Innovation is primarily a function of need. Faced with a given problem, an entrepreneurial mind knows only one response – to devise a solution. To use a famous example from Israel itself, the development of efficient irrigation systems didn’t simply emerge from a vacuum. Faced with arid conditions and weak import prospects, drip irrigation developed because the need was sufficiently acute that failing to find a solution just wasn’t an option.
The same phenomenon can be applied to the aftermath of the global financial crash. As public trust in our financial institutions collapsed and the banks ceased lending, and regulators demanded ever-higher levels of capital adequacy, consumers and small businesses found themselves increasingly locked out of the credit cycle, and unable to finance their homes and ideas. Against this backdrop, the alternative finance sector emerged, growing to reach more than $36 billion in the US alone. All US figures are dwarfed however by the Asia Pacific market, now totaling $102.8 billion, following 323% annual growth.
In the latest episode of Invest with Influence: The iAngels Podcast, we take a close look at the future of the burgeoning alternative finance industry.
As investor-side and lender-side finance platforms continue to grow, individuals, enterprises, and institutions are facing a new set of issues, including questions of regulation, liquidity, consolidation and cryptocurrency. To discuss what’s next for this burgeoning industry, and offer clues for the impact of alternative finance on insurance also, host Max Marine is joined by iAngels Founding Partner Shelly Hod Moyal, President of Prosper Marketplace Ron Suber and UC Berkeley’s Richard Swart.
At the heart of alternative finance is the principle of p2p (person-to-person) – a model of finance where private individuals are incentivized to take on traditional banking and investment house roles, by distributing loans, credit, debt and equity.
Inevitably, the growth seen in alternative finance globally has generated p2p momentum in Israel’s startup scene.
Among the many investment candidates we’ve seen, iAngels has already put its faith into Backed, a social p2p lender, enabling young borrowers to leverage the superior credit rating of their peers to gain favorable loan terms. Beyond Backed, another p2p lending platform, BLender, is currently in the process of expanding its successful beta in Israel into markets in central and eastern Europe, backed by $5 million from Blumberg Capital.
There’s movement within other verticals too, as seen by companies like Invoice Cycle, which trades outstanding invoices for credit. Just last week also, we saw the high-profile launch of Lemonade, an Israeli peer-to-peer insurance company which has been in stealth mode since announcing its $13 million seed round last year, led jointly by Sequoia and Aleph Capital. Lemonade can’t be faulted for ambition. In aiming to bring p2p to the world of insurance, they’re seeking to tackle the last great pillar of the financial services industry to have avoided the clutches of technological disruption. Analysts will be watching closely, for indications of how far the p2p revolution can reach.
Finally, no synopsis of alternative finance is complete without referencing our own sector – equity crowdfunding. Without drafting an entire white paper here on the impact of equity crowdfunding for VC worldwide, it’s worth pausing for a moment to stress the diversification that’s taken place in the sector in recent years.
At one end of the spectrum, there are numerous ‘pure’, almost open source equity crowdfunding platforms. While they often have compelling arguments in an abstract sense, and there’s no doubt that their model is attractive to a certain category of entrepreneur, we’re unconvinced that it’s a model that’s scalable or sustainable.
At the other end of the spectrum – but bound by a passion to embed the values and tools of the global entrepreneur community within the actual capital raising process itself – there are hybrid platforms, including iAngels itself. For iAngels, ‘crowdfunding’ is an integral part of our DNA, allowing us to build, service and grow a sophisticated global base of HNW LPs, but it sits alongside due diligence practices harnessed in the world of traditional finance. In this combination, the revolutionary alongside the proven, we’ve built our business, and we see it as a strong guideline for assessing investment opportunities among alternative finance startups beyond our four walls also.