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How FinTech will be used as a force for good in the future

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Financial Technology (FinTech) is an exciting area to be in at the moment. Recent technology has opened up almost unlimited possibilities and disruptive businesses are using technology to undermine established global players.

Even before the 2008 financial crash, many people had begun to realise that the financial system was profiting only a small group, as private citizens were burdened with bailing out major global banks.

Deeply entrenched services, practices, and products at traditional financial firms weren’t evolving for their customers’ needs. They were also maintaining old banking practices, for example the transfer of funds should take seconds, yet still takes days. So new platforms popped up to offer brand new services such as TransferWise and Monzo.  Just look at how Monzo has managed to disrupt the banking sector with its app-based current account, in the process becoming the fastest growing bank in history!

But success stories like Monzo aren’t based on one technology alone ‒ it’s the combination of technology layers that allow for disruptive new approaches to finance.

Let’s take a look at the innovations coming through and how they will combine to turn FinTech into a force for good…

1. Distributed ledgers

Blockchain is the most widely used and well-known distributed ledger. Essentially, Blockchain is a public ledger of transactions. When a transaction occurs, it is added to the Blockchain. Other technologies can then reference the transaction, call up transaction history, and use the data in other novel ways. The fallacy here in this false messiah, is that it would require a limitless amount of energy to scale this globally.

The important thing to know about Blockchain is that it is public and cannot be edited, making it reliable and transparent.  While the technology and purpose are sound, the scalability issue needs to be resolved.

Consider how the Blockchain could be used to ensure sustainable and ethical purchases. A resource, such as a tree or mineral, is added to a Blockchain including reference information about where it came from, who the supplier was, the original costs, etc. Whoever then buys the raw material can check its history to ensure it came from an ethical source and that the works received a fair income.

This process then continues throughout the supply chain to the consumer.

Most people want to buy ethical and sustainable products but, currently, it’s impossible to know the full supply-chain history. Distributed ledgers will be used to provide the complete history of a product, right back to the raw materials, embedding economic justice into every product. This will allow consumers to make informed purchasing decisions which will, in turn, drive improvements to the ethics and sustainability of supply chains.

Until we fix the problem around the inequitable exploitation of workers in developing countries, we will continue to unconsciously dine on the suffering people in developing nations to fuel our economies.  A great example of this is the fuel that runs our cars, how do you know that this fuel was not harvested from conflict countries where the local people have been robbed of their resources?  Would you consent to this?  Are you aware of this?  As consumers people do not want to be complicit in the death and destruction of other communities, that is why transparency is so important and as our director of communications Kevin Jackson says, there is a tsunami of transparency coming to all brands.

Brands need to be on the right side of history.

Take our current forestry project in Costa Rica. We want to ensure the protection of the local environment and help develop the local economy.  By feeding the development through a regulated financial exchange which improves on the scalability of the Blockchain’s technology, we can ensure that developers are fulfilling their promises to provide sustainable wood while reinvesting into the community. The same approach could be applied to almost any product.

Imagine being able to find out exactly where your coffee was grown, how the farmers were treated, whether they were paid a fair price, and how the coffee has been processed along the way, that would provide a sense of meaning and fulfilment as you drink your morning cuppa.  You could ensure that every sip was ethical and cruelty-free.  That’s exactly what a number of key technologies are already doing – and we want to scale this to many other products.

2. Decentralised Exchanges

In the Western world, financial services make up a sizeable chunk of the economy. In the UK, the financial sector contributes 6.5% of total GDP

The reason the financial sector is so large is that it has become involved in almost every aspect of finance, from personal loans to government debt, home insurance to credit default swaps (CDOs), and, importantly, business loans. What’s more, while usually only acting as an intermediary for these services, financial firms earn a commission on everything they touch.

Essentially, financial services firms are expensive middlemen who have worked their way into almost every aspect of society.

Decentralised exchanges don’t rely on middlemen. As the name suggests, the exchange itself is not centralised in any particular location or around any particular company. Some even use alternative currencies like Bitcoin and Ethereum to facilitate exchanges. As such, they remove the power and profitability from a small group of financiers and put it into the hands of the customers.

In the future, decentralised exchanges will play an important role in the democratisation of money and finance. People will be able to choose where to put their money, towards what initiative or cause, and move their money around at will without the complex and expensive middlemen. Platforms such as GSI Exchange and Binkabi.io are already offering a solution for issuing, trading and financing commodities on the blockchain, creating the potential to trade anything on a decentralised exchange.

3. Smart Contracts

Smart contracts use the Blockchain and decentralised exchanges to enact specific terms automatically, using technology. A simple smart contract used for a token purchase, for example, could state that when the sale is closed that x-amount of tokens will be transferred to the purchaser in exchange for x-number of Ethereum. The investor essentially buys the contract which is then executed automatically when the sale is closed.  While this is a fairly simple example, there are almost infinite ways smart contracts could be applied. The technology is also developing at a rapid pace, allowing smart contracts to be applied in more cases than ever.

Again, smart contracts will cut out the expensive middlemen, allowing for direct and secure agreements between two parties without the need for financial advisors and lawyers. This will make it cheaper and easier for businesses to create deals and provide an additional level of security.

Small businesses will be able to float stock options without the need for a centralised stock exchange, freelancers and sole traders can ensure they are paid on delivery of the work, and charities can automate large chunks of their financial admin…just for example.

Applied to things like economic development, smart contracts could be developed to help build investor trust around assets that are owned by the indigenous people of a developing region. A smart contract could, for example, ensure funds are automatically distributed from escrow simultaneously into stakeholders’ accounts when the product has made it through the supply chain and all ethical standards have been met, all without having to pay expensive lawyers and financial middlemen.

Smart contracts, if constructed in the right way, can provide this level of transparency, efficiency and trust in all transactions, levelling the playing field for countries that have been left behind by investors.

4. Crowdfunding

Crowdfunding platforms have been around for almost 10 years now and have developed from simple reward-based platforms like Kickstarter into sophisticated equity investment platforms like Crowdcube, which attracts millions in capital.

One of the main allures of crowdfunding is that entrepreneurs can connect with potential customers to raise finance without risking losing a controlling stake or having an angel investor meddling in their business idea. Additionally, individuals can easily and cheaply own stakes in a number of companies they want to support, without all the complexities and costs of the stock market.

Essentially, crowdfunding allows anyone to become an investor rather than reserving that right exclusively for a capitalist class. This puts even more power into the hands of customers to drive innovation ‒ instead of being led by market forces and submitting profit to already wealthy individuals, customers can use their money to direct the market by helping businesses get started while enjoying a share of the profit.

In the future, Blueprints will be launching a joint-venture for decentralised exchange that will integrate all these technologies.  Enabling a crowdfunding platform for development projects with an equitable share to the locals.  Allowing individuals to support development projects around the world, where people can participate with money, time, or resources to advance the project, tracking its progress as it develops. This will allow them to make scalable investment returns while generating a positive social impact, which due to changing consumer demands will be absolutely correlated in the future.  More and more, people are demanding that the products they consume are based on the values they want to live by.

As we can see, FinTech is redistributing financial power away from big, centralised businesses into the hands of individuals.  Until we democratise finance we cannot claim to live in a true democracy.

Making finance democratic is a key step in our growth ‒ your money is a vote for the kind of future you want to see.  

ABOUT THE AUTHOR

David Solomon is co-founder and CEO of Blueprints ‒ a FinTech company aiming to make international development fair and sustainable. David worked on Fixed Income Business Management at Citigroup and Salomon Brothers Investment Bank for five years before leaving to pursue his interests in social enterprise.

David was a pioneer of the Nation Building Initiative, a new blueprint for Impact Investment, as well as co-founder of the Financial Times Global Impact Summit. He has attended the World Economic Forum as a participant from 2013-19 and is an advisor to Heads of State, Kings, UHNWs, Leaders, Generals and CEOs on strategy.

Web: https://blueprints.org

Crowdcube: https://www.crowdcube.com/companies/blueprints/pitches/qY9Goq#

Instagram: https://www.instagram.com/solomonk77/

LinkedIn: https://www.linkedin.com/in/solomon77/

References:
1
https://www.brookings.edu/opinions/stop-worrying-the-finance-sector-isnt-destroying-the-economy/
2 https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN0619

How to raise funds during Brexit uncertainty

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The kind of Brexit we will get is still unknown. Whatever we get some predict we will face a recession. If so, what will this mean for business owners and the investment community?  Is now a good time to raise funds to scale up your business?

It is possible to raise funds during an economic downturn. We’ve been helping businesses raise finance since 2004. I remember sitting with an entrepreneur who needed a cash injection in the last recession, advising him to wait. Our investors had gone quiet; the market was quiet. But two months later, I ate my words. After the initial shock, angel investors recovered and while investment was harder and slower to come by, it was still there.

Tips for fundraising in 2019

Although start-ups should not put the brakes on any fundraising plans, we do advise a different approach to raising equity finance during times of uncertainty;

Exercise patience

Savvy entrepreneurs know that seeking equity investment is a lengthy process. It is a marathon in good time and a full iron man in an economic downturn.  Technology has enabled scaleups to have far more control over their fundraising activities; one way is to keep their funding rounds open for as long as they need to.  With a climate of greater caution, this is the best way to find the optimum start-up/investor ‘fit’.  There are others benefits too; a longer round allows a company to capitalise on any unforeseen successes, such as publicity, a new contract or simply some attractive ‘buzz’.

Look to a variety of investment sources

With banks, angels and crowd investors all being more cautious it is more important than ever to be prepared to woo investment from a variety of sources. According to Alec Lynch – CEO of DesignCrowd.com, a crowdsourcing start-up founded at the height of the last recession, ‘when the economy falters, angel investors in particular, look to move their money out of the stock market and may be willing to fund you if your prospects are promising’. To be effective, entrepreneurs must make sure they have all their documentation ready and adapted for each audience. Keep in mind that what is important to your business network in making an investment decision, may not be the same thing for angel investors. Having a fundraising platform that allows you to restrict document views on an individual basis, is really useful for ensuring you get the right message to the right potential investors.

Keep focused on investor relations

Happy investors make repeat investors. Despite this, many businesses revert to business as usual after a raise and tend to forget about shareholders once the money is in the bank.  It is crucial that businesses communicate honestly and regularly with their investors.  Whether it’s through an investor relations portal on a digital platform or having a dedicated staff member to keep them happy, it’s a vital factor in any start-up’s road to success. 

Be sure to provide your shareholders with regular updates on business performance, good or bad: they can celebrate the good and guide you through any trouble spots.  By keeping your current shareholders happy, you are potentially saving yourself a lot of hard work when it is time to raise funds again. 

Develop your international strategy

International is key and should be looked at strategically from two perspectives: How can international expansion benefit my business? And how will attracting international investment help my business to scale? 

Having a presence in multiple markets allows you to spread risk; should sales slump domestically, sales in foreign markets unaffected by Brexit can bolster revenues. Keep in mind that international expansion is a long-term project and often requires significant capital, so those businesses who currently have no international operations may want to look to form strategic partnerships in the first instance. 

Investment from abroad is the second point to consider when looking at internationalisation. With more caution potentially coming from local investors, international represents a large and important opportunity. China is the perfect, Brexit-proof, example.   Mark Hedley, Director of the China-Britain Business Council says ‘You simply cannot afford not to look at China. There is a huge consumer demand for innovative UK tech and this has created a vibrant opportunity.’   Chinese provincial governments even have a mandate to attract high end technology companies for mutual gain; this has led to the creation of funds and incentives, such as dedicated tech parks, subsidised rent schemes and incubation/acceleration programmes.

Be realistic with your valuation

Downturns affect the public stock markets first.  And where the public goes, the private follows.  Therefore, it is crucial to have a realistic valuation. Modwenna Rees-Mogg, Editor of The Angel News, explains. ‘Businesses looking for money have to be reasonable about their valuation. Investors are looking for a company that has cashflow and an interesting structure – borrowing money that converts into shares protects the downside from a lower valuation’.  

‘Companies decide what expectations to signal, and signalling has a significant effect on how new investors structure offers’, continues Todd Hicks, writing for Forbes.  ‘I have seen investors walk away because the signalled expectations were too far from the price and terms they were prepared to offer. On the other hand, a company that signals confidence and an expectation that is slightly aggressive – but basically realistic – can lead a new investor to make a better first offer. It’s vital to get at least one offer and very important to get more than one. This is the strongest reason to keep expectations reasonable at the start’. 

Ultimately, the message is: don’t pick a valuation out of thin air, get advice from an expert – such as a professional investment analyst – and listen.  They know what they’re talking about.

Getting ready

There’s no real evidence that deal flow or angel appetite is reducing. ‘The hope is that Brexit creates an opportunity for SMEs, as they can be nimble and manoeuvre quicker than bigger companies which may give them an advantage’, says Mark Brownridge, DG of the EIS Association.

Yes, times are uncertain. However, the data suggests that the fundraising landscape is as healthy as ever.  Our portfolio companies are still very attractive to our network of sophisticated investors.  If your business is ready to scale it is a good time to look for investors and weather whatever Brexit brings.

ABOUT THE AUTHOR 

Scott Haughton is COO of Envestors, a fintech company that connects investors and scale-up companies.  With its fundraising platform Envestry for Scale-ups, companies get a personalised site to promote deals, raise finance and engage with their investors 24 hours a day, 365 days a year. 

Envestry has raised £100m+ for over 200 companies through its own private investor network. 

Founded in 2004, Envestors is regulated by the FCA and has offices in the UK, the Channel Islands, the UAE and strategic partners across China.

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon

Facebook: https://www.facebook.com/pg/envestorslondon/posts/

Data sources for this article: Pitchbook, London & Partners, Beauhurst   

Business loans for business expansion

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Businesses rarely stand still. They expand – or they may be likely to go under. On the premise of your preferring the former, therefore, what role might business loans play in your plans for expansion in 2019?

Expanding your business

Expanding your business means capturing new markets and increasing the sales of your company’s goods and services.

There are innumerable ways in which you might try to do that – from launching new product lines, conducting the associated marketing campaigns, taking on more staff, re-fitting and re-equipping your premises, or installing new plant and equipment.

The possibilities certainly don’t end there. The website Shout Out UK, for instance, on the 21st of December 2018 listed 15 ways in which you might expand and improve your business in the year ahead.

Despite the myriad ways in which you might grow your business, however, if one thing is for sure, it is that it is likely to require the injection of fresh capital.

Business loans

That is when the typical business is likely to consider borrowing the necessary funds.

In the past, the most obvious – and, in many instances, only – place to turn might have been the local high street bank. You probably needed to support your application for a suitable loan with a detailed business plan and cashflow analysis to present in a face to face meeting with the bank manager. There followed a delay – which might last a matter of weeks – before your application was considered and an answer given.

Although banks still perform such a role, they have become increasingly wary of doing so. Fortunately, therefore, others have stepped into the breach of providing business loans with considerably less fuss and bother – with the process frequently conducted entirely online and significantly faster.

Online business loans

Online business loans are typically available for sums up to £100,000 – enough to finance even some of the most ambitious company expansion projects. Indeed, many expansion plans are kickstarted with loans of around £50,000 or less.

The loans are short-term and typically repayable within 12 months – so, avoiding the accumulation of significant amounts of interest that you may face with a longer-term period of borrowing.

Often with a fixed rate of interest and equal monthly instalments, your total cost of credit is known from the very start, so that you may plan the necessary expenditure whilst maintaining full control over your company’s cashflow.

Perhaps the biggest advantage with these types of online business loans is the sheer speed with which they may be arranged – in some cases a decision in principle on the amount you wish to borrow and its repayment terms may be given practically immediately.

The formal application which follows is also streamlined and requires none of the detailed documentary support likely to be required by any bank. Instead, a series of questions helps to establish the affordability of the loan and your company’s ability to repay, so that, if the application is approved, in some cases the requested funds are transferred electronically, directly to your bank account within the next 48 hours or so.

Finding working capital

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Sufficient working capital is essential to any business. It is defined by the simple equation of current assets (including debtors) minus creditors, explains the website informi.

The answer indicates the overall financial health of the business in terms of its ability to meet its short-term debts and liabilities – which it must be able to do to continue trading.

Working capital is closely related to another critical indicator of business performance, namely cashflow. Cashflow is literally just that: the net amount of cash held by the business after the deduction of cash paid out from cash received from trading activities.

Although the amount of working capital that is required varies from one company to another, depending on its trading profile, there are likely to be times when working capital or cashflow are under sufficient pressure that additional external funding is necessary in the shape of business finance.

Business finance

That business finance may come from a number of possible sources – including a business finance loan. The Institute of Chartered Accounts in England and Wales (ICAEW) and the British Business Bank have jointly authored a comprehensive guide to all these sources in their Business Finance Guide.

It may be worth reviewing some of the most commonly used sources for major or relatively modest boosts to your working capital:

Business angels

  • in its detailed report for 2018, the UK Business Angels Association (UKBAA) claimed a membership of some 15,000 business angels at work in the UK;
  • these are wealthy individuals – you might have seen some of them on the popular TV show the Dragon’s Den – prepared to invest funds in a business in return for a share in its equity;
  • since you offer a share in the equity of your business, of course, you may also expect the investor to claim a share in the decision-making too;

Equity release

  • a further way for a company to raise business finance in its own right is through equity release on any commercial property it owns;
  • equity release – effectively remortgaging the property – is commonly used by home owners as a way of releasing capital in their home but may be an equally appropriate way for any business to make the most of its property assets.

Cashflow finance

Although angel investment or equity release may offer ways of raising the business finance necessary for major projects such as the acquisition of other enterprises or the expansion of your business, there are also times when it may be needed to resolve immediate or ongoing cashflow problems.

Factoring

  • factoring offers a way of making the most of another of your assets – invoices receivable from your customers;
  • invoices receivable may be sold to a factor, who pays an upfront value (typically around 85% of their value) and the balance – after deduction of the factor’s commission – once the debts have been recovered;

Invoice discounting

  • this is similar to factoring, but invoice discounting leaves you responsible for the actual collection of invoices receivable, whilst receiving an upfront credit on their value;

Trade insurance

  • trade insurance effectively maximises the value of invoices receivable – boosting your business finance available – by indemnifying you against those customers who fail to pay your invoices or who fall into bankruptcy or insolvency.

There exist a number of ways in which you might boost the working capital available to your business – ranging from a business loan to the major investment likely to be required for business expansion or the acquisition of other businesses to your need to improve cashflow.

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Website: www.speedieconsulting.co.uk