This shows clearly why it may never be possible for the crowd to have information symmetry in order to make a sensible informed investment decision.
Back in 2012 Jon Allen successfully pitched for investment on Crowdcube for his company Front Up Rugby. Crowdcube named him 2012 Entrepreneur of the Year.
Having failed miserably to get close to his sales figures he was back again in 2013 and was again successful - promising the earth on the back of the 2015 Rugby WC. Unbeknownst to investors, Allen had been preparing a pre packed deal with Lyle and Scott. This entailed L&C picking up all of the company's assets, listed at £300k, for £20k and giving Jon a FT job running this new L&C brand. And finally they paid off his business loan. All apparently legal.
Investors had put in around £400k and the company had o/s debts taking the balance owed over £500k. They were all simply jettisoned.
If you now google this episode it appears that L&C bought Front Up Rugby as part of a grand expansion plan - Front Up being some success. Allen's own Linkedin page applauds his many business attributes and his building from scratch and then sale, of his highly successful Rugby shirt empire. No mention of admistrators, shady deals and burned creditors.
Coming to this story now, only 18 months on, it would be very hard to get at the real truth. That Allen set up this whole charade, lied to investors on more than one occasion and was clearly able to very easily hoodwink Crowdcube. He is simply a conman but our guess is he will appear again on crowdfunding sites once L&C have had enough of him.
Why do you think we have not heard about the investors (of this or any other ECF investment) experiences in the news as of yet?
ReplyDeleteI suppose most people dont like to look foolish and this is more true for the sort of 'dragons' who play on Crowdcube. Also this information is not readily available to the press - who are notoriously lazy. It took us quite a bit of digging to find out that the press releases from L&s and Allen's own version were nonsense. If you read them you would think that investors made a mint out of Front Up Rugby. Crowdcube are very good at disaster management - which will be useful for them in the future.
DeleteTo be frank with you I would imagine that if someone has invested say 1000 pound or more adn was told a few months later that you aren't getting anything back he would not be blaming himself and feeling foolish. I think he would be very fucking angry and would let others know.
Deletehttp://www.insidermedia.com/insider/midlands/125850-crowdfunders-lose-stake-front-rugby/#author-bio
DeleteThe problem was Allen never got close to sales predictions so this reporter has got that bit wrong. He simply invented figures that potential investors wanted to hear and lied about the real situation, egged on by Crowdcube who wanted him to raise more money so they could claim their commission. The delicious irony of his last raise was that they were never paid and were on the list of o/s creditors.
DeleteI think the investors just do not know about the sale to Lyle and Scott. There was no communication about that (I haven't received anything myself)
ReplyDeleteI invested a small amount in the business myself in 2012 when the first round was pitched. I can't complain, with EIS and the product allocation I had as part of the deal, I didn't really lost any substantial amount of money.
To be fair, back in 2012, the pitch was interesting even if this is true the sales figures were optimistic. But it was a risk worth taking.
The second round of investment is the issue in my opinion. The situation was described as good and about to boom while in reality, looking at the figures, this looked like the business was about on the brink of failing. Financially speaking it wasn't viable. As an existing investor, I was asked several time to invest again. I refused as I though the business was going to die. It was clear new capital was about to fund the daily operation for some time and couldn't be used for any expansion of the business.
Moreover, first valuation was just ridiculous. If I remember correctly, the funding target was lowered as it was to miss it.
I feel bad for the second round investors because their investment was always to be worthless. I think the issue with these investments is the lack of due diligence performed by the investors. They base their decision on a good sales pitch only.
Thanks for getting in touch - always good to hear from investors. Really Crowdcube should have spotted what Allen was up to and stopped him - but then they would have lost their commission. The delicious irony is that Crowdcube were one of the many unpaid creditors when the business failed so they didnt get paid anyway.
DeleteYou make a very point about EIS. It actually encourages worthless businesses run by crooks like Allen to pitch and encourages investors like yourself to have a punt. This money is not free money, like a river it has to come from somewhere. It is our tax money that is being wasted.
I completely agree with your point of view regarding the use of the EIS. It creates some kind of moral hazard. This is a transfer of risk from the private to public sector, while potential profits are almost fully keep by private investors. EIS should be reduced or scrapped for crowdfunding as clearly it gives the wrong incentive to investors. My first boss told me "only invests what you can afford to loose". Investment shouldn't be subsidized.
ReplyDeleteThere is also an issue with Crowdcube. A lot of projects are hopeless from a financial point of view, but also from a pure business point of view. The standards applied by Crowdcube for selecting their projects are particularly low. Only few businesses are worth the risk
Yes - would agree with all of that. Crowdcube's pitches have improved over time but then the valuations have shot up. ECF really needs a fresh approach were the crowd is far more involved with the valuation and there is some liquidity for them.
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