The scale of losses racked up by the front runners in the Altfi sector make eye-watering reading. We learned recently that Funding Circle saw its deficit double to £36m last year which, if nothing else, sends a clear message about what it costs in real terms to achieve a dominant market share in the UK and to expand in the US and Europe. Expensive as it has been, the strategy appears to be paying off; over the same period revenues rose from £13m to £32m, a jump of more than 145%. In its six years of operation, FC has lent over £1.5bn to SMEs and is now ranked third in that particular neck of the lending woods behind established giants Lloyds Bank and RBS.
That’s some achievement by anyone’s standards and bears testimony to the foresight and confidence that FC’s backers had (and presumably still have) in the management team when they pumped another £115m into the project in 2015 to get the job done. Perhaps FC’s CEO and co-founder, Samir Desai, summed it up best when he said: “You’re not going to be able to build on the same scale as those coming out of the US and China unless you have a global perspective – and that takes time and money.”
A similar picture emerges at Ratesetter. Having made a pre-tax profit of £0.5m in the financial year to March 2015, the company announced a week or so ago that it had lost ten times that amount (£4.9m) in 2015-16 as it pursued its own ‘invest in growth’ strategy. But again, the company could show that loans were up by 70% over the year to £581m and have since gone on to reach £640m. The company can also boast more than 36,000 lenders over its platform.
The backers who put another £20m into Ratesetter in March 2015 – including big names like Woodford Investment Management and Artemis – should be applauded for their faith and courage. Their commitment also shatters the illusion that all UK institutions are only interested in the short term and a fast buck.
Perhaps the best example of all is Zopa, widely regarded as the pioneers of P2P lending, which has been going since 2005 – a period that, crucially, includes surviving the financial crisis that engulfed the banking system in 2007/8. Zopa has now lent £1.6bn in consumer loans and the company is still losing money on a large scale.
It raises the whole debate about when losses can be regarded as good losses. Fashions and appetites do change, but it seems the prize of creating an entirely new market – one that can be sustained – is still a sufficient incentive for the backers. The music has to stop sometime, of course, but for now the alternative finance adventure is still very much alive. Who knows, the UK may yet produce the equivalent of a Facebook, Microsoft or Amazon?