brand.
“The methodology isn’t new but it was often a small group of large benefactors rather than a broad base of supporters,” he says.
EdAid is a good example of how peer-to-peer platforms provide many other benefits besides transferring cash from one party to another. Woolf thinks that equity-based crowd funding platforms, such as Crowdcube and FundingCircle, have introduced a broader and deeper pool of direct funding for SMEs, while Kickstarter and Indiegogo help test the validity of an idea in the marketplace.
“If you are able to build a prototype and sell it to an audience, you’re getting proof of concept, raising awareness and building your user base,” he says. And if this early test is unsuccessful then it is a very powerful sign that either your product or your marketing needs a major rethink.
This could save a lot of time and money further down the line. Woolf, like many serial entrepreneurs, doesn’t believe that failure is a weakness. Instead he repeats the mantra, “Fail fast and fail cheap”. Crowdfunding allows you to do this, unlike the traditional alternative of seeking an angel investor who will give you a large sum of money in return for an equity stake and control. And that is before you’ve even established whether the market is interested in what you have to offer.
Peer-to-peer sites also remove third-party obstacles. There are no bank loans or interest payments at EdAid, while Woolf points to GoCardless as having redefined payments. He also mentions Nutmeg, which allows people to choose pension products for a half of a percent fee, removing the need for high commission charges to salespeople. “It’s all about disintermediation,” he says. “These are not charities, they are businesses that use technology to change the way we make payments or choose pensions.”
If you are able to build a prototype and sell it to an audience, then essentially you’re testing audience size, raising awareness and pre-selling your stock
This direct connection can also be a powerful tool for seeking expertise or building relationships. For example, a student is more likely to work for the company that backed him through university (though with EdAid there is no obligation on either side). A business will establish a closer relationship with an audience that has backed its ideas. Indeed, research shows that peer-to-peer lending default rates are less than 0.2 percent, compared with 15 to 20 percent in commercial agreements.
In this region there are still hurdles to overcome. Beehive is one local platform that allows individuals to invest in start-ups. But until the UAE banking system catches up with direct debit payments and an automated centralised banking system, Woolf thinks there will be logistical difficulties for other networks. He is also sceptical of the crowdfunding platforms for the UAE property market. “Some sectors work better than others,” he warns.
He finishes with a piece of advice for any start-up: never ask someone to put in money if you’re unwilling to do the same. “Don’t expect a third-party investor to pay you the salary you got from your previous company and fund your new business. You need to be prepared to make sacrifices.”
He is also adamant that an entrepreneur should build a prototype of their product or service to prove that it works before even seeking funds. “If you have something you can touch, taste and feel, then people will back you,” he says. “There is so much liquidity in this region for ideas, and we are not struggling for investors. What we do lack are ambitious entrepreneurs who are willing to put their money, time and resources where their mouth is.”
- – -
The Venture, launched by Chivas, is a global competition to support social entrepreneurs. Visit theventure.com for more details.