Friday, 3 April 2015

The case of the failure of Bubble and Balm.

The failure of Bubble and Balm is a classic tale of ECF. The company was the first to raise money on Crowdcube in 2011. £75,000 for 15% of the company. By summer of 2013 its had closed; owing creditors several hundred thousand pounds.

Bubble and Balm had won a business award and grant from BT and had professional financial backers.  Before it pitched on Crowdcube, it was listed in at least one major chain store. Its growth, since its creation in 2009, had been steady and well thought through.

The company's greatest mistake was using Crowdcube. Enthused to promote the company at a present value of £500,000, sales projections for the next three years showed rapid growth. They had to. As only in this way, could the current valuation and promoted ROI be justified. The presence of professional investors - a minor VC company and the BT award helped credibility.

So what went wrong so quickly.

It was a classic case of cash flow. In business cash is king - like water for humans, business cannot exist if its cash runs out. Bubble and Balm had relied heavily on a new listing with a major retail chain to build its projections. When this listing ended, they simply couldnt pay the bills. Its a very old tale - large retail chains have a habit of trialling new products from small suppliers and then recreating them in own label.

So a business that could still be going and growing, vanished, taking with it investors money but also more importantly, creditors dues. This would not have happened without the help from Crowdcube. The requirement to over value a businesses to justify the equity price leads directly to unusable and very dangerous business plans. If new funding isnt available when the sales fall way short of predictions, it's curtains.

Another and much larger Crowdcube 'success' Righteous, had exactly the same problem. It used a new contract with a US buying house to up its value and raise a second round on Crowdcube (having failed to meet its first round expectations). This contract lasted all of one shipment; the product was slow to move and it was cancelled. Righteous has still to get anywhere close its predicted sales and profit figures.

Shortly after  the Bubble and Balm collapse an article appeared on the Syndicate Room website - Its worth a read as it explains how platforms like the Syndicate Room, which combines the Crowd with VC investors, help to avoid this type of failure. Unfortunately Bubble and Balm did have VCs on board. It also goes on to say that investors could avail themselves of EIS and SEIS tax rebates, so their loss would be minimal. Shame really that it doesnt recognise the very obvious failure in this logic. If the investors are not paying the full amount invested - who is? The answer is of course - all of us who pay tax in the UK. So it does matter.

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