''Sir Tom Hunter has invested in our business''

When companies claim that someone as important and influential has invested in their business, you should shut up, sit up and pay attention.

Sir Tom Hunter is probably Scotland's best known, modern day entrepreneur and through the Hunter Foundation, he has been doing great work helping to develop Scottish business.

Recently The Hunter Foundation took over the running of the Edge Fund. The Edge Fund was initially established by Scottish Enterprise, a government quango, to invest in start ups and early stage growth companies. Applicants pitch their businesses in a series of rounds to a panel of judges, who eventually decide as a quorum on who gets what. Prior to Hunter Foundation control, it had been rather over heavily influenced by the Entrepreneurial Spark incubator programme in that most of the awards had gone to ES participants.

Sir Tom Hunter is on the board of the Edge Fund. He is one of the judges.

However to claim that because the Edge Fund granted your business £50k, that Sir Tom Hunter is a direct investor in your business, is at best misleading. It is certainly wholly untrue.  Such a claim was  made very recently by Mara Seaweed, whose shambles of a crowdfunding campaign we have highlighted here before.

The claim went on that because he had invested, and Scottish Enterprise had also invested, that the business plan was sound. Hmmmm ........ the Edge Fund and SE invested in Log Six Systems Ltd a couple of years ago and that company and its Director are being investigated for fraud. At the time of the investment said Director was in fact a disqualified director. So much for their due diligence.

Crowdcube's Sprint Programme - is this the answer for young entrepreneurs?

So just what is Crowdcube's much lauded Sprint Programme.

You would imagine that this is a start up help package - an incubator programme to get young first time entrepreneurs in the mix when it comes to raising finance.

Wrong.

Crowdcube's Sprint is like so much on the platform, merely a marketing ploy. It offers no real help to struggling entrepreneurs - in fact it boasts that you can get your pitch live in 14 days which is likely to be anything but a help. It is good enough to only charge the standard 5% success fee not the extra legal fees - which are in fact very small anyway.

Its promotion uses all the usual Crowdcube razzamatazz - mentioning big names who have raised on Crowdcube even though they didnt use Sprint. 

It is lots of puff and no substance and that is why there are currently 8 Sprint pitches on the site out of a total of 23. Not one of these 8 looks likely to complete its fund raising. They represent some of the worst pitches the platform has ever seen.

This tells you all you need to know about Crowdcube's management and their Sprint Programme. Young entrepreneurs would be better standing still and coming up with inevestible plans than being fooled by Crowdcube's  never ending marketing. Sprint's only achievement will be to set these crusaders back or put them off all together.

Companies House failure to devolve a workable system for small companies accounts and returns.

A slightly dry topic but nonetheless a very important one.

We have a mound of evidence showing that you cannot believe the accounts and returns that are filed with CH for small businesses. These are the official accounts and returns that people like you use to judge an investment opportunity on platforms like Crowdcube.

This comes about because of the very lax systems we have in the UK. Small companies with turnovers of less than £6.5m are not required to audit accounts and they can present their own 'version' of their balance sheet with no need for a P&L. Most companies on Crowdcube come into this small company bracket.

Who checks this information is correct? Simple answer is no one. It works on the deterrent model in that directors know fines are applicable if they get it wrong but they also know that the chances of being found out are very very small.

The errors are not always, or indeed maybe rarely, due to fraud. The forms for example for AR01and SH01 are not straight forward if you are not used to dealing with them. The facts are that a large number of filings are incorrect and people are now using these to make investment decisions.

By way of example, a firm that raised capital on Bank to the Future, which we have featured here, has just filed its Annual Return. Datemy Ltd's AR01 shows a number of new shareholders with a large number of new issued shares. So there must have been a filing of the SH01 for new share allotments? No  - nothing. This SH01 filing is a legal requirement under the Companies Act 2006. As far as we can tell the issued share capital is still all owned by the founder and amounts to £1000.So what exactly do these new shareholders own? Do they really exist? Certainly two of the names on the list are employees of Bank to the Future, so they are real people. Who knows.

There are plenty more cases. Clearly CH are struggling with staffing levels and are simply not covering these filings; hoping the deterrent will work. Accountancy blog sites confirm this view - its a mess. It didnt really matter before the Crowd were invited to invest in penny shares - something heavily backed by the Government. CH need to up their game and come up with a new system that works for small businesses and crowd investors.

Hotcha minibond on Crowdcube is fried.

We are pleased to report that the Hotcha mini bond on Crowdcube was a flop. See what we said a while ago about their appalling customer ratings - http://fantasyequitycrowdfunding.blogspot.co.uk/2015/07/a-seriously-bad-investment-idea.html.

The Crowd seems to be getting a little better at spotting the lemons - but then they are getting plenty of practice. You would think by now Crowdcube would be able to spot them too.

Why numbers and reading accounts correctly are important for business.

Numbers matter.

The recent case of Mara Seaweed is a good example of how not to try to raise money by crowdfunding.

To start with, as we have already pointed out, the total of £500k that they are raising is not the total they are raising on Crowdcube; as they had already had £300k of it pledged - off the platform. So the current pitch's claim that they have raised nearly 80% of their total is at best misleading. Trust is an important friend when crowdfunding.

More worryingly the debacle of the Dragon's Den has shown very clearly that this business has no one on board with any clue about numbers. The CEO lost the plot and made some gaffs about turnover and gross profit - understandable under pressure. What is not understandable is her willingness to compound this error with a far more alarming one. She stated very clearly that the company expects to be making a net profit margin of between 30 and 40% when it has a turnover of £8m. This, she claimed, was based on research her advisers had done into Dorset Cereals - a niche food brand that was sold for £60m to ABF.

We checked Dorset Cereals accounts back to 2003 and in no year did the NP ever exceed 20% and in all but one year it was between 10 and 15% - so under half the figure Mara are projecting. GP and NP are critical figures for a business - they control the cash and cash is essential if you want to remain solvent.

Mara's CEO claimed that serious advisers had given her this figure.

Of course it is entirely possible that her advisers had read a report in the Telegraph that stated Dorset Cereals had made a profit of £16m on a turnover of £36m in 2012. This would have given them a NP margin of 44%. However it does help to be able to read accounts and then you would realise that this figure included a one off payment of £14m for the sale of an intangible asset ie the Brand Name. The real NP was £2m on a £36m t/o or 5.5%.

So do you think Mara have built their whole business on a massive mistake??

We could have told them all this had they asked - the crowd is now very reluctant to back them with only £67k of the £200k raised and time running out. We have little doubt that the business has potential and that the current management's inability to accept their own shortcomings is going to ruin that. It's a crying shame.

Mara Seaweed a classic MBA study in how not to do it.

Rory McPhee, the now famous silent partner in Mara Seaweed's Dragons Den debacle, might be a good marker for potential investors in their current Crowdcube pitch.

An article in the Guardian two and half years ago sings his praises as the seaweed collector off the Lizard - that's at the very tip of Cornwall -   http://www.theguardian.com/lifeandstyle/2012/nov/22/cornwall-seaweed-capital-europe. Yet now he is the CEOs right hand man and an expert on collecting seaweed in Scotland - eh? Something must have gone wrong in 2013 Rory?

There can be no doubt that Mara's founder is not up to the job - even given nerves and a brittle style, she was clearly wading way out of her depth in the shallows of P Jones' gentle questioning. Mara's product has legs but its management have none and it takes both to create a successful business.

I do believe that her failed pitch could become a classic in future MBA presentation seminars  - it is often easier to learn from seeing things done badly than vice versa and this was truly bad. Not knowing some very easy basic business facts is one thing but when in a hole do stop digging. Mentioning Dorset Cereals (like everyone on Crowdcube does) and then flannelling the name of the person there she spoke to was unforgivable.

A value of £100k for the business today might be on the light side but it has to closer to the mark than her ludicrous valuation. Will the Crowd be fooled??

Reviews are nothing if not unreliable indications of success.

We wrote about some odd reviews on the Trust Pilot site for Just Park a while back. They had hundreds of 5 Star reviews all dated in the same very tight time frame and then mostly poor reviews over a more 'natural' period.

Flavourly have consistently been poorly reviewed on TP - until just now. A group of reviews all within a 3 hour slot are all first reviews for the presenters and all very brief but 5 Star. Most of the other reviews are 1 or 2 star.

Flavourly use the internet to misdirect. They pitched on Crowdcube promoting their large subscription base as a key success indicator  - failing to point out that it was mainly made up of Groupon customers  - oneoffers looking for free deals. The reaction to the product and service was poor. We looked at their pitch at the time, pointing out that they had come up way short of the predictions they used when they pitched previously on Angels Den.

Be aware - the best advice is to ignore the good reviews and read the bad ones - if they are truly awful then avoid.