When will Crowdcube's Magic Carpet crash?

Here we go again - another ride on Crowdcube's Magic Carpet.

A pitch that funded on Crowdcube in 2011 has just published its 2014/15 accounts. That is at the end of its 3 year projections - the ones used to sell the equity.

We wont mention the name of this company as they are still trying hard to make progress and we wouldn't want to damage that.

The pitch 4 years ago showed a 3 year projection with turnover for 14/15 of £1.5m and net profit of £150k. This allowed the company to sell equity and show a handsome return for investors. It was all, as ever, sanctioned and due dildoed by the number crunchers at Crowdcube.

In reality the turnover for 14/15 was £120k and profits came to £11k. Roughly the same margins, so they should be applauded for that. This figure is 50% lower than the actual turnover declared by the company for 2010/11, as is the profit. However this 2010/11 'actual' posted in the Crowdcube pitch was in fact wrong according to the accounts filed at CH for that year. Hard to know what to believe.

It is just another example and by goodness there have been a plethora of them, of how Crowdcube allow pitches to publish completely laughable projections so that equity can be sold and a 'return' shown to be a 'reality'. 

Sooner or later surely the magic that keeps the carpet flying must run out. It is almost unbelievable that it has not already. But then it is this belief that the next one will be the one, that keeps both The Lottery and Crowdcube going.

Crowdcube - the masters of collateral damage

We have been saying this for a while.

When asked about the various companies that have funded on Crowdcube and then gone bust, Luke Lang, CC's PRing man and co founder, has always glibly replied that there are bound to be some failures along the way - its collateral damage which is made worthwhile by the benefits.

We have brought various failures to the attention of our readers and the one very small success to date.  One of the failures that is still in its final death throws illustrates just how very wrong Luke Lang's philosophy is.

Ovivo Mobile Communications Ltd raised over £500k on CC. One day shortly after raising this money, all the lines went dead. The company had folded and was put into liquidation.

That was a year ago and the liquidators annual report reveals the full extent of Crowdcube's collateral damage.

The company found no buyer and the assets, which were valued by the owner at £90,000 realised £4,000. Cash at bank was £80,000 and the liquidators bill to date is £41,000. So essentially the company will have nothing to distribute by the time it is closed - sometime next year.

Ignoring the large number of shareholders who believed the Crowdcube pitch, what else did Ovivo owe when it closed?

A lot is the answer. The liquidators report shows debts of just under £3,000,000.
This includes £1,000,000 of customer credits but more alarmingly £650,000 of trade creditors.

Now Ovivo was only able to trade because Crowdcube presented their projections in such a way as to entice investment. Without the Crowdcube money, Ovivo would not have been allowed to build debts of almost £3m and leave over half a million pounds worth a trade creditors hanging out to dry. And all of this was done with the blessing of HMRC via EIS rebates.

So Mr Lang the next time someone asks you about the collateral damage you are causing, do try to have a proper answer ready.

A classic but untold tale of Crowdfunding

We wrote about Waterbabies a while back - http://fantasyequitycrowdfunding.blogspot.co.uk/2015/03/the-truth-is-simply-whatever-you-can.html

The musical flopped on its first outing having raised what was then a record £1m on Crowdcube - although there was evidence that the platform had dressed the pitch up to make it look more tasty. The reviews are well worth reading if you like a laugh.

The company, Water Babies Music Ltd is still in liquidation and not yet closed. The most recent report from the liquidators shows zero assets with £120k due to creditors and over £1m lost by shareholders  - many of whom had invested over £10k.

What we find odd about all of this is that you cant find this information anywhere - no news stories, no Crowdcube PRing as with the E Car Club sale. Nothing. Just silence.

We think that lacks a certain balance and a certain honesty.

Many Crowdcube 'successes' have now closed, losing investors and creditors in the region of £4m. One small success, made investors £1m and it is headline news.

Doing a Crowdcube

We came across this -


9. Investors’ appetite for niche, complex businesses will grow.
We’re already seeing companies from specialist sectors, which address highly complex business and social problems, successfully attracting investment through alternative finance. Biotech company Cell Therapy, for example, has just funded on Crowdcube – and this is the kind of business we didn’t expect to be approaching us four years ago. As the number of registered investors on crowdfunding platforms rises – we expect to have as many as 300,000 on Crowdcube by the end of 2015 – the understanding and range of interests of the investor base broadens and deepens, increasing the capacity for niche businesses to find their audience.
10. Entrepreneurs will take the opportunity to make an exit.
2015 will mark three to four years since the first crowdfunded businesses launched, and it’s likely that entrepreneurs will start taking the chance to exit, and the investors who backed them will get a return as they’re successfully sold.  That is an incredibly exciting prospect.

Its from the Crowdcube Pring Dept's 10 predictions for 2015.

No.9 - Cell Therapy could be interesting. They were due to IPO this year but as with most businesses in this sector, timing is always fraught. However although the Crowdcube projections are the usual rubbish, the company is making progress and may yet come good.

It seems highly unlikely that the investor number will be even close to 300,000 - its currently at 198k. Of course this is now known as doing a Crowdcube. It helps to explain why all of their business plans contain projections you can half before they make sense.

No.10 - Wow! E car Club aside and this was a deal forced on shareholders who would have done far better to stay in, this prediction looks laughable for 2016 let alone this year. The missing ingredient is the simple fact that entrepreneurs dont sell businesses - buyers buy them. Where are the Crowdcube businesses anyone would want to buy? They dont exist on this planet.

The Nursery that never was - yet another Crowdcube success is a flop.

One of the companies we listed as being likely to close soon has filed for closure and then cancelled the filing - no details at CH.

http://fantasyequitycrowdfunding.blogspot.co.uk/2015/03/some-cold-hard-facts.html

Stakis Daycare Nurseries Ltd raised over £100k on Crowdcube in 2013. Their first accounts showed a £143k loss against projected profits (the usual Crowdcube pattern) and now this year they filed to close only to cancel it.

This is what the Stakis website says today(August 2015) when you click Our Centres -

Stakis Daycare Nurseries is currently negotiating for several key locations for its initial nurseries, expected to open in early 2014.  Watch this space for further announcements.

We are still watching. We take that to mean that nearly 3 years after raising money on Crowdcube the business still has no operational nursery!

The list of failures is growing and yet people are still throwing money at this platform -  how stupid can we be.

Front Up Retail administration drags on.

We have featured Front Up Retail here before. This company raised over £300k on Crowdcube in several tranches, then immediately went into administration, where it turned out Jon Allen, the founder, had done a pre packed deal with Lyle and Scott. This deal has left all shareholders and creditors with nothing but Allen with a full time job at L&S and payment of his business loan. The timings strongly suggest that the pre packed was an idea alive and kicking when Allen was allowed by Crowdcube to sell yet more equity - based as usual on totally fictitious projections.

That was a year ago on August 31. The administrators are still not done.

In their interim report, from April this year, they have revealed that they handed in a confidential report to the Secretary of State concerning this affair.

If there is any justice in the world, this report will highlight the timing of the final equity sale on Crowdcube and the pre packed deal. This should result in disqualification of the Director and may lead to further action from the shareholders. Caveat Emptor.

Would you like any Discounted Cash Flow with your chips? No Ta!

Can we all please agree that using the discounted cash flow valuation model for start ups and early stage Co's is a complete nonsense.

So why do they do it?

To be fair they dont all do it, but a recent example gives us a clue as to why the more naive try it.

Mara Seaweed, featured here for its outstanding valuation and ridiculous net profit margins, has now declared that it used DCF  - via their accountants calculator - to come up with £3.5m valuation. Apparently as the accountants made the calculation, it is sound.

Rule number one when using DCF is that the depth of histrical data should be sufficient to give confidence in the projected future cash flows. Clearly being a start up this data does not exist for Mara. Putting the wrong figures into a calculator generally results in a false reading.

Rule number two, is that the ratios used must be tried and tested. Mara has a net profit margin of around 35% when its 'valuation' is calculated - it hasnt achieved anything like this yet. There is no evidence from any market or from the company that this NPM is achievable at these turnover levels. It is a figure plucked from thin air or rather one worked backwards to allow a high valuation.Putting your own imaginary figures into a calculator will always produce your own answer.

There's the rub. This whole ludicrous process is being driven by the valuation - it is supposed to be the other way around.

Mara have shown already just how naive they are when it comes to business - see Dragons Den. They have refused to accept a single of the many sound arguments put forward on Crowdcube for a more realistic valuation. Now they have admitted to using a totally inappropriate calculation technique to endorse this valuation.

Our bet is they will lower the valuation in a week or so when they are still around £100k short; by which time any right minded person would have concluded that the whilst the product is of interest the management have some serious issues.