I recently had a chance to sit down with Derek Uittenbroek, CEO of UK equity crowdfunding platform FundTheGap. I was able to get some great insight into the UK crowdfunding landscape as well as how FundTheGap differentiates itself from other platforms in its approach to funding small business.
Crowdfund Insider: Tell me a bit about your background in the financial services industry. What made you decide to jump into crowdfunding?
Uittenbroek: I started off working for a financial services firm here in London back in 2008, and I was in the corporate finance department focusing on fundraising for small businesses. So what we would do is small businesses would come to us and say we need 2 million or 5 million or 20 million to execute our business plan. Can you help us raise those funds? So we would sort of package that up and help them put together a business plan and sign it off from a regulatory point of view, and then we would take them around to institutional and retail investors. That’s my immediate background. After that I moved on to Accenture, a management consultancy firm, where I was on a slightly different side… more from a strategy and technology consulting point of view. I did that for just over two years. I worked with some of the largest UK banks here largely on business banking and corporate banking propositions, so very much in the general small business space. Now, I’m always kind of convinced that there are better ways of doing things. For example, the corporate financing process that I was involved in back in 2008 was a very lengthy process, it was very manual, and I was convinced that there was a cheaper and more effective way of doing this, because many smaller companies were priced out of that process because it is very expensive for them. Quite often they would have to pay a fee up front of maybe £25 thousand. Unless companies were raising £2 million or more it didnt make sense for them to go the corporate finance route.
So marrying the two together – my technology experience at Accenture with my corporate finance experience before that – I thought there was this real opportunity here to take the small company/corporate finance/equity fundraising process and simplify it, streamline it and thereby make it more cost effective and more accessible to smaller businesses.
That is essentially what FundTheGap is. It’s that process streamlined, simplified and made more cost effective, to the point where now actually a small business looking to raise, maybe, several hundred thousand can access investment in the same fashion that a larger business would be able to raise through a corporate finance hub.
It’s clear that there is a demand for this because there is not a day where you don’t read about small business funding and issues around small business funding. It basically hasn’t been modernized at all, and that’s why I thought there was such a huge opportunity.
CFI: One of the things that I noticed about Fund The Gap when looking at the platform is that you have a lot of offerings in the Telcom space right now. What is the root of that? Was that a function of your connections in that space or is there another reason?
Uittenbroek: There’s quite a big drought in the UK at the moment for rural broadband. There are a lot of rural areas in the UK which are absolutely key to the UK economy, but at the moment their broadband connections are very poor. That is because the large telcom providers in the UK use standard infrastructure, and there are a lot of disparate rural areas where that standard infrastructure doesn’t lend itself very well, so quite often these rural areas go ignored by large telcos and a lot of the wiring hasn’t been modernized. So there is a big push from the UK government, and in fact there is a massive several-million-pound fund for funding and improving rural broadband infrastructure.
We’re really excited actually about the three companies we’re working with because the interesting thing obviously is that the ultimate beneficiaries of the enhanced broadband service that these companies will provide are potentially incentivized to invest in this, because they’ll ultimately end up with better broadband in their area. So it lends itself really well to the online fundraising model.
CFI: One of the things you’ve touted for FundTheGap is being very selective about the companies that get to list on your site. Can you talk a bit about what the process is to decide whether or not a company is viable for listing on FundTheGap
Uittenbroek: I think this is something that really differentiates us because from the outset obviously we have a lot of experience. One of the aspects that is key to us was that we wanted to introduce the right level of due diligence and transparency to the online funding world. The trick is where do you draw the line between you doing due diligence on the company and investors doing their own due diligence, which we always encourage them to do anyway. We found it quite difficult to draw the line and we thought that the only way for us to be able to actually put in place the right level of due diligence and the right checks on the company was for us to treat each investment as if it’s our own. So that is quite literally part of our model. We invest in every single business that lists on our platform. It makes determining the focus really easy because we treat it as if it is our own, and the way you scrutinize and look at things is completely different. So what that does for us is that it aligns our interests toward long-term success as well as the founders and investors, and we don’t just sort of take our fee and disappear off into the horizon. The due diligence part was quite key.
There are a number of things we do. There’s the first stage, which is what the company needs to do to get on the platform. Secondly, what happens at the point of investment, and lastly how do we monitor the business on an ongoing basis. Usually we’re approached by a business either by referral or on the platform. It usually starts off with them submitting a business plan to us, and we review that and will submit that into our funding committee. Now, our funding committee consists of the whole team and we look at every single business plan that comes in.
We look in the business plan. Does it make sense? Do the numbers make sense? Is there a market there? Is it realistic? Is it achievable? Most importantly actually, who is behind the business? Who is the management team, who are the people setting this up, who is backing it, how much money have they put in, how much time are they putting in and so forth. We all know that small businesses are 95% about people, because they drive the execution. So then what happens is that the funding committee actually decides whether to go ahead, whether not to go ahead or whether to go ahead with certain conditions in place which might involve directors of the business putting in more funding and so forth.
Once we’re happy to go ahead, we start a formal due diligence process and we’ll enter into a contract with them.
CFI: We’re in a bit of a sticky situation with investment crowdfunding here in America as you probably know. Things seem to be moving a little more fluidly in England in regards to crowdfunding and people being able to participate now. We’re kind of stuck waiting for regulations to get through Washington. Can you tell me a little bit about what the general crowdfunding landscape is in the UK and where you see that headed particularly in the coming year or two.
Uittenbroek: The rules and regulations here in the UK are very strict. It’s really difficult to get licensed because the rules are quite outdated and they don’t lend themselves very well to the internet world. So what we end up with is two sides in terms of the crowdfunding landscape. One side consists of platforms that are unregulated, that rely on certain exemptions or clauses in the law to come up with what I think is a relatively artificial structure in terms of doing things. So a lot of these platforms are focused on open source funding and letting the crowd decide as it were, so there is a feeling that the crowd is always right and if the business doesn’t get funded or if it does get funded it’s because the crowd decides it all.
On the other side of the fence, and this is actually stirring up quite a big debate in the UK at the moment about crowdfunding, you have the regulated platforms. Now, they are already prescribed to the rules and regulations, they’re keen to educate on the risk warnings associated with investing. I think we fit in the latter group in the sense that we explain the risks in detail and we make it very clear that investing is a long term gig.
That is broadly what the landscape is about now. What that means is that discussion or debate even is currently evolved from being what is crowdfunding, what is donation, what is equity… to now being around regulation. Half the landscape is thinking more regulation is extremely harmful to the industry, the other half saying we need more regulation. Same on due diligence.
CFI: You had mentioned before that the FundTheGap team invests in every offering on the site. Is there anything else that really differentiates your platform from the others and might be a signal for a certain type of entrepreneur to list on your service versus others.
Uittenbroek: One of the things that we do is actually screening investors. I’ve mentioned before that investing this is extremely high risk, and the worse case scenario would be for a company to end up with lots of investors that don’t understand that and who maybe felt like they’ve been misled to investing. What we’re very adamant about is that all of the investors understand the risks. We screen them, we put them through an investing questionnaire and they have to pass. We actually do background checks as well automatically on investors to make sure they don’t have a history of fraud or anything like that, so we do lots of anti money laundering checks to make sure that all funds that are coming into the businesses are 100% clean and come from an audience that understands it.
A lot of these companies will go bust. Out of 10 of these businesses maybe 5 will go bust, and the worst case scenario would be to have a lot of shareholders that don’t understand that. Then when things do topple they’ll end up in revolt.
CFI: You’re providing services to entrepreneurs, but at the same time you and all platform founders are entrepreneurs yourselves. I just want to ask what has been the hardest thing about getting into the space, creating a company… your entrepreneurial experience itself. What has been the biggest challenge and also what has been the biggest reward? What has been the pleasant surprise in doing all of this?
Uittenbroek: I would say that the biggest challenge for me and for us as a team was to actually come up with a structure that is innovative and fully leverages the internet, social media, etc… something that is truly positively disruptive while following the rules that were written decades ago when the rules don’t lend themselves at all to the internet. That was one of the biggest challenges that we faced and actually we invested a lot of time and money into finding a structure that was fully compliant but also innovative. That obviously took a lot of time and we ended up pushing back the launch a little bit to the point where we were really happy with the structure. That was a big challenge.
What I’ve found the most rewarding was when I recruited my management team. It actually just started out as an idea pretty much by myself, and it was largely inspired by existing donation-based models and I thought “Hey, there’s a huge opportunity here in the equity space.” Now, the most rewarding thing for me actually was to pitch my idea to my investors and to my board of directors and my team and to get their buy-in, because they bring so much to the table and they have so much experience. Between the team we’ve done more that 500 million to small businesses, and for me to get that kind of endorsement clearly validated the model and the opportunity we had.