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What’s Happened To Crowd2Fund? Update 2019
Crowd2Fund looked like it was going to take off. It was going to raise millions of pounds in startup funding through its own users this year. It was going to hire experienced staff. And it was going to become very transparent with its data, so that we can all see just how well it's doing.
All three have failed to materialise in the way 4thWay expected. With Crowd2Fund now preparing to try to raise more money from investors, here's my Crowd2Fund update.
Crowd2Fund raises 1/3 of expected amount
It's quite normal for peer-to-peer lending websites to sell shares in their businesses to either professional investors or the public. The goal is to raise money so that they can grow and thrive. Ultimately, they want to make all the investors money.
Typically, they raise money in stages, and that's what Crowd2Fund* has been doing. Previously it had raised a combined £3.7 million from three fund raises, including from its own website users.
Crowd2Fund went back to the people who use its lending platform to ask them if they would like to buy some more shares. It priced them at £2 million. But it raised just £668 million, selling just one-third of the shares it intended.
Crowd2Fund's team is seriously underweight
This fund-raise failure appears to have had significant knock-on effects. Crowd2Fund was intending to put £250,000 of the raise into financial and legal costs, which could have included hirnig people with a lot of experience. That hasn't happened.
Crowd2Fund could have done with someone in-house who has proven skills in writing loan approval policies or who can conduct the kinds of risk modelling we usually expect to see on small business loans. That's someone who would have a title like Head of Credit or Head of Risk.
It could have hired someone who has been carrying out the actual assessments against potential small business borrowers for years – a so-called underwriter.
It could have hired someone with a lot of experience in recovering bad debts from small businesses – a collections officer or even a specialist lawyer.
Instead, Crowd2Fund's CEO told me that its lending team has been “consistent” for years. But two of them still listed on its website as employed by Crowd2Fund (as of 16th September 2019) moved on this summer, according to their own LinkedIn profiles. The CEO did not respond to that.
The most impressive person listed on Crowd2Fund's website is more distanced from the action than you might believe from Crowd2Fund's own website. After having a meatier role some years ago, Navdeep Arora is now an external advisor.
I didn't get a straight answer to the question of who is the key rainmaker on the lending team, but CEO Chris Hancock, formerly a digital marketing manager and project manager, told me one thing in response: that he is responsible for the whole business. If that means he's in charge of the lending team, it's not encouraging to see that someone with no relevant prior experience or training has this position.
I have not received any information on any disclosed prior training or experience for any of the remaining people on the lending team that I consider to be relevant to their jobs.
An information shortage doesn't help!
Although Crowd2Fund* right now has a junior team, it maintains its prior, well-defined lending policies and bad-debt recovery processes. That is good news.
I think it's therefore not completely outside the realms of possibility that a small, inexperienced P2P lending site doing straightforward business loans (such as the Crowd2Fund Loans and Crowd2Fund Bonds) could run itself with the help of a well-written lending policy, a good training programme – and an external advisor on tap. But such a P2P site has a lot to prove and should put more effort into doing so.
In my experience, Peer-to-peer lending platforms that leap at the opportunity to jump on a call with us, and take the time to answer questions in full, even going beyond that to provide additional access and information – these P2P sites tend to have the better records over the medium or longer term.
In contrast, Crowd2Fund* hasn't been rushing to offer 4thWay access to key people when we have shown an interest in asking it probing questions.
Some of my recent requests for direct access or written questions have been ignored or not properly responded to. While it's always possible that they are simply very busy, my record shows that our recent questions are not answered clearly, directly and in full – or at all.
Another kind of information is data. If the people at Crowd2Fund are really making great lending decisions, Crowd2Fund can go some ways to proving it by regularly supplying us – and the public – with lots of detailed information, showing the performance of every loan it has ever approved.
With such a junior team still at Crowd2Fund, that level of detail becomes more essential, so that it can demonstrate its success.
It did publish a reasonable chunk of the data we need for a detailed analysis, but that was just once, over a year ago. You can still see that data on its statistics page, if you click on “View Loan Book”.
We had been told that it would start to keep this up-to-date, and that reassured us – for a time. However, it has since argued that it's too time-consuming to produce the data.
Crowd2Fund update on results
As I said, Crowd2Fund doesn't give us the underlying detailed data.
But it does publish its own statistics and graphs, which, as far as they go, indicate that its results are good enough. They appear to show that Crowd2Fund has historically held it together – if not necessarily over the past few months.
Yet that comes with a lot of caveats. Crowd2Fund's statistics are not entirely clear. They are open to interpretation. They are out-of-date. And they are not laid out the way that a professional would do it – at least none I know. This is not reassuring.
They also miss a lot of vital information. How many borrowers borrow more than once? How many loans are now fully recovered? How are new loans performing compared to older batches? How solid is the security? These and many other big questions can't be completely answered from Crowd2Fund's statistics page.
Pulling meaningful results from these stats is not easy or reliable. There isn't enough information for a super solid assessment, but I shall give it my best shot.
While I ask you to bear all the above very firmly in mind, this is the way I interpret Crowd2Fund's limited statistics:
What have lenders been earning at Crowd2Fund?
Lenders who have spread their money across a lot of Crowd2Fund borrowers have probably been earning in the region of 5%-9% per year, on average.
If you exclude lenders who are lending in too few loans, the vast majority of lenders have likely made a profit up to this point.
However, one graph appears to show a big deterioration in results recently, potentially signalling a lot more loans have just gone bad. That can be normal, since more bad debts will occur as all the existing loans mature, but I can't see that with the information provided.
Crowd2Fund's results compared to Funding Circle
Funding Circle is Crowd2Fund's biggest competitor. Crowd2Fund's results appear to be loosely comparable to Funding Circle's performance when it, too, was four-year's old.
The data seems to show that around seven or eight out of every 100 loans are bad debts or 60+ days late. This is the same as Funding Circle's most similar loans, with similar interest rates, at the time when it was the same age.
Results compared to small business lending generally
The number of apparently struggling businesses borrowing through Crowd2Fund appears to be around the typical levels you get for small businesses in the UK generally.
At present, eight out of every 100 UK businesses are in distress, which includes businesses that should never be considered for loans. (That's based on statistics paper 016152 from Parliament on the total number of businesses, and on distressed businesses from Begbies Traynor‘s Red Flag Alert.)
As I've already said, at Crowd2Fund, my best interpretation of its data is that around seven or eight per 100 are suffering trouble. I think that figure is more likely to tick up than down, due to a number of relatively new loans that might still turn bad.
With just 400 arranged loans, it's not appropriate to rely too precisely on the results so far. They could easily diverge significantly from where they are today.
Crowd2Fund needs to provide more information on its bad-debt recoveries
Lenders will be hoping that they'll get some of their money back from the borrowers who have become unable to meet monthly repayments.
Crowd2Fund says it has recovered half of bad debts (49.87%) as of May 2019, which I would consider to be a highly satisfactory result for these loans.
However, I absolutely insist on being shown the underlying data. The issue is that it's not easy to be sure of all the nuances of Crowd2Fund's full definition of “recovery” without seeing the details. In other words, is the full picture being shown here? And has all the recovery occurred in just a handful of very large loans? Such questions need answers.
Funding Circle's bad-debt recoveries were very low on the loans it arranged in the first four years of its life – even for a P2P site that does unsecured loans. If Crowd2Fund would just sit up and offer evidence for its performance in this regard, it would be very useful.
The really worrying statistic is because of you!
It worries me deeply that nearly half (45%) of Crowd2Fund lenders are choosing to lend in nine or fewer loans. For these kinds of business loans, 50-200 is the correct minimum number to get more reliable results. (I can't be more precise on the actual number without more information from Crowd2Fund.)
With nine loans, anything can happen, as chance plays a big part. The more loans you lend in, the less it is about chance and the more it's about whether the loans are good quality.
It's perfectly acceptable – indeed desirable – to lend across lots of peer-to-peer lending sites in order to spread your money around. Then you can reasonably choose to lend in fewer Crowd2Fund loans. When you focus instead on your overall returns, you don't need to worry about your performance at individual peer-to-peer lending platforms.
I hope that's what a lot of these Crowd2Fund lenders with under 10 loans are doing.
Read my updated view of Crowd2Fund in the Crowd2Fund Review.
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