Here's a piece we helped with in the Wall St Journal - we would have liked a larger mention given how much time and information the journo took!
U.K. Shows the Way for Amateur Venture Capitalists
By Max Colchester
1171 words
24 December 2015
The Wall Street Journal (Asia Edition)
AWSJ
B5
English
Copyright © 2015 Dow Jones & Company, Inc. All Rights Reserved.
LONDON
The U.K. has led the way opening up a new ultra-risky market in which fledgling companies pitch shares to amateur investors online. The country "is now the best place for equity crowdfunding in the world," says Kieran Garvey, the policy program manager at the Cambridge Centre for Alternative Finance, which benchmarks such projects across the globe.
Buying shares in unlisted companies is a long-shot bet: Few if any of these companies will ever have a public offering that will allow investors to cash out at a hefty profit. The main hope for many investors is that the company is eventually sold. Financial reporting is thin, and the U.K.'s regulator has expressed concern that amateurs aren't suited to do the kind of financial sleuthing a venture capitalist can.
So far, out of 367 U.K. companies that have raised money between 2011 and the first half of 2015 via equity crowdfunding, only one has made a profit for investors, according to Altfi Data, which tracks the alternative finance sector. Since then, Camden Town Brewery became the second company set to make money for investors, after agreeing to sell to a rival brewer.
Still, U.K.-based investors have snapped up stakes in companies making everything from flying cars to burritos and musicals.
The U.S. is following the U.K.'s lead, with the Securities and Exchange Commission set to allow armchair investors to get in on an act long reserved for "accredited investors" -- broadly those with a net worth of more than $1 million or who earn at least $200,000 a year. Other countries remain wary. Germany eased disclosure rules for small businesses looking for funding but caps the total investment at 10,000 euros ($10,900) a person. In Italy, individuals can invest only 500 euros at a time and 1,000 euros over a year.
In the U.K. the rules are more relaxed. Retail investors must certify they won't invest more than 10% of their portfolios, excluding housing, pensions and life insurance, in crowdfunded companies. Websites make investors pass a multiple-choice test to show a basic understanding of the risks involved.
The U.K. equity crowdfunding market is small but growing rapidly, roughly tripling between 2013 and 2014, according to the Cambridge Centre for Alternative Finance, helped by generous tax breaks for investors. Proponents see it as an important way for small companies -- many of them starved for credit as European banks pare lending -- to access funds. It also allows investors
Critics say it opens the path for companies with inflated valuations to hawk equity to uninformed investors. One in five companies that raised funds via crowdfunding between 2011 and 2013 is no longer in business, according to Altfi.
Many of the companies that raised money are still growing. "It's going to take another year or two or three to get a feel of how well it is working," says Luke Lang, co-founder of Crowdcube, the U.K.'s largest equity crowdfunding platform. Mr. Lang says the current failure rate is better than expected. Several companies that tapped cash online via Crowdcube have gone on to raise funds at higher valuations, he says.
Investors in Britain aren't just hunting for the next Uber Technologies Inc. or Facebook Inc. Hungry customers at Chilango, a U.K. chain of Mexican restaurants, were recently handed leaflets promoting a share sale along with their burritos. Chilango raised GBP 3.4 million this month selling equity to investors onCrowdcube. The equity raise came after Chilango loaded up on more than GBP 2 million of debt last year via a "burrito bond" also pitched to customers.
"What better people to own your company than those that support it?" says Chilango co-founder Eric Partaker.
A lack of transparency has made judging the success of such capital raises hard. Most of the crowdfunding websites don't provide regular information on how companies that raised money are holding up.
It can also be unclear how much traction a pitch actually has. For instance, Crowdcube says that a theater musical, called "The Water Babies," raised GBP 1 million on its website in 2013. However GBP 800,000 of the total had already been lined up offline from other investors, says Peter Shaw, one of the show's producers. (After some negative reviews, Water Babies Musical UK Ltd. went into liquidation earlier this year.)
So far, around 90% of U.K. companies that raised funds via Crowdcube have missed their projected financial targets, estimates Rob Murray Brown, who tracks crowdfunding investments on a blog called "The Truth About Equity Crowdfunding."
Phil Murray, a teacher, made money from a sale of an equity crowdfunded company earlier this year. He invested in the electric-car rental company E-Car Club, which was sold to a competitor.
Mr. Murray, who has invested around GBP 80,000 in about 25 small companies via online platforms, also saw another bet go sour. "I don't think you can ever predict what the outcome will be," he says. Most people investing via these websites "have no idea what they are doing," he adds.
Earlier this year, the Financial Conduct Authority, the U.K.'s regulator, said it was concerned that the majority of the people placing funds on the sites had no venture-capital investment experience.
to access investments they wouldn't have been able to before.
Tax breaks are a major incentive. The U.K. offers 30% tax relief on investments up to GBP 1 million ($1.48 million) and allows investors to offset any losses they incur against their income.
Critics say it opens the path for companies with inflated valuations to hawk equity to uninformed investors. One in five companies that raised funds via crowdfunding between 2011 and 2013 is no longer in business, according to Altfi.
Many of the companies that raised money are still growing. "It's going to take another year or two or three to get a feel of how well it is working," says Luke Lang, co-founder of Crowdcube, the U.K.'s largest equity crowdfunding platform. Mr. Lang says the current failure rate is better than expected. Several companies that tapped cash online via Crowdcube have gone on to raise funds at higher valuations, he says.
Investors in Britain aren't just hunting for the next Uber Technologies Inc. or Facebook Inc. Hungry customers at Chilango, a U.K. chain of Mexican restaurants, were recently handed leaflets promoting a share sale along with their burritos. Chilango raised GBP 3.4 million this month selling equity to investors onCrowdcube. The equity raise came after Chilango loaded up on more than GBP 2 million of debt last year via a "burrito bond" also pitched to customers.
"What better people to own your company than those that support it?" says Chilango co-founder Eric Partaker.
A lack of transparency has made judging the success of such capital raises hard. Most of the crowdfunding websites don't provide regular information on how companies that raised money are holding up.
It can also be unclear how much traction a pitch actually has. For instance, Crowdcube says that a theater musical, called "The Water Babies," raised GBP 1 million on its website in 2013. However GBP 800,000 of the total had already been lined up offline from other investors, says Peter Shaw, one of the show's producers. (After some negative reviews, Water Babies Musical UK Ltd. went into liquidation earlier this year.)
So far, around 90% of U.K. companies that raised funds via Crowdcube have missed their projected financial targets, estimates Rob Murray Brown, who tracks crowdfunding investments on a blog called "The Truth About Equity Crowdfunding."
Phil Murray, a teacher, made money from a sale of an equity crowdfunded company earlier this year. He invested in the electric-car rental company E-Car Club, which was sold to a competitor.
Mr. Murray, who has invested around GBP 80,000 in about 25 small companies via online platforms, also saw another bet go sour. "I don't think you can ever predict what the outcome will be," he says. Most people investing via these websites "have no idea what they are doing," he adds.
Earlier this year, the Financial Conduct Authority, the U.K.'s regulator, said it was concerned that the majority of the people placing funds on the sites had no venture-capital investment experience.
In the U.K., investors tend to be men who have disposable income, says Jeff Lynn, chief executive of Seedrs, an equity crowdfunding platform based in London. The peak investment time on Seedrs is at 11 a.m. on Monday mornings, he says, suggesting that investors are looking for an exciting distraction at work.
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