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.
Your consulting service is to companies looking to raise equity, but you seem to blog entirely from the point of view of a retail investor.
ReplyDeleteAre you saying the Crowdcube model doesn't work overall, or doesn't work for investors? Do you think the Seedrs model works? The main difference that most people don't seem to realise is that Seedrs effectively has carry whilst Crowdcube only makes revenue on the transaction, which would suggest that one would value quality more and the other just quantity/volume.
Its content marketing - we write about ECF to get business. We donty advise on investing or not investing as we are not FCA regulated. The retail investor angle was given to us by the article - its not our angle. Seedrs model is certainly better than CC but they have started using a crazy IRR that is telling investors they are making money on the basis that their investments have not gone bust yet. This analysis also chooses to ignore the fact that a closed business is a real loss to investors, not a 0 loss as they count it. Horses for courses - different platforms offer different types of businesses a better chance of succeeding. And no we would not never use CC - but we would be very careful about using them especially at the moment as their completion rate has taken a heavy fall. Investors are simply waking up to the BS.
ReplyDeleteGreat article. I too have lost serious amounts from investments and made money from others (and also come from 20+ years in the City).
ReplyDeleteThe amount of over-optimistic companies out there who are utterly naive about their sales prospects or the true economics of scaling is crazy. To be fair I also know many well-known larger Fintech companies whose business models are still unproven and yet command crazy valuations.
The biggest problem is the nature of equity investment and the timescale of Companies House returns. Unlike debt investment where you know the problem is real when the first monthly payment is missed, these companies can continue as zombies or missing targets for years before a final death occurs and even then the formal death is often a year or more after trading has finished.
Yup - totally agree. The platfroms are currently ignoring this time lag and claiming that only a few companies have closed. Which is true but the real picture is only portrayed by what Crowdcube childishly called our 'simplistic' analysis. Over 93% missing projections and not just missing them....missing them by galaxies. This suggests these companies are not doing well surely? We have at least 40 that are looking like zombies - which is the same number as those that have closed. The urge for immediate returns fueled by the two main platfroms CC and Seedrs, doesnt help. Pushing a young business too hard before its ready is a great way to go bust by running out of cash.
ReplyDeleteThere are some shady companies raising funds for films via EIS that I can always foresee making a large or complete loss of capital, based on a few warning signs. Firstly, the share capital is always set up so the producers have share capital that has 51% of voting rights, so investors have no effective say. Secondly, the min investment is low, so the main target is small investors accessed by hard sell direct telesales with no meeting (although some big hitters still get suckered in). Thirdly, they have high running costs for no apparent reason, so income is swallowed up. Essentially investors have invested in a film and the day to day lifestyle of the producers (office, staff, script development, trips to Cannes, AFM etc), but their only revenue stream is from the film, they get nothing from the producer's future projects that have been set up with company resources. Raising funding for films is really tough, even with S/EIS. That should put investors in the driving seat, so they have the power to ensure their deal is fair and there is monitoring/ oversight of key decisions. I would have thought a City exec would get this, and if the investment is sizeable be able to get assurances.
ReplyDelete"There are others out there trying to do a better job." - which ones?
ReplyDeleteWell pretty well anyone. We advise companies that come to us which ones.
ReplyDeleteI don't have anything to add on the discussion, but I am very happy to see your work positively mention in the press.
ReplyDelete