Dr Louise Beaumont: “David vs. Goliath looks like a fair fight in comparison”

Dr Louise Beaumont explains how Alternative Finance was born and the scale of the task involved in growing a new industry to service the engine room of the UK economy, the country’s SMEs.

Welcome and thank you for being involved. How did your journey begin?

I started work in my mid-twenties which is a little later than normal because I did an MA from St Andrew’s University and then I did a PhD from Strathclyde Business School. So, I took a while to get into the workplace.

I did about eight years of hard labour for Capgemini which is an IT services company. For them, I did a variety of roles from earning my crust as a consultant to doing jobs which are broadly best described as business development, in as much as it’s trying to understand where the marketplace is going, what services we need to deliver them, how you would market those, how you would sell those and productise them. Then, actually getting involved in the selling of them so you could see if they actually delivered any return on investment and whether we made any money or not. Then I moved to Siemens’ IT Services division where I did more of the same, including getting involved in some of their biggest deals.

After that, really it was consultancy, setting up my own business, which makes it sound terribly grand, but it really wasn’t. It was a very small consultancy called Vector which really was my vehicle for doing what I did. So, it was all of that stuff around business development, whether you want to be fancy and call that strategy or whether you want to call it sales or marketing or product design or delivery. Whatever you want to call it, it was that.

I developed relationships and won business from about seven or so of the world’s largest blue-chip companies and my clients included Capgemini, Siemens, Hewlett Packard, Microsoft, Adobe, Logica and Vodafone.

Then I realised there was a huge gap in the world of SME finance when I sold a large project to Siemens and made two mistakes. My first mistake was to have plotted and inveigled my way onto the Siemens preferred supply list where I had no business being; my business was far too small. But, nonetheless, I’d sold my way onto the preferred supplier list so I could win projects from them. The problem with this was there was really one defining way in which you knew you were on the preferred supplier list and it was that they stopped paying you in 30 days and started paying you in 90 days. Effectively, you started subsidising their cash flow, all for the right to win business. Shocking.

Then I went and compounded the error by winning some business. It was quite a large piece of business and they wanted me to sub-contract all of the other people that were going to help deliver this project. Of course the sub-contractors wanted to get paid in 15 days or 30 days and I was only going to get paid in 90 days.

That sounds like a very large negative cash gap.

Yes. All for having won work via being a preferred supplier. So, it was a comedy moment. I thought ‘I’ve got a problem now. What do I do?’ I did what every other SME does. I went to the bank and worst of all I went to the bank in about 2007 where they were preoccupied with tanking the global economy. I asked for what every single SME asks for which is an overdraft and they said no. I asked for a loan and they said no.

Then they offered me this thing called invoice finance. It just seemed to be loaded up with every variety of fee and it seemed to be incredibly restrictive. There were up-front fees, annual fees, fees for using the service, fees for not using the service, fees for extending the service, fees for terminating the service. There was a facility ceiling which was low and just restricted my ability to actually use the service I was paying all these fees for.

There was a debtor concentration limit too. I had all these other clients and what the bank said to me was “You’ve got to sell us all your invoices except the Siemens ones.” All my other customers paid me in 30 days. They were not the ones I had a problem with. I thought maybe they hadn’t understood. I said “I don’t have a problem with those. I have a problem with the payment terms of the Siemens invoices. So, I don’t need you to buy all the other invoices, I need you to buy (effectively discount) the Siemens ones.” They said “Oh no, but we can’t do that because too much of your business is with Siemens.”

What was that like?

It was ridiculous. It was just beyond parody, it was literally a farce. I just said “Well, there’s no way I can buy this service from you because it just doesn’t work.” They were surprised, but nonetheless there’s no point in buying a service which isn’t fit for purpose. So, my learning on that was that banks have products which are developed for industrial revolution style companies; big companies who want big sums of money, for long periods of time, which can be secured on assets.

I was a teeny-tiny little business. I wanted a small sum of money for a small period of time and I had nothing on which to secure it, other than the trading record of my business and my pipeline. So, in this respect, I’m just like every other business which has been born in the last 20 or 30 years. The number of small businesses in the UK has tripled in the last 20 or 30 years. The vast majority of these new businesses are services businesses, so you might hear of these as called intellectual property businesses or knowledge economy businesses. What that means is at the end of the day the asset gets in the lift and goes home. There are few other assets.

90 per cent of SME lending is delivered by four banking groups. They’re set up to lend to businesses from the industrial revolution, not the knowledge economy, so I thought ‘Right, there’s a problem and an opportunity too.’

At that point I got together with some friends of mine who’d been kicking this idea around and we decided that we were going to launch a business to help meet this SME finance gap which we duly went on to do. We launched the company, we built the technology and we grew the business. I grew it to £75 million traded in the first couple of years, the first two years in fact, which was good because it was an entirely novel way of doing invoice finance.

We secured investments from an institutional investor, for whom I now work, called GLI Finance. GLI Finance have investments in 19 SME alternative finance providers which between them deliver eight different types of SME finance on three continents, so the US, Europe and Africa.

The really interesting thing is the sheer number of challenges that are in your path when you’re trying to disrupt an incredibly vested interest, namely traditional finance. It is an established fact, from the Bank of England’s own statistics, that every quarter since 2009 bank lending to SMEs has declined.

I spot a real determination and tenacity. What skills and what tips do you have that have enabled you to achieve that?

I’m going to give you some answers which are counter-intuitive as well as some ones which, I suspect, are fairly standard. The real answer is a combination of bloody mindedness and stupidity on my part. It really does take those two characteristics. I’m sure there are some more, like you have to be very hard-working, you have to be diligent, you have to be thorough, you have to work with good people, all of those things. I’ll come back to all of those points, because they are important.

My utter stupidity was that I failed to understand the size and scale of the task. If I had understood the size and scale of the task, I would have gone and done something easier. I was stupid; I didn’t understand and I didn’t know that I didn’t understand. So, in the words of Donald Rumsfeld (United States Secretary of Defence), who said that there are known knowns, known unknowns and unknown unknowns, the size and scale of disrupting the established finance model for SMEs was an unknown unknown.

What’s been the upside of that?

Tenacity, from our deciding to get this little start-up going all the way through to it being part of a much larger investment portfolio, in GLI Finance. Real tenacity and bloody mindedness.

This is such a block to the economic growth of the country given the main engine room of growth in the UK economy are SMEs. They deliver 50 per cent of our UK GDP. It’s just shocking how fundamental they are to our economy and bank lending to them has declined by billions since 2009. This means that the engine room of the economy is not getting the fuel it needs. That means the economy isn’t growing as fast as it should do, it means that companies aren’t growing as fast as they should do and tax take isn’t going up as fast as it should do.

The reality is the banks are less willing and less able to lend to these smaller companies. Less willing because regulation has come in since the inter-galactic financial meltdown which means that they have to hold more money against riskier asset classes and SMEs are seen to be riskier asset classes. Therefore, it’s more expensive and a bit trickier for banks as the reality is they were set up to lend to industrial revolution era companies. They’ve got regulation which they can say, quite rightly and quite honestly, is impeding their ability to lend to SMEs.

So, we thought ‘Right, that’s absolutely great, we’ll get loads of referrals from banks.’ No. We have had to go to the extreme lengths of getting an entirely new law through the Houses of Parliament to mandate banks to refer to non-banks. It’s absolutely shocking that this is actually requiring legislation, but it is. It received Royal Assent in March 2015 which is just under a year and a half after we first took the idea to Number 10. It really does make David vs. Goliath look like a fair fight because we’re so tiny and they’ve got hundreds of years of established practice and very deep pockets.

My advice and guidance is: don’t be stupid. Understand the scale of the task you’ve decided to take on, but if you do then go through that phase of dawning realisation that it is actually a shockingly enormous task then you’re going to have to be bloody minded, tenacious and you’re going to have to get the rules changed to make it fairer. But the good news is that the industry is growing very fast. In 2012 a quarter of a billion pounds traded. In 2014 one and three quarter billion pounds traded.

This is through the sector.

Yes. That’s the thing that matters, right? Because it’s not just about GLI Finance’s portfolio of SME alternative finance companies, it’s actually about growing the sector. That’s my other point of guidance which is: stop being so obsessed with yourself. Because somebody who is just obsessed with yourself, when you’re trying to change something as fundamental as finance for half of our GDP, you can’t just focus on your proposition, you’ve actually got to create something more.

I’m hearing fairness.

Yes, and I wouldn’t overdo it. Fairness is important in all things, but just don’t be naïve and assume that it’s going to be fair. Understand that you may have to change the field of battle so that you have a fighting chance.

So, it is a lot easier to walk into the high street and establish a premium coffee brand. Why? Because premium coffee brands have been well established in this country for a decade or more. You expect to be able to walk into any high street and see a range of premium coffee brands. So, as much as it may look like a crowded market, we are trained, as consumers, to drink premium coffee.

SMEs expect to go to their bank and ask for money and they expect, actually, to be turned down. Then they expect not to do anything else. So, you’re changing something gigantic in terms of how finance is delivered, but you’re also educating. I did make a very bad joke, about five years ago, where I said “We’re not in the business of alternative finance, we’re in the business of education.” Everybody laughed. All I can tell you is nobody’s laughing anymore because it’s so true and it’s shocking how ill-informed SMEs are about options for financing their businesses.

What makes you so passionate?

Well, I don’t think of it as passion. I’m sure if you saw me up on stage giving a speech about this kind of stuff then you would describe it as passion. I don’t feel wildly emotional about it; I’m not a wildly emotional person.

Belief then…

Yes, it’s a much more logical, rational characteristic, I think. If the numbers don’t stack up, don’t do it because you’re just leading people into a battle they’re never going to win and there’s going to be nothing there if you do win. So, don’t do that. Do the analysis, understand the opportunity and work out what you need to do to secure your fair share or, ideally, a bit more than your fair share of that opportunity.

You’ve got what, to many, would appear to be an insurmountable wall of industry and institution. Not only that, but having made inroads you’ve then got an enormous amount of educating to do. In the face of these huge challenges, if you were advising someone else, what would you say?

It really is the quality of resilience. So, I think it is stupidity, bloody mindedness and resilience. So, you have to be stupid, you have to not understand the scale of what it is that you’re trying to take on and to not understand that you’re going into a big boy’s fight with toothpicks. They have got established armies of hundreds of thousands of people and an established infrastructure and established distribution network and they are the first port of call.

You have none of that. You have a smart way to get money to people who need it, as and when they need it. You absolutely have that, but they haven’t heard of you. They’ve heard of RBS or Barclays or Lloyds. If you want to make a change this big, you have to fundamentally not understand the scale of what you’re taking on otherwise you wouldn’t do it. Sensible people would not do this. The dawning realisation comes upon you, you have to understand ‘OK, it’s a bigger fight than I was expecting.’

There’s a huge business opportunity here for Britain’s SMEs to get money as and when they need it to drive the growth in their business. That is a huge business opportunity. It’s a huge business opportunity for them and it’s a huge market opportunity for the businesses that solve that problem, which we can.

It’s about smart technology and smart processes and smart underwriting and smart credit analysis. Then it’s tenacity because the fight will take years. Years and years and years. In reality it may take decades or more. It’s that fundamental a shift and you’ve got to be tenacious enough to say ‘I’m not backing down, I’m raising more money, I’m doing this.’ I think those really are the three overriding characteristics.

What mistakes would you advise others to avoid?

My main mistake was, as I say, stupidity, so do better on the understanding than I did. Recognise there may be unknown unknowns. There may be things that are so big you haven’t spotted them yet. The scale of the problem was that I was standing with my nose pressed up against the Great Wall of China. I knew it was big, but I didn’t know it was that big. The advice I would give is: better understand the challenge, but really, what you’re really assessing, is not the size of the challenge, but whether or not you’re up for it. So, understand yourself. Do you want to make your life difficult for a substantial period of time? Because that’s what it’s going to take. If you decide no, I’d rather have an easier life or run a lifestyle business or work for someone else, those are all absolutely legitimate choices. You don’t have to put yourself through the challenge of creating a new industry, you really don’t. Find something else.

In summary then, the advice you gave was around understanding the challenge and trying to find out what you don’t know. There’ll be things that you didn’t realise you were unaware of.

Try and get people to identify the great big blind spots that you’ve been happily ignoring. It does mean going and talking to people and listening to what they say. They may not be right and you may not want to hear what they’re saying. That’s also fine, but at least go and listen and don’t be put off. Really, don’t be put off.

Have you got an example of where you have been tenacious to achieve an outcome?

It really is this alternative finance industry. Realising that actually, in order to create the economic opportunity for our country, you had to get legislation passed. We’re not through that battle yet. The Royal Assent came through at the end of March. We’ve then got a further nine months of getting the secondary legislation in place and the banks complying. It’s not going to be easy.

You seem to be a woman who confronts the challenges head on.

Yes, not always a smart thing to do, but I tend to think, if you wanted to go and work with the banks on something like this, then (1) they don’t feel that they need to work with you and (2) their business model is broken so you can’t incrementally improve the situation and make a difference, it has to be a fundamental shift.

So, you will tend to find pioneers in any walk of life. Bloody minded, tenacious – those are all pioneering characteristics. Stupid, that’s definitely a pioneering characteristic. The people who will path-find in a new industry or a new service or a new product will tend to be the people who don’t listen when people say ‘Why don’t you just go home and do something that is a little bit easier?’ They tend not to be the people who do that and behave in that way. You don’t want too many of these people around because they’re a nuisance. You will not find a huge number of this characteristic type around because they’d drive us all nuts. I drive myself nuts. I’m sure I drive other people nuts at times too.

But there are other characteristics that you bring in at different phases in the cycle. So, there are the people who are operators of businesses. They run things, they incrementally improve. Those are valuable skills as well. It’s just you don’t tend to find them at the pioneering, painful end of the pointy bit.

If you were getting on a plane and had 30 seconds, what one more piece of advice would you give?

Choose who you listen to. Everybody will have an opinion and you have to know your own mind well enough as to who you should listen to because there are lots and lots and lots of people out there who would like you to do something which is in their interest, not yours, and not in the greater interest, not to achieve the bigger goal. So, choose who you listen. Listen to everyone, consult wisely, but choose who you really listen to.

What’s enabled you to choose the right people to listen to?

Gut instinct and a good understanding of what people are really like.

Thank you so very much and keep pioneering on behalf of our SMEs.

Thank you.

In brief

If you want to be a pioneer of change you need to be tenacious, resilient, bloody minded and a little stupid.

With any ground-breaking new idea, find out what you don’t know from those who have been through something similar. Ask others, but choose who you decide to listen to.

Try to get to grips with the unknown unknowns. Get as clear a picture as you can of exactly what you’re getting into and decide up-front if it’s really for you. Deciding that it isn’t is a perfectly legitimate choice.