Article from WSJ

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

Max Colchester

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.

Chilango pivot leads to losses of more than £12m.

Chilango raised over £4m on Crowdcube via equity and bonds. Now 4 years on, it has decided to change its emphasis. A change the management blame for their large and inceasing losses

Crowdcube projections - you remember those financial fairy tales - had Chilango with a revenue of around £14m (dates are different so hard to be exact). Actual revenues are £9.7m. Money raised in 2017 was at a flat value with the Crowdcube 2015 raise. So dilution cometh. Accrued losses at now north of £12m. £3m of that came from the last year.

The FD recently left.

The latest accounts indicate that their Camden unit under performed and has been closed along with the Limehouse delivery kitchen - another idea that seems to have bombed.

Not sure how many chances you get, but these guys must be at their limit. Very tight on cash, the predicted new unit in Birmingham has not opened. They predict that EBITDA for the current year will be positive - we will wait to see that.

Investors will just be happy for the moment that Chilango has avoided the Day of the Dead.

Chilango loses one of its outlets and a fistful of dollars.

Chilango, the Mexican fast food mini chain, opens two, closes one and has one reported missing, in a race to achieve growth after raising £5.4m on Crowdcube.

Chilango has raised equity and bond capital on Crowdcube. Accounts filed two months late, show losses for the year of £1.97m against projected losses of £900k. £800k of this is explained by the loss of their 2015/16 vat reclaim.

The £2m 4 year Burrito Bond is due for repayment next year.

The chain, which had 10 units in 2015 today has seen revenues rise by only 7% for the year in question. Revenues for the year were 6.97m when they were £6.5m for YE March 2014. They fell way short of their expected revenues of £9.7m. A failure in their brand new Camden outlet, which is now closed after a year of operation, can explain some of this. The company states it has 12 open units currently operating in its accounts but their website states they have only 11. Its seems a little careless of the management to actually lose an outlet?

The company's GPM has fallen by over 4% in the year.

With advisers like Kevin Bacon (no not that one) and clients like Boris Johnson, this company may yet go far but its has certainly slipped off the starting blocks. Vamos Muchachos!

The Burrito Bond is back - Dónde va a terminar

Chilango have issued a new bond - this time on their own. Burrito Bond 1 was issued through Crowdcube in 2014 and is now due for repayment. As the company is someway off all of its targets, this new bond will do the trick.

Chilango had 6 restaurants when they issued the first bond in 2014 and had a total of 10 ready to go by the end of that year. Now they have 12 - 4 years later. Revenue for FY 2017 was a mere £10m compared to the projected ~ £20m (date changes make a like for like difficult). No profits were due and no profits have been delivered but the losses have been considerably higher than anticipated - aided by the slow progress and closure of one unit. Losses of around £250k have turned into losses of £1.4m.

Chilango also raised £3.7m on Crowdcube from over 2000 investors, in 2015. Maybe the lack of progress has meant that a new equity round was going to be hard work. According to the accounts to YE March18 they raised around £1m in the year and another £28k after YE. 

Since the 2014 success, the company has lost its battle with HMRC over a £700k vat bill, lost one of outlets and its central kitchen and pivoted the whole concept, costing many millions. You can read about all of this here. Reviews of their food are stubbornly stuck at average.

In an amusing twist, the company's auditors are Grant Thornton, whom you may remember recently missed a £20m hole in Patisserie Valerie's accounts. Room for a few burritos there. 

The current balance is in the red and company as at 31 March 2018 was short on cash with heavy debts and still struggling to break even.

In the Bond Offer document back in 2014, they told investors - 

Q - What happens if you can’t open any new restaurants?

A - Although our plan is to open new restaurants, if we can’t our existing financial position would be        strengthened as our current restaurants continue to mature. 

Well that didnt work too well. They forgot about closures, bad choices and rising costs. 

Given the above, what are their chances of raising more on this new bond? 

Well as with almost all things to do with ECF, astonishingly, they have, after just a day or so hit their minimum £1m target. Of course none of the information above was readily available to investors.

On she sails.  

Some like it HOT - but not the VAT man

Chilango lose case for £700k VAT refund.

The food chain Chilango which raised millions recently on Crowdcube, has had its VAT reclaim for almost £700k rejected.

Their food was considered served hot by the judge and with changes in 2012 to the vat regulation regarding hot and cold takeaways, they are not eligible to be zero rated.

Investors will just have to hope that this money was not an important part of their business plan!

Chilango cut losses to £1.4m

Chilangos may have turned a corner. Losses for YE March 18 are half last years and some of the dead wood has been removed as part of that loss. New ideas have been launched. The next 12 months will be critical.

Of course you can kiss goodbye to all the Crowdcube projections and promises of large profits by now. This has been a company on life support. The 50 restaurants by 2021, as per Crowdcube's 2015 pitch when they had 7, looks a little far fetched with the current number on 11. The £20m turnover for the last year is in fact £10m. This is what an immature Luke Lang had to say about it in 2015 when it raised over £3m against a target of just £1m. The proposal actually turned out to be nonsense.

“As before, Chilango has excited investors with the passion and high quality of its proposal and Eric Partaker’s video pitch particularly grabbed people’s attention as it was so vibrant. Also, the company is backed by a lot of top execs from high profile brands in the hospitality sector and that’s always reassuring for our subscribers.”

Recent funding suggests that the valuation is around £42m whereas in 2015 investors were persuaded to buy at a valuation of £43m post money. There has been some dilution since 2015. 

The company reports that the £2m Bond it issued via Crowdcube in 2014, is coming due for repayment but that a large percentage of holders have agreed to extend the date on for a few months by which time the company has plans to issue a new bond - good luck with that. 

Still the patient is alive and showing some signs of life. 

Rumour is Hopstuff is looking at a listing and selling off some assets for a new project; as well as a new raise.

Ambition is a wonderful thing - in the right hands. Leave the nest too early and you will likely end up dead. 

We have written a few pieces on Hopstuff, it has to date been a success - an almost unique situation for a Crowdcube funded business. But now we hear that the founder has asked for advice on a listing in the next 12-18 months and raising some cash against assets - for a new project.

Hopstuff doesnt make money in the real world - its projections do. Its current valuation of £14m is based on what might happen next. We think there is a good chance that the required happenings may come about but only if they concentrate on getting there....not something else. The company is talking about a new raise early this year - as well as the news on a listing and asset sale. Profits are projected  - they always are. 

Their plans are already very ambitious - and have taken a slight fork. They are now due to be opening bars (taprooms they call them) in number, even though the original two have not yet been truly tested. We did suggest to him that he might want to rein in the ambitions a little and consolidate but like most entrepreneurs he knows best. He still thinks his comparison to Brewdog is a valid one. 

So why the headlong rush? Is it a Millennial thing?

We dont know. But we do know that the reason that many successful early stage businesses go bust is because they over trade. They over extend their risk based on false, often untested assumptions. He must have his reasons.

Now is not the time for new projects or enquiring about future listings. Now is the time to deliver on your last set of projections and for ensuring as far as possible that plans for new openings work. It's like they havent learnt a thing from the delay in opening the new brewhouse and the lease issue with the Taproom - things never go to plan. 

How many businesses have we commented on that have had similar ambitions that have failed miserably. Taylor St Baristas, River Cottage, Rushmore Group, Ethos Global, One Rebel, Hen Restaurants, Pizza Rossa, Chilango etc etc have all promised and tried to expand via new openings and all have failed - some with dire consequences. We cannot list one that has succeeded to date, apart from The Dirt Factory, who 2 years after funding have still not opened their first unit. Getting it right is not easy and for sure out of 5 new units, one at least will end up a dog for reasons that are perhaps not even apparent now. Well that's our experience from 30 years opening new units of various kinds.

The hazards are many  - all untested by Hopstuff. The rewards enticing. 

This will of course fall on deaf ears. But just so we can say told you so. Alternatively you the investors might want to drop him a line. And of course, if we are wrong, then much humble pie and hat eating will be on the menu. Our record speaks for itself.

The Crowdcube story is a classic example of how not to grow your start up.

Crowdcube were the first but they have failed to capitalise on their first mover advantage. As yet another Crowdcube success fails, what is their next roll of the dice? 

You have to give Darren and Luke, the founders of Crowdcube, a certain amount of credit for having the idea and getting it going. But that's where the credit must end.

PR can only paper over so many cracks before the walls cave in. Crowdcube is mainly PR - lift the hood and you find a cheap two stroke engine where the PR says its a gleaming V8. Proving the model worked was always going to be difficult. To work, we had to see exits and these take time - much longer than the fantasy figures provided in Crowdcube pitches. You dont expand your cost base unless you have evidence the model works - not if you want to succeed. They either couldn't wait or more likely didnt know this. So they led with PR and fell back on PR - it's all been a myth building exercise. 

To illustrate, here is an article from 2017 in The Telegraph by James Titcomb - it opens....

• James Titcomb 

12 JULY 2017 • 6:40PM

Members of the public have invested more than £250m via Crowdcube, the crowdfunding website has announced.

The milestone comes after a number of businesses funded through the site have been sold, leading early investors to pocket huge gains.

Firstly the public have not invested more than £250m and they know it. Secondly you would have to look very hard for one of these lucky recipients of huge gains and even then, you would fail. It's simply PR put out by the boys and naively reprinted by a lazy journalist. Of course it does depend on your definition of 'huge'; a ploy CC use a lot. Ask CC's loyal investors and they would just cringe.

The main problem is that neither Darren or Luke have run anything successful - ever. They do not have that knowledge, despite what Darren claims in his CV. They have made mistake after mistake with Crowdcube, to the point where now, 7 years after they started, real progress has hit the buffers.

You cant blame them for trying but the really stupid part is repeating the same thing over and over again and hoping it will bring you different results.  

The initial reaction to their launch and the first businesses was WOW - first adopters were enthusiastic. The business was small but grew rapidly - failures were slow to come through and they managed a couple of decent (not WOW) exits with Camden and ECar Club. They managed the situation very well - big news about the exits and very little information about the failures. 

By 2015/16 however, there were no more exits and the failures began to mount up. People started asking if the hype around the pitches was just that. Darren and Luke introduced some new toys - mini bonds for example. This allowed them in future years to promote a return on investment figure - even though these were loans not investments in the equity sense - ie 'returns' were just the interest paid out on the bond. They didnt bother to distinguish as this would rather spoil the story.

These bonds came and went and we are now left with one company failure  - Square Pie - where all bond holders lost their cash. Plenty of other companies that have used the Crowdcube bond have been struggling - The Eden Project, River Cottage, Chilango and Taylor St Baristas to name 4. 

By 2016 Crowdcube as a company was accumulating very large losses, running at between £4m and £5m pa. It had in its own CC raises, created some ludicrous projections. In fact our records show that the Crowdcube projection to reality ratio or the PR ratio (!), is one of the worst for 500 companies we have records for. That says a lot.

Investors at this stage were still buoyant - still believing the PR issued that 'next year will be a very exciting one for Crowdcube'. You can take any year, the PR message is the same. Jam tomorrow.

By 2016/17 Crowdcube was burning through over £8m a year. They put their commission rate up from 4% to 7.5%  but they were no way near to raising the required £100m plus per annum to get to break even. Despite the PR, their accounts will show more massive losses for 2017. Their backers are deep pocketed but there will come a time when they stop filling in ever larger holes. 

And here's the rub. They are now running out of time. With no exits to talk about and investors becoming far more vary of the sorts of manipulation they have been guilty off, the funding for businesses is not growing at the required rate. We dont think they will ever get to BE. How many times can Luke say that next year is the one? We have a queue of failing companies on our radar - all funded via Crowdcube. Yes there are some we would expect to make a good exit but by the time investors have been diluted 6 times and had their 'rights' rewritten, what return they will is questionable

Their latest ploy is a good one - partnerships with various related companies outside of London. So for example a partnership with Scottish solicitors Harper Macleod is expected to pick up Scottish business. According to their own PR, this will double their deal flow. Well it may increase the number of attempted pitches, but will it really increase the investment stream - they only make money on completed deals? We doubt it - it has come too late. Harper Macleod may not have done much research into Crowdcube. They fell for the PR. Their clients wont be pleased.  Investors we speak to have moved on to other platforms, ones that take a much more professional and holistic approach. This is the way forward. Crowdcube fund you and ditch you - investors have to look after themselves; the platform takes zero responsibility for the information it publishes. Which is fortunate, as they might have been sued otherwise. But that model simply doesnt work. Investors tell us this and the number of failures and zombies funded via Crowdcube endorses it.

The only answer for Crowdcube is to get at least one large exit - a X10 job. And it has to be in 2018. They have lost their first mover advantage and in the hands of Darren and Luke it turned out to be a disadvantage. Funding hopeless companies using fantasy projections is never going to create a sustainable business - for anyone. Even with S/EIS. 

There are one or two possible exits. One has a targeted IPO for this year but Crowdcube were only involved in a very small way - Seedsr will get this credit. Others have 'exited' early, much the same as Camden, forcing CC SHs to sell up and greatly reducing their returns. Many have gone bust or are doing nothing. The return is very poor. You cant hide that forever, even by mixing in bondholders percentages. 

Having bigged themselves up so much for 7 years, it looks likely that Darren and Luke will be hoist on their own petards. When people told them that their model wouldnt work, they would have done well to listen.