Sunday, 8 March 2015

Houston - We have a problem

One of the key problems with ECF as the Crowdcube model plays it, is the misuse of business plan projections.

It is obvious to anyone who takes a few minutes to think about it. If you wish to sell shares in your company, you will promote the best case scenario. Its not illegal and there are no rules; so why not? Encouraged by the platforms, who only get paid if the pitch completes, this is the norm on ECF sites. Our research shows that only one out 60 or so pitches that raised money managed to get close to its projections - most missing by miles.

The effect of this is two fold. Firstly new businesses that fail by miles to reach predicted sale targets, run out of cash and either refund, as below, or go bust. Secondly and more importantly we feel, this encourages existing and young companies to over trade. This then leads to crippling cash flow problems and either refundng or closure. In both cases closure doesnt just mean loss of investors money but loss of money to o/s creditors with all the effects that can have and waste of taxpayers money through the misused EIS and SEIS schemes.

There are many many examples that we have on file but one of the best was a recent one on Crowdcube. The start up company pitching had a YR1 sales forecast of nearly £1m from two outlets in the City. The credentials behind the company looked sound, backed as it was by one of the world's leading business schools.

During the pitch a few queries on the forum started to show some cracks in the plan. For example the dynamics used to work out this strong YR1 turnover included Saturday trading. This was pointed out by two separate people but ignored as the founders said their model was faultless and backed by an award from one of the world's leading business schools. What was pointed out and ignored was that the City is not busy on a Saturday and that therefore one sixth of the calculated t/o or £150k, was in jeopardy before they even launched.

The questions on this issue were erased by the site and the pitch went on to complete.

A year later they were back on Crowdcube. When asked what had happened to the predicted Saturday openings they stated that Saturdays in the City were not busy. This they claimed, having been told that their original pitch stated Saturday trading, was all part of a new businesses learning curve.

You might ask did the new pitch on Crowdcube mention any of this. Or the fact that the sales projections of almost £1m had in fact turned out to be just under £100k or a tenth of the predicted figure. All this with an award winning plan from ..................

No is the answer. The new pitch talked about the way customers loved the product. It mentioned how a few teething problems had been ironed out. Nothing about the enormous gap between reality and predictions.

In the first pitch over 100 investors took part. Of these under 20 chose to back the company in the second pitch and these were largely people who had only invested in this company - so not the crowd. Meaning that nearly 100 new investors would  not have been aware of the gap as described above.

We will let you how these guys get on.

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