Dating for dollars

In 2009, during the depths of the recession, Matthew McGrath identified a big problem. He noted, with increasing frustration, the struggles that legions of companies encountered when trying to access capital through traditional bank channels. “I started thinking about alternative ways to provide financing on the market,” he says. That’s when inspiration struck. He quit his decade-long gig as a vice-president of private client services at Royal Bank of Canada and got to work — this time, as his own boss.

This past September, McGrath launched P2P Financial Inc., which he hopes will solve the financing problems many entrepreneurs still face today while simultaneously exploiting a gap in the investor community. Toronto-based P2P operates a website that connects wealthy investors to entrepreneurs for loan, equity stake and debt-purchase deals. It is currently certified as an exempt market dealer in Alberta, B.C. and Ontario, and McGrath expects to be approved in other provinces soon. Exempt market dealer status gives P2P the authority to facilitate securities-based deals with accredited investors, those Canadians with high net worth and income who are allowed by their respective provincial securities commissions to park their money in non-traditional investment vehicles.

But the company does more than matchmaking; P2P provides quality control, too. While any entrepreneur can try to list his business on the site, P2P’s staff vets each request before posting to make sure that all risks are disclosed, the financials make sense and the entrepreneur’s pitch is logical. “We do the initial due diligence,” says McGrath. “We have to get investors comfortable with the deals.” All together, the investor gets access to screened opportunities without having to hunt them down or know the right people, and the entrepreneur gets a one-stop shop for non-bank funding. It’s a novel idea — there’s no business quite like it in Canada — but McGrath is up against one crucial question: is there a need for this type of service?

Here’s how the site works. Entrepreneurs apply to P2P to list their request on the site. To be considered, the entrepreneur has to disclose information on the company’s goals, history, current financials, projected financials, planned use of money, managerial track record and, if applying for a loan, a guarantor’s financials. Every approved request is posted to the P2P database, some anonymously. On the other side, any accredited investor can open an account and start browsing the investment opportunities. (P2P checks the accreditation status of each registrant.) When an investor finds something she likes, P2P will facilitate an email exchange with the entrepreneur, which maintains the investor’s anonymity — something, McGrath says, many accredited investors want. If the investor wants to continue, P2P will set up a moderated phone conversation, disclose identities and, if desired, coordinate a meeting. When the investor is ready to buy in, she’ll transfer money into her P2P investment account, which the entrepreneur can then access. Interest payments, dividends or other income owed to the investor are deposited into the same account. Both parties can monitor the deal through their profiles on the P2P site.

While McGrath believes P2P fills an underserved niche for both lenders and borrowers, he considers the people with the cash — not the money-seeking entrepreneurs — to be his target customers. To a degree, he’s after professional angel investors, but he isn’t betting on them to be a major source of deals, since many like to do their own legwork on investments. He expects most of the deals to be made by non-angel accredited investors, a far larger group of wealthy folks (he pegs their numbers in Canada at 260,000) who have money but lack the time and/or inclination to research how to invest it. This latter group is lucrative. According to Industry Canada, accredited investors spend $11 billion on what’s broadly described as “informal investing,” with a further $13 billion ready to be deployed. By contrast, professional angels invest about $3 billion per year.

McGrath doesn’t expect investors to abandon their normal methods of sniffing out deals, which often involves networking with peers. But, he says, his site gives people access to far more deals than word-of-mouth hunting. It also allows people to search for investments 24 hours a day. “There might be a busy executive looking for something besides mutual funds to invest in at 11 o’clock at night,” he says.

As valued as these selling points may be, informing investors of the P2P model — and persuading them to use it — will be a challenge. McGrath is targeting investors with a $4-million ad campaign; he and the marketing consultants he has hired plan to buy ads in small business magazines and on business websites. He’s also in discussions to partner with TV’s Dragons’ Den, although he can’t share the details. “There’s potential there to get interest from viewers, a large portion of whom are looking for these types of investments.” And in an effort to drum up some support among professional angels, McGrath will contact angel networks across the country over the next few months to champion the benefits of his service. He believes that once accredited investors hear about his service, they’ll give it a shot.

McGrath hopes to facilitate about $1 billion in deals within the next two years. With P2P taking from 2% to 5% of the value of each deal, he plans to break even by the end of 2011. Two months after the site launched, McGrath had completed his first deal, worth $100,000 to the entrepreneur using the P2P site. While McGrath waits for more investments to close — he expects the average deal to take four to six weeks from start to finish, which, he says, is comparable to normal transaction timelines — McGrath is starting to expand his team of 10. Hiring is a top priority, and he is currently interviewing account reps and marketing people. But whether P2P takes off, all the financing request rejections he saw during the recession give him reason to believe there’s a need for this service: “The clubby network of ‘I know a guy who knows a guy’ isn’t the only way to do business anymore.”

WHAT THE EXPERTS SAY

Elspeth Murray
CIBC Teaching Fellow in Entrepreneurship
Queen’s School of Business Kingston, Ont.

I love this business! Peer-to-peer financing has worked in the U.K. for a few years now, and it’s high time a Canadian firm made headway as well. I think three factors work in P2P’s favour. First, the newest generation of investors is comfortable with the idea of peer-to-peer transactions; McGrath likely won’t have too hard a time marketing the concept to these folks. Second, enlarging the pool of potential investors is simply brilliant. There is plenty of money out there, but it’s not always easy or efficient for investors to find a non-bank home for their wealth. Finally, I am intrigued by the anonymity concept, as it makes it easy for anyone to invest, regardless of location, occupation or pedigree. P2P may be democratizing new venture investing by providing average investors with access to deals they wouldn’t otherwise ever see—and entrepreneurs with access to money they couldn’t otherwise find.

Jeff Dennis
President & CEO
Oneworld Solar Corp.
Mississauga, Ont.

McGrath is probably right that the web will ultimately facilitate more connections between lenders and borrowers. However, I have three main issues with his plan. First, in order to get detailed information on deals, investors must submit their address, social insurance number, etc. I’d be surprised if any sophisticated investor would divulge this so early in the process, if at all. Second, if McGrath continues to carry out due diligence on every deal, he won’t be able to scale up fast enough. And, despite all the disclaimers on the site, P2P could be held liable for investments that go south if its due diligence missed anything. I suggest he instead create a web-based clearinghouse for Canadian angel-funded deals. He could charge less, but would get the volume. Third, and finally, if McGrath is intent on doing due diligence and acting as an exempt market dealer, he must charge more, and he must charge something up front. Perhaps, with some fine-tuning, P2P could be a real hit.