So there we have it - Crowdcube investors put in £6m and will lose 90% of it. Another great success for the platform - by far its largest disaster yet.
We predicted this as soon as we saw that Sugru couldnt get close to their projections from 2015 - we warned investors in 2017 that this would go pop. Read about it here
Sugru always made bold promises but never delivered. A bank financing deal recently collapsed, nailing this innovative product - or you could put it down to naive management. There is nothing wrong with the product. In fact it's a fantastic.
We revealed a few weeks ago that this was happening only we didnt reveal the company name, as we didnt wish to harm the deal. Thanks to our source on the inside.
Sugru tried and failed in 2016 to raise £1.5m on Envestors at a valuation of £30m - so its not just CC getting this all wrong.
We revealed a few weeks ago that this was happening only we didnt reveal the company name, as we didnt wish to harm the deal. Thanks to our source on the inside.
Sugru tried and failed in 2016 to raise £1.5m on Envestors at a valuation of £30m - so its not just CC getting this all wrong.
Sugru is now owned by a German company, who have purchased this £40m company for £7.6m - most of which is going to pay off debts. No doubt the Germans will pull and push it into shape and go onto make a fortune with it. The founders all get to carry on as before. We the tax payer, get to help the Germans make loads of wonga. A sort of 8-0 world cup defeat.
This is a classic case of over trading. Stretching out your company so far on the costs side as you rapidly expand, that if there is a failure in either funding or sales, even just for a short period, then a perfectly viable business gets into trouble. Here we have both sales failing to live up to the expectations and the bank withdrawing - perhaps with an eye on the sales. In military terms its known as over stretching your supply lines - See US Marines at Coshin, North Korea, as an example.
It is our opinion - you knew we would have one - that the way Crowdcube operate has brought this about. Businesses are encouraged to grossly exaggerate the up side of their performance - in that way they can raise their valuations on future expectations. It sexes up the platform and gets the investing juices flowing. As no one at Crowdcube has ever run a successful business, building it up gradually from the bottom and avoiding this mistake, then they have no advice to give campaigns except - max it out. Formformform Ltd, the founders of Sugru, fell straight in to the trap. As so many others have - all via Crowdcube.
Their first Crowdcube raise projections had them making £1m loss in 2016. The actual accounts show a £3m loss. Are you surprised given this gap that they got into financial difficulties? One major issue was the fall in their GPM - whether through discounting or higher COS it was projected at 54% but came in at 42%. You simply cant run a business based on that sort of error.
This is a classic case of over trading. Stretching out your company so far on the costs side as you rapidly expand, that if there is a failure in either funding or sales, even just for a short period, then a perfectly viable business gets into trouble. Here we have both sales failing to live up to the expectations and the bank withdrawing - perhaps with an eye on the sales. In military terms its known as over stretching your supply lines - See US Marines at Coshin, North Korea, as an example.
It is our opinion - you knew we would have one - that the way Crowdcube operate has brought this about. Businesses are encouraged to grossly exaggerate the up side of their performance - in that way they can raise their valuations on future expectations. It sexes up the platform and gets the investing juices flowing. As no one at Crowdcube has ever run a successful business, building it up gradually from the bottom and avoiding this mistake, then they have no advice to give campaigns except - max it out. Formformform Ltd, the founders of Sugru, fell straight in to the trap. As so many others have - all via Crowdcube.
Their first Crowdcube raise projections had them making £1m loss in 2016. The actual accounts show a £3m loss. Are you surprised given this gap that they got into financial difficulties? One major issue was the fall in their GPM - whether through discounting or higher COS it was projected at 54% but came in at 42%. You simply cant run a business based on that sort of error.
The only losers here are the shareholders. But they should have known this one was going to come unstuck with the valuations Crowdcube allowed them to sell themselves at and the ridiculous projections which they missed year on year.
Isnt that what we have been saying for a while now. Sugru would have been a mainstay in the Beauhurst CAGR fantasy ROI nonsense they annually churn out. It was one of Crowdcube's golden boys.
Filings at CH are not helpful here. The company has only filed one list of SHs in and that ws in 2015 when they had 4 of them. Obviously this has changed considerably and I not sure why they got away with miss filing subsequent CSs. Too late now. The Q is did the VCs who backed the company get out on different terms to the Crowd?
Very helpful reporting - thank you
ReplyDeleteOh dear... What went wrong here? Just poor quality management? Too high valuations getting them stuck at a point no institutional investor would touch them? Both?
ReplyDeleteWow, this is big news. Such a great product. Beauhurst data is a bit of a joke.
ReplyDeleteWe are told that the sale is for £7.6 million. The last raise was at a valuation of £34million. On that basis investors in the last round should be getting back 22% of their money. Investors in previous rounds should be getting back even more than that.
ReplyDeleteIt seems the return is less because of that £7.6 million a large amount is actually going to pay off debt. So they haven't really realised a sale price of £7.6million. How this company took so much cash off investors and nevertheless ran up massive debts is anyone's guess.
You're right that the Sugru product itself is excellent and will no doubt have an ongoing life. Given the SEIS/EIS tax support that the government provides to most ECF, this does pose the question as to whether UK PLC should find some way of ensuring ongoing IP stays within the country. I'm sure it would be very complex to enshrine that in law, but there's something fundamentally unjust about a German country picking up the value in a fire sale.
ReplyDelete(Note that I'm assuming the investments in Sugru were supported by EIS - but don't know for certain).
The whole S/EIS system needs a massive overhaul. I believe Sugru were EIS eligible. Agree with your point entirely.
DeleteI am one of those shareholders. I invested £2000 and will probably get back c£180. I thought it was a good product and liked the inventor and was swept along in the morph style video hysteria and irish lilt. I mean why couldn't it go on to be the next sellotape, blue tac or post it? You Live and Learn. I wish I could be more Learn and Live though.
ReplyDeleteCouple of questions Rob, how did you know it was coming and where does your inside angle come on most of these investments? I know you're a strong critic of Crowdcube but what makes Syndicate Room any different (I know you've written a Due Diligence report for them so perhaps you can't be quite so impartial), there must be a few ghosts in their cupboard, The Diabetic Boot Company, Jupiter Diagnostic, etc?
Rich
Hi Rich - Sorry for your loss. What makes SR different is the way they go about it. They include professional investors as leads, their DD is of a level that I find acceptable and I believe and it is only my opinion, that they are the future of ECF. I dont think there is any conspiracy here. I agreed to write for them because I like what they do - I wouldnt dream of writing for CC uless they got rid of their management. I do cover some of SR campaigns but the blog concentrates on Crowdcube - that much you have right. We simply dont have the time to cover all the platforms at the moment but we are working on it. Sure SR like all the platforms has had failures - but there are IMO two sorts of failures. One that is a genuine business failure - you expect these in the start up world and one that is pushed into that position by the platform. SR have very few of the latter, Crowdcube have a cupboard full. Hope that explains it.
DeleteSorry - on your other Q - we have an inside source. Simple.
Deleteps I was informed that the return for SHs wold be 20% - ie you have got back £400 of your £2k. Seems the Germans ran a hard bargain down to 10% unless debts were larger. Crowdcube have known about this for a long time - just shows on which side of the fence they sit.
DeleteAnon, Why is Jupiter Diagnostics a 'ghost in the cupboard'? Have they gone under?
DeleteWould be very interested to understand how things went wrong.
ReplyDeleteSelling equity at v.v. high price is a symptom of unrealistic expectations, but that does not cause company failure (does it?).
Thanks Andrew - a good point. I think that is exactly what it can do - see post. Over trading is a fatal error for any company but especially newcos. So how this could work in this instance. We know that the bank(s) pulled a £1.5m debt deal with Sugru quite recently. The company had exposed it self to overtrading by overstating its expectations and ramping up its debt position to prepare for the sales - which in the end never got close to those exaggerated sales numbers promoted on/by CC. It is a classic case of what i have been saying here for 3 years. All actions have consequences and by using exaggerated sales numbers in order to verify high valuations, you set the over trading clock ticking. And then bang a loan facility is cancelled. Caputsky time.
DeleteI, too, have invested and will lose a good chunk of money which is painful. For me the real scandal is not necessarily that shareholders lose money - that comes with the territory and investors (including myself) will have know the risk. The scandal in this case is that as recently as March last year, Sugru did another investment round. This is absolutely outrageous to drag more people in when things were already on a downward trajectory. Jane ni Dhulchaointi and her team should hang their heads in shame. They will probably make a killing out of this deal and sit comfortably on the board with future dividends coming in. This is a huge snub to the "community". I hope, I really hope that there will be a backlash to the directors.
ReplyDeleteYou make a very good point. We see time and time again companies not being honest with existing SHs when they are desperate to raise more wonga to avoid the noose. We need to have much more clarity voluntarily or better laws to allow SHs a comeback if they have been materially misled. We hope that if we manage to get out new site up and running for all investors and companies who are involved in this space - that we can build pressure for change - positive change to help ECF flourish not wither and die as its has in this case.
DeleteI first saw this product not long after it launched and was a bit supporter and advocate for it. I also felt it had the potential to become well known and in everyday use. I was another early investor with £500 on the first round. I'm very disappointed with the management when knowing the issues they still put out another investment round (which I put £1,000 into). I'm less concerned about the total loss, I understood the risks, but I'd be more accepting if the company had folded, or we had been able to retain our shares in some fashion in the larger business group. The return we have been given is pitiful.
Delete"Additionally, if you claimed EIS relief, you may have to repay a small proportion of that tax relief. However, the loss that you have made on your shares may be able to be offset against your income in the current tax year."
ReplyDeleteWell, that's an extract from the email to shareholders, and I think it is just plain wrong! Since the company has been sold before the 3 year threshold, then surely all the EIS relief is lost.And the capital loss cannot be set against income tax unless the company folds completely. Sigh!
Another very good point - we had forgotten to mention the EIS situation. The forst round on Crowdcube was in 2015 so this maybe ok - but the second £1.6m round will certainly be within the 3 years - so yes total loss/repayment with interest of your tax reliefs and as the company has not closed (yet) then no loss relief (yet). I daresay the Germans will want to close the old Formformform Ltd.
DeleteJust spoke to HMRC. Both rounds are still within the three years, but you don't have to pay it all back - only 30% of what you receive if that's less than you put in. You then take the initial investment, minus what you receive, minus the rest of the EIS (the bit you kept) to come up with your total loss, and then claim Share Loss Relief on that. So, you should end up with about a third back including the cheque and the tax relief, if your Loss Relief is at 40%. Glad I'm not the guy who put £1m in...
DeleteSurely if a company fails within 3 years of investment the EIS relief is not clawed back? It's where there is an "exit" eg a sale.
DeleteIt was sold at 9p a share. A large loss, but not a "failure" in terms of going bust. Need to be careful with language around tax. There is no claim for "negligible value" because you do get 9p a share.
DeleteOf course Will is quite right - this company has not failed in a legal asense so investors cannot claim that relief - it was sold for 9p in the pound which leaves investors nowhere and helps the company and its founders save their skins. If it turns out that some of this was planned, then investors may well have a case against Sugru for the misleading information supplied in March 2017 Crowdcube pitch. It certainly looks a little less simple than they have tried to make it look.
DeleteThese asshole were trying to raise of Envestors. you didn't mention that. Can't remember if they managed to raise in the end. What a waste of time sitting through their pitch. It's a awful product. Have you ever used it?
ReplyDeleteCareful with that language :)) - we have mentioned it now - thanks. I thought the product was very good although have never used it. Seems the management couldnt add up and were too full of the old blarney. As some else pointed out here - it's great for the Germans! The Envestors pitch (valuation £30m) failed.
DeleteThe product is awesome. They also did a private raise themselves in early 2016 for existing SHs at the same valuation as the 2015 CC raise.
DeleteThe auditors' report for the accounts ending December 2016 said there was a "material uncertainty in the ability of the company to continue as a going concern". The publication of the accounts for that period were only made available via Companies House in December 2017. To me that is a significant omission.
ReplyDeleteAny kind of early stage investment is risky but this exit is a kick in the teeth because it comes so early into that three year period which means we all lose any EIS benefits.
And what about a word for professional Venture Capital firms like Localglobe who put money into Sugru? Surely they did their own extensive due diligence? You put the blame squarely at Crowdcubes door yet super successful firms like localglobe who have backed unicorns poured money in aswell
ReplyDeleteSorry but I dont remember any VC company offering the crowd a £1.5m investment opportunity at £33m valuation in March 2017. That offer was made by Crowdcube. Sure the VCs got this one wrong but that is a separate issue. Indeed you might be asking if the VCs got out on the same terms as the Crowdcube investors - given they had different shares. Now that is a Q worth exploring.
DeleteSounds like more of the same...lost most of their money. Robin Klein must be raging seeing as you think “the way Crowdcube operate has brought this about”
ReplyDeletehttps://medium.com/@robinklein/sugru-an-investment-failure-but-worldwide-success-1948774db579
By the way for those who invested in the 2017 round the loss is just under 92% not the 90% that is widely being reported. Share price in that round was £1.11 and sale price is 9p
ReplyDeleteI got my cheque for £182 this morning for my 2k investment, can I claim anything on the EIS?
ReplyDeletePart of the answer to the question of what went wrong is in the over-hyping of the product, not the company. Sugru goes off far too quickly. Once you've had that happen you don't buy it again.
ReplyDelete