The times they are a'changin. There are a noticeable number of larger raises on Crowdcube from companies at the cutting edge of their sectors.
Back in 2011/12/13, most of the businesses raising money via equity crowdfunding were small start ups in consumer goods and services and the internet. That phase has been unsuccessful in that no single company has managed to return a penny to investors. Amounts being raised were averaging £50k to £250k - nothing above £500k. Equity on offer tended to be generous but then 40% of nothing isnt worth more or less than 4% of nothing.
Now the likes of Pavegen, Justpark and Sugru are all looking for around the £1m mark and selling in the region of 4% of their companies. So why the change?
None of these companies can sensibly be valued today at the price tag they give themselves but they are still a better bet than the Crowdcube class of 2011/12/13 and 14. You cant get rich buying an early growth company's shares at values of £50m upwards but you might at least see your money back. That's certainly more than anyone on Crowdcube can say today.
For the founders this is simply easy money for very little equity. All of the companies above have great products; all totally unproven as money generators. We believe that VCs, who are already involved in these companies, are pushing their companies towards equity crowdfunding to raise easy money before ramping up the company for expansion. Why would they give up what is a free offer of say £1m plus free PR and a cohort of 1000 plus supporters, for a much smaller percentage of the company than another VC would demand were they to approach this market. In 2011/12 and 13 it was pretty well unheard of for pitches to be involved with already signed up VCs. Now the VCs seem to be running the larger ones. Its akin to the canny pub chains creating 'local' 'organic' 'independent' brands to fool the public. The Crowd will find playing with these professionals a painful experience.
For Crowdcube itself, the need for some good PR is paramount - that's good PR not the rubbish they make up. These high profile companies are more likely to succeed than the restaurant chain or craft brewer but are they more or less likely to make money for investors. We cant see either achieving this objective but we are happy to be wrong.
Fools and their money!!
ReplyDeleteThe important point to remember is that if you are a UK taxpayer, its partly your money! Under the Gov's SEIS and EIS schemes, investors in pitches on Crowdcube et al get between 30% and 50% rebate on the amount invested via their next income tax return. So given Crowdcube alone claim to have funded over £80m to date, that means HMRC are missing around £30m in non received income tax. Fine if this has a sustainable benefit but to date we cant see one apart from making Crowdcube money. That gap has to be filled from somewhere or more cuts made. HMRC dont check these claims, I know, so its open to massive fraud.
DeleteHi Rob, was wondering what you think, if anything, can be done to save this space? So... there is a problem, yes, now as an entrepreneur what could be a valid solution here?
ReplyDeleteOf course - some positive input would be good! Its a very difficult question.
DeleteFor a start the rules governing EIS and SEIS availability should be tightened so -
1. Companies using either have to report full accounts inc P&L within 3 months of YE for 3 years and if existing for one year retro
2. The business plans for these pitches have to be independently assessed along with the track record of the founders/directors before EIS and SEIS is granted.
Platforms must be made legally liable for the information their site produces and there should be an independent complaints procedure - not the FCA
Platforms presentation should be tightened - things like 'over funding' and 'extensions' should be banned along with the PR and Dragons Den style marketing
Ideally the state should set up a ECF platform which is not for profit for pure start ups. It could have had over £40m 'free' money to invest alraedy if they hadnt given this the Crowdcube et al 'successes'.
In the end Im not sure any of the above will negate what just might be the overidding conclusion that this type of investment just simply doesnt work and so should not receive any government help. ASSOB in Australia have a more rigorous set up and better results. It should be allowed as its a great way for businesses to get finance but you cant justify spending tax payers money on it if it doesnt have any long term benefit for the nation as a whole. My feeling is that without EIS and SEIS the likes of Crowdcube will go bust as the 'fun' in it runs dry. Will put something on the blog.
ps - investors rights etc are also crucial but will cover this in the blog.
Delete