Frazer Fearnhead, chief executive of The House Crowd, talks to Andrew Saunders about property, pensions and that Dragons’ Den pitch
IN A WORLD WHERE THE fintech sector seems to be dominated by excitable chatter about high-octane venture capital (VC), unicorn valuations and big ticket (if often subsequently disappointing) stock market flotations, Frazer Fearnhead – founder and chief executive of P2P property development lender The House Crowd – is a model of level-headed rationality.
“We’ve never approached VCs, we’ve got quite a bootstrap mentality and we’ve never wanted large sums of money,” he tells Peer2Peer Finance News. “We pay our own way and we’ve been profitable for a few years now.”
It’s a straight-talking attitude informed, he adds, both by his background as a property entrepreneur and the fact that The House Crowd is based in Manchester where he grew up, far from the froth of the metropolitan fintech bubble. “What’s the point of running a company if it doesn’t make any money? But if you’re involved in the fintech VC world it seems to be about just raising more and more money and showing that you can scale,” Fearnhead comments.
“It puts an awful lot of pressure on those companies, and I am not sure the industry is ready for that. Not many of those companies end up succeeding.”
He’s on a mission to help democratise property investment, getting more urgently-needed houses built and opening up lucrative lending opportunities to ordinary people, not just financial institutions. But rather than engage with deep-pocketed but demanding VCs or unpredictable angels, Fearnhead has grown The House Crowd more carefully, through organic customer acquisition combined with a few judicious bouts of crowdfunding.
He raised £1.3m in 2015/16 from existing customers who were already lending on the platform and wanted a piece of equity in the business too. In September this year, The House Crowd launched a new crowdfunding round. The business is looking for £1m on a £29m valuation, and this time it is open to everyone. “It’s the first time we have done a public fundraise,” says Fearnhead, “and we’ve already had pledges that far exceed the £1m. I am amazed by the amount that has been pledged – we don’t want that amount, we’ll cut it off well before.”
Crowdfunding works well for The House Crowd, which has managed to attract no fewer than 27,000 registered users thanks to its solid returns and customer-friendly approach. “We’ve always been very customer oriented and retail focussed – the number of people on Trustpilot who compliment our service is very gratifying,” Fearnhead says.
“We’re an online platform but someone is always on the end of the phone.” But in the current climate of economic uncertainty, is it not tempting just to take all the money you can get while it’s on the table?
“There is pressure to take several million pounds, but can we use all that effectively? It would also involve quite a serious dilution – I still own quite a substantial chunk of the equity and I believe in the growth potential of the company. I’d prefer to sell my shares later at a much higher valuation.” Fearnhead’s attitude to external fundraising may also have been shaped by his unhappy experience on TV investment show Dragons’ Den back in 2015, when he joined the small but exclusive club of entrepreneurs whose ideas have gone onto success despite being thrown out by the Dragons.
Described by Sarah Willingham as “the most disrespectful pitch” and by Peter Jones as “completely stupid”, Fearnhead’s insistence that he could get funding elsewhere on a £20m valuation seems to have put the Dragons’ backs up. “We believed we could raise money on a £20m valuation – we had no expectations that the Dragons would invest but I didn’t expect them to be so vitriolic,” Fearnhead recollects. “It was a very uncomfortable experience.”
There are three key priorities which Fearnhead will use the proceeds from the latest crowdfunding round to help accelerate: launching a new investment brand aimed at millennials (called Money Mog); improving its tech platform via ASMX’s blockchain-powered secondary market; and to help attract more investors for its Innovative Finance ISA (IFISA), which Fearnhead sees as a major growth area for the future.
“ISAs I believe are still untapped, when you look at all the capital that is out there it’s still very early days,” he states. “There is £1bn in IFISAs, but £600bn in stocks and shares and cash ISAs, getting returns that are either low or very volatile.” He believes that the IFISA has a big role to play in helping to persuade retail customers to put their hard-earned savings into a relatively novel product like P2P – something the industry has struggled with to date.
“It’s very expensive to raise retail money – we’re paying around £200 to acquire an investor whose initial investment is around £6,000 and whose lifetime value to date is around 31,000,” Fearnhead reveals. When it comes to their rainy day money, people are inherently risk-averse, he says – something which has only been exacerbated by recent high-profile failures such as Lendy.
“People are sceptical of new things anyway, and these stories clearly don’t do the industry any good,” he comments. “That’s why ISAs are a real potential growth area. People with money in cash ISAs already have that money set aside and are getting an average return of only two per cent or so.” Fearnhead is also confident that The House Crowd’s new Money Mog brand will help attract a younger customer and broaden the business’s reach beyond its current 40 to 70-year-old demographic.
Today’s 20 somethings may have been painted as a ‘live now’ generation which isn’t interested in making provision for tomorrow, but that may reflect their distrust of old school financial services firms more than their reluctance to invest, he says. “Millennials have a natural antipathy towards traditional institutions, but apps like Moneybox have shown that there is a market for that younger audience.”
Money Mog – fronted by a cute cat logo of course – will enable less well-off younger customers to invest as little as £50 a month at an interest rate of 3.5 per cent, which they can boost to 5.5 per cent by referring their friends.
Fearnhead is a former music industry lawyer who began advising on property investment in the noughties, before launching The House Crowd in 2011. The business started life as a buy-to-let equity crowdfunding platform, but Fearnhead soon realised that the model was not scalable and pivoted to P2P debt funding instead in 2015. “It just makes more sense to invest in property on a debt rather than equity basis,” he asserts.
“Why bother with all the hassle of owning a property if you can use it as an underlying asset instead? “It’s the way banks have been investing forever. With P2P you get paid out before the owner of the property and you get a higher rate on your money that you would from buy-to-let yields.” The House Crowd is steadily selling off its buy-to-let property portfolio and now focuses on bridging loans and property development funding instead. “We don’t do any new equity investing now and we’re about 70 per cent development finance to 30 per cent bridging on the balance,” Fearnhead says.
“We want to get to about 85 per cent development finance – they tend to be larger ticket items and you are dealing with a better-quality borrower, not amateur investors. It doesn’t mean things can’t go wrong but the security is better.” The business also has its own property development arm, which executes many of the deals. The sweet spot for The House Crowd is developments of between 15-50 properties with selling prices of £200,000 – £600,000 apiece, mainly in the North West but also in the M25 South East commuter belt. What about the capital itself?
“We certainly won’t be doing any prime central London because so much of that is bought by foreign investors – you just don’t know what will happen.” Liquidity – or rather the lack of it – is an aspect of P2P lending that is often cited as holding back growth, discouraging investors who fear they will not be able to exit loans before term.
Fearnhead believes P2P lending is already a fairly liquid way of investing in property, but he recognises investors’ concerns and is pleased to have found a solution in the form of ASMX’s off-the-shelf secondary market technology, which he first came across in these very pages.
“We have continuously pushed the development of a secondary market down our product roadmap because of the expense and complication – we’d have to charge fees and it would be cumbersome to operate,” he says. “So when I read an article in Peer2Peer Finance News [about the ASMX platform] I thought it sounded perfect. We don’t have to spend £100,000 developing our own system, we can implement a technologically advanced product quickly and cheaply, and it gives us access to institutional and retail investors around the world who already invest in other platforms.”
However, Fearnhead adds that most retail investors would do better to focus on making good long-term investments rather than worrying about how quickly they can make an exit. “There is a prevalent short-termism which can be frustrating,” he says. “Anything that is over 12 months on our platform does not do as well as things that are six to nine months, but successful investors like Warren Buffet invest for the long term. Why not leave your money in there for longer and let the interest compound?”
Hence the firm’s other big new development, a white-label pension product that will make it much easier for residential property investments to be included in a self-invested personal pension. “We have struggled with this for years, but now we have finally found an adviser who has done all the due diligence and is prepared to accept it,” he says.
“There are certain restrictions – the money has to be lent to a limited company, for example, so we will probably focus on development loans [rather than bridging finance].” His goal for The House Crowd and its 28-strong team is thus appropriately long term – to keep growing sensibly and profitably, and to try and make it easier and cheaper for anyone to access the returns available on property lending.
His career has taught him, he says, that success is a marathon rather than a sprint. “There is no magic wand or golden key, success doesn’t come overnight. Instead every day you have to keep doing the right things, however small, to reach your goal.”