The upside down world of the EIS incentive as Redemption Brewing Co fails to gain traction on Crowdcube

What a perverse world we live in. Brewers can make up all sorts of stuff about the number of units they operate, their turnover and plans but if they have EIS they almost all get funded on Crowdcube. 

Yet a decent brewing business like Redemption, with a solid existing core and Ebitda positive accounts, which has no EIS due to its trading for more 7 years, is failing to get traction on Crowdcube.

It makes you wonder. Is getting 30% back on an investment which will never see a return and will probably fold completely, really better than investing in a company already over its teething stages but without that relief. Common sense demands the answer to be no. Clearly losing all of your remaining 70% investment isnt a good plan.

I fail to see why there is a 7 year line. Young businesses are far more risky and there is a far greater chance that the EIS reliefs will be wasted. No one checks to see if these start ups are really sensible, with sensible plans. Yet a business in its 7th or 8th year, which is producing positive Ebitda, has no access - even though it is a more sensible investment and is therefore a better use of taxpayers money. 

We really need a system that is less rigid - a 7 year cut is plain stupid. A case by case test should be allowed. I know there is an 'allowance' made for companies that can prove their new product is for a  new market, even if they are more than 7 years old but I have yet to hear of a company successfully using this option with ECF.

I havent looked in any detail at Redemption's plans.

A new approach to S/EIS

Ask yourselves - what is the purpose of EIS and SEIS? Is it to help individuals get richer or is it to help UK plc?

Equity Crowdfunding relies almost entirely on the Government tax rebate systems SEIS and EIS. Without these there would be little investment. So from that standpoint, it is working - it is releasing private cash into companies as an alternative to the banks and VCs etc, where money has largely dried up or is too difficult to access for start ups and small SMEs.

So the next question is what happens next? What does this money achieve? Well the answer is a little more disappointing. The end goal of Government intervention into private funding of UK start ups, has to be the long term benefit of UKplc. You simply cant have Government handing out money from the public purse, to allow punters to go on a Saturday One Arm Bandit Spree - risk free. That wouldnt make any sense. And if further fallout was such that other SME's suffered as a result - because these newly funded, poorly run businesses went bust owing them money, then that would be crazy, right?

Well this is pretty well what Vince Cable set up. Investors openly tell us that its only because of SEIS or EIS that they take a punt. Some take an interest in the business, but many we have spoken with dont - some even admitted not reading the plan at all, they just like the rewards and with the rebate it makes sense even if they lose their principle. Is that helping UKplc? 

I have sat through numerous meetings and conferences on ECF, where the main speaker isnt an entrepreneur, but a lawyer. His is the most listened to section of the event and gets the most queries. He isnt talking about marketing, product development or cashflow. He's talking about how to maximise your S/EIS benefits. 

When a small business raises £250k on an ECf platform for their plan, and within a year has gone bust owing trade creditors that again, something in the system is wrong. Crowdcube now have around 60 failures (closures, so not accounting for the 100 plus that are zombies) to 3 dubious successes - the best exit being by sale to an overseas company, thereby taking any future benefit out of the UK. In fact 2 out of the 3 'successes' have been sales to overseas companies. 

It might all work better if the companies applying on the platforms were better chosen, or in some cases were actually chosen. A simple new director's course and test might help? If you havent passed it you cant access S/EIS. I am constantly staggered by the naivety of most plans and they never fail to back me up. If we really want to help these start ups we need to start at the beginning. The money so far wasted on tax rebates for 'investors', better described as punters, in businesses that never had a prayer of lasting 2 years let alone 10, could have helped fund this course and test. We'd be in a much better position now. It would allow easy access investment, help to protect investors, benefit the platforms and the businesses and most importantly benefit UKplc, which is where we started.

It's not instant, so wont be liked but it has to make more sense than HMRC pouring yet more tax payers money down the drain. 

All comments welcome. 

The S/EIS model is broken

We came across someone recently who was in the process of raising money for their business using equity crowdfunding.

The business had a good level of support from HNIs but there was an issue over EIS due the length of time the business had been running.

As part of our conversation I was told that EIS was an essential part of the HNIs participation - they wanted their 30% rebate or they would not back the project.

This strikes us as being back to front. If you believe an idea or business is investible then it has to investible with or without EIS. Receiving a 30% tax break when you lose all of your investment makes you a loser - not a HNI.

Agreed both SEIS and EIS are useful derisking tax breaks but they should certainly not be making the investment decision. This is not the first instance we have come across where ECF investors have leapt blindly off a cliff simply because they know that the fall is not the full distance. Fact is it is still a fall and is still very likely to end in tears.

This reliance on tax rebates is also skewing the market from the entrepreneurs' perspective. Many companies over 7 years old, or outside the time limit for these rebates, would make good investments based on the business fundamentals. A few use ECF but most are scared off by the overwhelming numbers showing how qualifying for S/EIS makes for a successful ECF pitch. Likewise, many non starters get funding simply on the basis of these breaks.

What is the purpose of the 7 year limit? Why 7? Shouldnt we be encouraging businesses that have succeeded for 7 years or more to expand by allowing them also to access this new funding. God knows, it might even produce some decent ROI.

The case of the Headless Chicken - Crowdcube's Hen Restaurant chain lasts under 12 months

Where to start with Hen Restaurants? This is the one we mentioned a couple of days ago but didnt give the name. 

Here maybe - Philip has grown up in the restaurant industry managing several restaurants and opening two successful London based restaurants.. with the opening lines of their Crowdcube pitch. Given that Philip has overseen the burning of £150k of investors' cash in less than 12 months, we would have to disagree.

In the final rambling, emotional and rather sad letter sent to investors, Philip demonstrates a total lack of business, let alone restaurant chain, acumen. Most of the letter is spent trying to explain how investors can get back all their losses via SEIS and other HMRC tax breaks. In the rest he just seems totally confused. We think he has missed the point.

Lets rewind a little.

Philip set up a chicken joint in Brighton. It was quite popular with the folk there. He made a living. He was a successful part of the great British SME culture.  

Then, he trips over some Crowdcube PR and reads about how easy and cheap it is to raise capital using this new equity crowdfunding thing. Hell, he thinks, I'm having some of that. So a little later, armed with a well thought out business plan and projections to die for, he travels to Exeter to see Crowdcube. 

The Crowdcube DD department are out to lunch, so Philip's pitch passes muster and he is away. Money raised, no questions asked.

Fast forward 12 months and Hen is a sad sight. Doors closed, the business and Philip in ruins. He had run out of cash, by his own admission, despite stating in the next sentence that sales had been good. EH? So if sales are good then he must of lost control of the costs - but he has this trade in his blood according to Crowdcube.

Ah there's the rub. A perfectly serviceable small business, with no hope of scaling, is tempted by the Crowdcube PR to expand. Its Business Plan is total nonsense but the investment is raised. The business goes bust in under 12 months. The end.

Should we be doing something to prevent this? Well as a parent if you allowed your children free reign to access the sweet shop whenever they liked, then all their teeth would fall out. It's common sense. Of course we should.  

We had this comment from an investor in Hen, which neatly sums up the problem - 

'I've got a few investments on Crowdcube but this is it for me now, don't trust their due diligence process at all.'

Suit that Fits is raising its own funding on its own site just 10 months after taking over £800k from Crowdcube.

A Suit that Fits has launched its own funding exercise, under the shade of Envestors' FCA license, having achieved little that the Crowdcube £800k pitch promised less than a year ago

One thing the Crowdcube pitch did not show was a new funding round. This after the amount in the pitch financials to make this business work was stated at only £500,000 against the achieved £800,000 plus. Now they need another £500k at approximately the same valuation. 

The new prospectus shows that the company has strayed off the path they so carefully laid out only months ago and which Crowdcube verified in their OTL dept. Namley losses of £310k against realised losses of £460k.

Of course this fact doesnt quite make onto the new pitch deck.

Envestors are the platform that recently had the Early Bird business pitching.This was then withdrawn once it was pointed out they were touting their wares elsewhere and had failed on numerous occasions to explain why their projections were so far removed from the reality of their performance. They also currently have SUGRU asking for more cash - not it appears with much luck.

One interesting point that Envestors might like to look at with regards to the Suit that Fits offer. The offer gives a variety of rewards based on discounts for suit orders and a 20% bonus share award. Now it is our understanding having recently dealt with a similar offer and HMRC, that if you take up these cash incentives as part your investment, you lose some or all of your EIS relief. All comments welcome. 

Equity Crowdfunding and its effect on EIS and SEIS funding.

A new report put out by HMRC  -

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/448308/July_2015_Commentary_EIS_SEIS_Official_Statistics.pdf

gives some good evidence for the real increase in EIS and SEIS funding since 2011, when ECf started here in the UK. EIS funding relief has been running since 1993 - so it is interesting to see just how clear the 2011 line is.

The graph showing the increase in investment via EIS is particularly clear - initial boost at the end of the 90's then flat until 2010/11 and almost vertical since. Likewise the bar chart with the number of new raises and subsequent rounds is equally powerful. ECf has had a massive impact. Its effect is emphasised by the BofE's figures on SME bank overdrafts, which since 2011 have fallen from £21B to just £13B in 2015.

Which brings us to the point - is this money well spent? Time will tell and it is still early days, but the evidence is certainly not convincing. One very small return via Crowdcube and many of the companies funded bust - figures unknown as the platforms like to keep these as quiet as possible but certainly exceeding the 10's of millions lost.

Hats off to the SEIS and EIS reliefs if they really are going to bring about a surge in sustainable UK businesses. God knows the banks are not much help. But if, as we fear, the vast majority of these businesses either limp along forever or go bust then this money could have been better used.

The rapid rise of ECf has created large disruption and it is to hoped that out of this noise we will start to see platforms who take the matter of creating long term businesses more seriously. The soft launch of Growthdeck this week is one such instance.