After the recent article in The Times - https://t.co/95DwWuLTv8 - we were contacted by an ex Investment Banker with some real experience of investing in start ups over 14 years. We thought we would share it with you. It's not the picture Crowdcube paint, but that should come as no surprise.
So Mr X told us that he invested over £2.8m in 12 start ups between 2000 and 2014. That is a very sizeable chunk of cash in a good variety of businesses. Mr X considers himself a sophisticated investor who knows the ways of the world. He was in the City for 24 years.
Below is the text of his email laying out his story -
Just read about your blog in the Times, and took a look. I hadn’t seen it before as I gave up investing in start-ups two years ago, for reasons you will see below.
Anyway, real and current evidence is very difficult, so I thought I would share my experience.
Between 2000 and 2014 I invested £2,814,000 in 12 different start-ups.
Of the 12, There have been
Two successful exits - one made 400% return, but this is 11% IRR over 16 years which is the real measure. The other 82% return in 2 years, 42% IRR, and I had to work hard with the company to make it happen.
Six total losses - most have failed pretty quickly, within 2 to 3 years.
One alive and cash generative
Two alive zombies - spinning wheels but not making or using cash One semi- zombie, good product and in seventh year but constant fundraising
If I count zero returns from those still alive but no market for their shares, I have lost £1,264,000, which equates to IRR of -14%. This is with EIS rebates, which have been considerable at £610,000. If I ignore EIS benefit, £1,874,000 has gone!
But it’s not that bad as the remaining four companies I estimate are conservatively worth c. £600,000. Let’s add that into the mix and net loss is £664,000, and IRR of -5% over 17 years.
For full disclosure, one of the total loss startups was one I founded myself and worked hard on. We burnt through £800,000 of shareholder funds (including £200K of mine). The business model just didn’t work so we cut our losses.
These investments were at what seemed at the time very sensible valuation levels. Certainly far more sensible than we see today on Crowdcube and Seedrs, where I can only describe some valuations as bonkers. So I can only assume a portfolio of investments would be even worse than my experience. My last note to investors is to avoid films at any cost - two of my total losses and one of the zombies were films. The intricacies of the film business and completely unethical practises I experienced, but which seem normal to them, stack the odds even more against investors.
We think this makes interesting reading - if only to warn people that promotions used by the likes of Crowdcube are highly misleading. You can see from this that returned are very hard and often take considerable input - something that never happens in Crowdcube funded companies.
That is not to say ECF cannot work - it's just that the Crowdcube model cant. Unfortunately The Times forgot to include in their article on our work , the fact that we offer companies looking to use ECF a consultancy service. The idea being that we help you gain the best results. Its cash flow neutral as we only charge on results. We are not negative about ECF but we can see and understand the shortcomings of the Crowdcube and Seedrs models. There are others out there trying to do a better job.