Funding Circle shares dive, is now a time to dive in?

The Funding Circle IPO has seen shares plummet, but does that mean the company is a bargain?

Article updated: 10 October 2018 9:00am Author: Michael Baxter

Traditionally, in this country, banks have failed business. The joke among many entrepreneurs is that the only businesses banks are willing to lend to, are the ones that don’t need to borrow.

It’s not true of course, banks do lend to business, but have never been good with truly entrepreneurial type firms.

For too long, it has been easier to borrow money to fund a holiday than a business venture.

The problem is not just banks. I knew a group of individuals trying to raise money in the UK during the late 1990s. To them, it felt like they were banging their heads against a brick wall. So, they flew to New York, checked into a hotel, and from a copy of the yellow pages started making phone calls. They left ten days later with a ‘heads of agreement’ for all the funding they required.

Banks take risks of course, but not the type entrepreneurs are begging for.

This time it is different

These days it is quite different. If you have a business idea, there are multiple ways you can get funding. Start-up loans, peer to peer funding, or crowd sourced funding, for example. The internet has helped transform it.

UK plc desperately needs this type of funding.

But is it viable?

The problem

I have long thought that lending to truly entrepreneurial businesses makes no sense. Most start-ups fail. Some become massively successful. The problem with lending is that the potential return is fixed, the potential loss is everything you have lent. Investing for equity is a different matter. With this investment approach you get a slice of the potential upside.

There is another problem — entrepreneurs are inherently optimistic. People who invest in them tend to lean towards optimism. Such optimism is a pre-requisite for success, UK plc needs it. It often seems to me that Americans are inherently more optimistic than Brits, which may explain why the US has traditionally been more entrepreneurial. But optimism can lead to hype and bubbles.

Funding Circle

I love what Funding Circle does. It supports crowd sourced funding in carefully vetted smaller companies, but enables investors to reduce their risk by spreading the lending over a broad range of companies.


Funding Circle has enjoyed phenomenal growth.

The number of loans under management have grown from £860 million in 2015 to £2.5 billion in just the first half of this year. Revenue has grown from £32 million in 2015 to £63 million in the first half of this year.

The UK is its main market, but it is also expanding in the US, Germany and Holland.

Valuation and IPO

There is one snag. The company is still loss making — £27.3 million loss in the first half.

The objective of the IPO was to shore up the balance sheet and fund marketing as it sought to expand further, especially abroad.

Its business is an economies of scale business. Marketing spend has fallen from 64 per cent of revenue in 2015 to 39 per cent in the first half of this year.

But the valuation at IPO was approaching £1.6 billion.

Well, shares have fallen from 440p at IPO a few weeks ago to 340p as I write. Does that make it a bargain?

Its market cap is now £1.2 billion.

Bull and bear

The bull case would say that if growth can continue, the profits will come pouring in. One of the problems faced by investors wanting to jump on board the so called fourth industrial revolution is that too many of the interesting companies are private. Well, Funding Circle provides you with an opportunity to jump on board.

There are several reasons to be bearish: For one thing, regulators may tighten up on the market Funding Circle operates in. For another, I reckon there are bubbles all over the place at the moment — Funding Circle clients may be exposed.

Finally, I worry about its business model. The best way to invest in the fourth industrial revolution is via equity not loans. I am not sure that Funding Circle represents the optimal way to invest in the very exciting future technology represents.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.