Wednesday, 30 September 2015
We joined Early Bird as they were offering free food to Crowdcube readers. Now they want us to invest £1000 in their campaign in the next 48 hours for free food for life for us and 5 friends.
Really you couldnt make this rubbish up. What they are really offering is free food until they go bust - maybe a year or two.
Like much of the stuff on Crowdcube it majors in gimmicks.
Bookbarn International raised money on Crowdcube only 12 months ago - from 54 investors.
On the 17 August this year the company entered into a voluntary arrangement under the 1986 Insolvency Act. The outcome is not clear.
RIP Bookbarn International - yet another Crowdcube success story that has failed to reach either Crowdcube's platform or the media. Crowdcube would have known about this as they were one of the investors named in the filed document.
The whole CC raise was the usual dodgy business. Started with target of £75k but failed, so raised the equity on offer, still failed so eventually reduced amount required to £45k and completed. The two main directors have certainly had a busy business life.
The company had charges registered with Thincats, BoS and Natwest.
When will the FCA insist that platforms like Crowdcube start to put out the bad news as well as the PR?
Tuesday, 29 September 2015
The founder Ms Christine Bayer states in the pitch that she co founded a consultancy in 2004. This is intended to imply this is a successful business and therefore she has form in creating a successful new business. The consultancy accounts show virtually no activity - certainly nothing to make you believe she can run more than a paper shop. She is a corporate. If this information is misleading then assume all the rest is also.
As usual Crowdcube DD section were out to lunch.
We thought these guys had an ok business so here's hoping they can turn the corner and make a return for the 400 crowd investors who backed them. It doesnt look likely that it will follow the Crowdcube version of events with an exit predicted 2016/17. We'd love to be wrong.
Monday, 28 September 2015
Here is a very recent example of the sort of sophistication level Crowdcube investors enjoy.
On a current pitch , which is now overfunding, an investor asks if, as an existing shareholder from round 1 , his holding will be diluted.
Asking this shows a level of sophistication just above primary school. But the response is more worrying. The company CEO comes back to tell the shareholder that the value of the company has increased because the shares on sale in the second round are more expensive. He ignores dilution altogether.
This is clearly complete nonsense as the shares are worthless bits of paper with a nominal value created by the company. It doesnt address the issue raised by the shareholder of dilution. As it happens, this company had raised a considerable sum in between rounds one and two, so the dilution to our poor shareholder will be substantial - he seemed unaware of this third share issue. Given his understanding of how this all works, I dont suppose he will realise what has happened before the company goes bust.
So much for Luke Lang's claims about the sophistication of the Crowdcube Crowd.
We have mentioned before how HMRC's records are not accurate.
SME's can file their own unaudited accounts and annual returns and the problem is either one of dishonesty or simple inability. Either way you cannot rely in the accounts and returns that are filed at Companies House. HMRC certainly do not check them.
Here is a typical example. Peach Lettings raised money on Crowdcube over a year ago. Their AR01 filed recently shows only one shareholder - the founder. On inspection the return does say that the company had raised money by crowdfunding, but then fails to list the shareholders. According to the AR01 the company has share capital of over £1m. This is of course complete nonsense.
We have no idea if Peach Lettings did or did not complete the raise on Crowdcube. They say they did and it completed according to Crowdcube's records. But the only official documentation shows it didnt happen.
Where does that leave investors in ECF? Shouting for help.
Crowdcube PRing is pumping out its usual bile - see here http://realbusiness.co.uk/article/31537-what-does-the-first-exit-mean-for-crowdfunding
We thought that in the interests of honesty we would take some of Lang's comments and look at them against the evidence. Here goes -
''While E-Car will go some way to proving the doubters wrong, it shows a lack of understanding about the types of businesses raising finance through crowdfunding. The majority of businesses that raise funds via the crowd have a team with proven experience and serious business nous. They have a clear business plan with a keen eye on how an exit might be given and in what timescale.''
E-Car Club shareholders were forced to sell by Crowdcube's standard drag along clause. Why would they have chosen to sell for 3 times when this company will, with the substantial backing of Europcar, become worth far more? They had no choice.
The overarching common bond between all Crowdcube pitches is that they have run out of money. Look at the accounts. Some, the minority, do have good teams and even good ideas but the second most common theme is over valuation. The third is a general absence of good business plans especially on the financial side. So to date one small exit, forced, stands against a growing list of failures with a losses of over £5m. It's certainly very good news for the liquidators.
''Far from being unsophisticated businesses for unsophisticated investors, they are increasingly established. Take JustPark, a platform that connects people with cars with unused parking spaces and driveways, who raised £3.7m earlier this year. Interestingly, they raised this money alongside more traditional investors like Index Ventures and BMW i Ventures, the VC arm of BMW.''
The last bit here is just nonsense. Both BMW and Venture index were much earlier investors in Justpark - not alongside. In fact it is our guess that it was Venture's idea to put JP into ECF - great exposure for a consumer product and free money for them - they are using the crowd. So this does not prove Lang's point. Interestingly since the investment went in the reviews of the JP service have been appalling - something we flagged up at the time. If you want to see the level of investor sophistication, then just read the forums. Sure it has gone up but from the basement and the lift is stuck at level 1.
''We will start to see more equity returns come through company exits as early adopters of crowdfunding start to mature, with many showing promising progress and growth. Meaningful returns for investors are vital for the long-term success of the crowdfunding industry.''
We havent seen any show promising signs. Crowdcube pitches all without fail predict ROI in 3 to 5 years - so where are they? Take Easyproperty as an example - look at their site. They claimed to have 10,000 properties lined up before launch, but they nothing like that there now a year after funding. We estimate they have a maximum of 3000 on their books. If you look at the businesses that funded in 2011/12/13, the one thing they have in common is that they have not delivered on their promised growth - many missing their projections by 1000% plus.
Sure with this many businesses funded we are bound to get the odd the return but will those make ECF worth bothering with? Not the way Crowdcube do it. Investors are becoming wise to the platform's manipulation - time frames moving, over funding and the lack of any meaningful due diligence. We know because that's what we see and its what people tell us. The only reason that it hasnt folded already is the tax reliefs via EIS and SEIS are still tempting people to have a go.
It really is time to wake up and stop being spoon fed by Crowdcube's incessant PRing.
PS - As if to prove our point the newest pitch on Crowdcube is Amarya Ltd. Reading the pitch you would think this was a well founded successful company. Its been running for 6 years, has a solid following and subscription base. But look at the accounts. Oh dear no money, accumulated losses of £780,000 and net assets of £13k. Ooops - another one that has run out of cash. Why spin it? Business is about making money not losing it continuously. No wonder they have not produced a financial snapshot. Team not great either in terms of achievements. Market is well established, saturated and so why would you risk it?
Thursday, 24 September 2015
We know of at least one case on Crowdcube, where the pitching company admitted to us that they had been advised by Crowdcube to ask for a smaller sum of money and then over fund. Their projections even had the higher total in the cashflow sheet. Asking for a lower total gives a lower 30% mark - a key driver to achieve if you want to complete.
So are there any dangers in over funding? We believe so. Of course its fine if the real target is met in the post completion rush to invest but what if it isnt? One of the reasons ECF was set up with a line companies had to get over or they got nothing, was because investors needed to know what this money was going to do and that there would be enough of it.
So for example a company's cash flow, which is so often the cause of early failure, is predicted on a set of numbers - one of which is the money raised by the sale of equity. If the money asked for is £200k but the projections require £300k to remain stable and the over funding fails, then you have a instant shortfall of £100k. Often investors will be oblivious to this - their target is the one the platforms publish ie £200k. Its never made plain by the platforms.
Likewise if a company makes a decision to raise X and after much careful thought decides to offer Y, when it reaches both of these goals, why would it decide to change them - unless that had been the aim all along. It's not like the original decision was an unimportant, off the cuff one or the time frame of the pitch was long enough for circumstances to have changed.
To take an extreme example, the recent lowering of required funds by Square Pie from £750k to £450k has gone unexplained. How can this company suddenly not need £300k?
As with much in the ECF world it is far from transparent.
When you have articles like this in Forbes about the way to value start ups, it is hardly surprising that entrepreneurs are getting theirs so wrong.
Why would you want to waste money asking an accountant what a start up is worth? If you cant do the basic maths then you shouldnt be running anything.
There is far too much talk of exits, driven by the ECF platforms who need them to show ROI. 99% of start ups that make it through the first 3-5 years do not EXIT - they simply carry on making money for those who work there and own the company.
To value a start up, simply work out how much money you need for the stage your company is embarking on and estimate the minimum you can get away with offering in terms of equity. Remember if you fail to entice investors then this maybe the end of your business, so do not be greedy. Having 50% of something is worth a lot more than owning 100% of nothing.
We get reports that the ECF platforms have an aggressive approach to company valuations - the more value a company puts on itself, the more it can raise for a % of its equity and the more the platforms make. Investors are starting to finally wake up to this - look at the recent successes on Cowdcube and they are mostly pitches that have been forced to raise their offer or fail.
They launched an attempt to raise much needed cash via a mini bond to the tune of £750k.
The pitch has been struggling for a variety of reasons but one of the main ones was the lack of confidence that investors would see their money back at the end of the bond period, or their regular dividends. The company had extended the pitch and still there was very little activity with the bond only being half fulfilled. It was never going to complete.
Now they have reduced the amount of money they need - to the amount already raised. Eh? Yup so they have completed. Eh? They dont need the extra £300k they did need only weeks ago. Eh? But the good news is you can still take them to £750k using Crowdcube's old friend over funding. Eh?
We love the way they have worded their announcement - '' We have all deciided to lower the amount that we are willing to close the bond at.'' Eh? You were not going to get close to £750k so you have simply fudged it to ensure you do get £450k.
Only weeks ago, the head of the SP pitch when asked what would happen if £750k was not reached stated that the bond WOULD NOT GO AHEAD. I hope the fillings are more substantial than their responses.
If we have a word of advice for investors in Square Pie its Run Away..............
Our purely empirical research, no Pring added, shows a different story. We have had various emails from investors in ECF who have wanted to get their money back, asked if we would buy their shares and wondered why the FCA sanctioned this type of promotion.
If you read some of the forums on the platforms you will find questions such as:
''I was an investor in round one of this company, so will my holding be diluted by this new round?''
''When will you start paying dividends''
''How much money will I make''
''What happens if you go bust''
''What are preemption rights''
''I wanted to give these shares as a present - will I get a share certificate''
''What is the difference between A and B shares''
''When will I get my rewards'' ( in an attempt to make it easier for small investors to get involved, pitches offer rewards as with the original Crowdfunding).
You get the idea.
Our guess and it can only be a guess, is that there are some sophisticated investors but the majority are just punters who have no idea what happens when a company issues new shares, have no idea about dividends and some who even think they can sell their shares. How many investors in say Crowdcube pitches know about their standard drag along clause which will, as in the case of the only exit to date, force minority shareholders to accept the will of the major holders?
We have had comments along the lines of '' We dont mind if the company fails, we have had a 50% rebate via SEIS and lots of perks that make up most of the rest''.
So what we seem to have here is companies who often do not know how to create a realistic financial forecast, selling to punters who do not understand what they are buying, all promoted by platforms who want to make money.
Just as a Thursday aside, we see that Zero Carbon Foods (Growing Underground) have stated on their forum that will NOT need to raise more money in the next three years - how often have we seen that post on Crowdcube!
ps - new post on the Brewdog pitch asking how much he would own if he invested £100. He clearly has no idea how shares work or even the basic maths to work out the valuation of the company. Point proven.
Wednesday, 23 September 2015
When two out of three of a company's directors head for the exit in the week before their annual accounts are due you know something is amiss. One of them is listed as the CEO.
Wild Trail raised £168k on Crowdcube in 2013 and tried to raise more in 2014 but we believe this second attempt failed. As with most ECF companies they had missed their projections by some way. They received further funding from one of the now resigned directors.
So its wait and see time but we are not hopeful for the 143 shareholders. Accounts due in 7 days. Cumulative losses to Dec 2013 were almost £0.5m.
Tuesday, 22 September 2015
Basic business skills are not out of the reach of anybody willing to do the graft. But you cant just make stuff up and hope that when it comes to the crunch it will just work like magic. Throwing a couple of eggs at the cooker will not make you an omelette.
The latest pitch to launch on Crowdcube looks quite promising in a small but compact way. Timbergram have a track record of three years of climbing sales, they have made profits and the team are ideally suited for the product. They have a non ludicrous valuation, which makes a change.
However, when you are attempting to drive your sales in such a cut throat mature market, you do need to spend some money on marketing. And if you are going to service customers at a level which helps your growth (rather than one that hinders it) you do need to spend money on staffing and administration.
This company currently sells 100,000 'cards' pa and is looking to increase this over 3 years to 1m. The marketing, administration and personnel budget only increase 2/3 times with this growth and that is from a small base. The sales increases are largely driven by overseas markets which in effect will be far more expensive to service.
Ignoring the ambition to increase EBITDA from Yr1 18% to Yr3 48%, partly as a result of the non spend above, would be foolish if you were an investor. Likewise making the mistake of using mass market card sector data to project potential growth when you have a niche, up market card come gift offer, would be the same.
We see no reason why this outfit shouldnt do well but it will not follow the projections on the Crowdcube platform. A basic understanding of how these things work is essential - just plugging in the same expense figures for 3 years for key areas like marketing and customer service is a little daft when the sales figures are flying.
Phew - funded at last.
Zero Carbon Foods - or Growing Underground as they chose to call themselves in this their second money expedition to Crowdcube - have finally got there.
Tortuous does their campaign no justice. Extended by a month as no one was interested, then giving away more equity as still no one was interested, they came to their last day today needing £35k, having only managed £165k in 3 months and what d'you know, they made it. Someone put in a large lump right at the end. Who we wont know until the AR01 is filed.
So despite most of the Crowd agreeing that the differential terms used for one investor just prior to this pitch launching were unfair and the also agreeing that the valuation was overcooked, as with Mara Seaweed the platform has managed to create another completion.
Well done to Zero - we'll be watching to report on whether this time you can get close to your predictions.
6pm...........Arghhhhhhhh! No its been extended for another 8 days to over fund!! What is the point in having time scales on this platform - they are only there to con the investors. If you needed further proof that companies have been persuaded to pitcch for smaller sums and then overfund this is it. Why?
Well there is a very simple metric in ECF - get over the 30% mark in the first two weeks of your pitch and you increase your chances of completing massively - this is from Seedrs research. So a smaller total clearly has a smaller 30% mark. Add to that the lemming influence where all completions manage to overfund at a far quicker pace than the investment came in before the target was hit and you can see it makes perfect sense to the platform. For investors it's just another bit of cheap salesmanship.
Navmii is an established and very well thought of app.
It is currently trying to raise £1m on Crowdcube and not doing too well.
In its pitch, the founder of the company claims that he sold Studentnet to IMPG in 1999 for $10m. This is very helpful information for potential investors looking for an exit with his latest venture - this guy has good form.
However, it appears that this claim is not entirely correct. In 2000 it was indeed reported by various media outlets including our BBC, that 3 students had sold Studentnet to IMPG for $10m, but these reports were inaccurate.
Had Crowdcube's DD Department taken shorter lunches or stayed at work for the afternoon, they would quickly have discovered that Studentnet was valued at $10m at the time of this deal but IMPG never paid $10m. See here - http://www.theregister.co.uk/2000/02/15/how_much_did_you_say/
The deal was multilayered and we will probably never know what money changed hands - suffice to say the story put out by Crowdcube is as usual nonsense.
Search for Studentnet now and it is no longer in existence. We couldnt find IMPG either.
The founder is described in the pitch as a successful entrepreneur, having built and sold two businesses. Studentnet we know about but we couldnt find the second one. He has started quite a few companies that have closed having not traded and Navmii.
This isnt really an issue with the pitch per se, they have other more important worries over revenue streams and growth. It is really just another solid indication that Crowdcube take severe shortcuts when it comes to due diligence; something the platform vehemently denies.
Surely it would be sensible to give names to claims like these so that people at least have a chance to check out their veracity?
Monday, 21 September 2015
Crowdrating has reviewed the company we reviewed in the post below - Eat Well Play More.
This is their considered view of the CEO and CTO's experience - ''The CEO and CTO have formed businesses before and while neither have achieved a successful exit, both have amassed significant experience running these companies''
This CEO, Oliver Pugh, is the guy we described as having set up 6 companies, only one of which traded and even that was for a very short time with a tiny turnover. The CTO is Spanish and has no record of starting or running any companies. How in God's name is that experience of anything apart from applying to Companiesmadesimple.co.uk.
As we said before these guys at Crowdrating are just leeches. Avoid.
ps - we notice that Crowdrating have declined to rate Brewdog. It has been generally agreed in the press that their equity offer on Crowdcube is too hot and the lack of support for it seems to confirm this. So why have they not commented, could it be Brewdog have enough fire power to sue?
This is what passes for an accurate description at the Crowdcube T Party.
East Well play More Ltd was founded by Oliver Pugh in 2014. In that year it raised money on Crowdcube. Now it's back for more. All true so far.
On the front of the pitch Oliver describes himself as a ''Driven entrepreneur with a hunger for success. EarlyBird (the company pitching) is my life passion, I'm fully invested in its success and wont stop until we make it.''
That certainly sounds encouraging and one would expect, looking at his short career, to find some entrepreneurial activity, to back it up.
So Oliver has started 6 companies since 2012. Three of these have been closed within 16 months of opening, with no trading. Another one is still open but at the First Gazette stage, one has traded and made a £4,000 profit before trying to close. The final company is the one in the current pitch. As far as we can tell this one is still open.
So in terms of activity, if we say opening a company and closing it without it trading, is a gauge of entrepreneurship, then he scores highly. We dont think any sane person believes it is though. So you have to ask how did the DD department at Crowdcube manage to pass this description of Oliver for what is an FCA regulated and accredited pitch?
It all helps to explain the lack of continuity between the claims made in the pitch about customer retention etc and the facts as we know them.
This level of accuracy is the norm on this platform and it really is time that either they got their act together or the FCA stepped in. Not really much chance of either happening this side of the looking glass. More T vicar?
Why do they do it?
Blind Spot Gear are raising money on Crowdcube - the business projections look sensible, the team has the required skills to make the company work. So why do they have to have misleading information in the pitch? Where are the Crowdcube DD department?
If you are going to state that one of the founders started and ran a lens refurbishment company then surely that implies this was at least a success at some, even small, level.
The company in question, Kine Lenses Ltd, was incorporated in June 2013, had applied to be struck off only 4 months later and was dissolved in February 2014, having not filed any accounts. IE it never traded. So why mention it? It shows no aptitude for creating a start up or taking it to growth. All it does now we know the truth is caste doubt over all the other facts in the pitch.
Here's the thing. When you have pitches on what purports to be a serious FCA accredited platform, asking for money from the public - you are entitled to expect these pitches to be vetted and sensible in their aspirations.
You only have to take a five minute look at the pitches on Crowdcube to see how this is not the case.
Take for example one pitch - a brand new start up with predicted growth of over 50 times or 5000% in year two and an overall average growth rate over three years of 2500% or 800%pa. This all achieved on a promotions budget of under 10% of revenues.
To take another example, a pitch where on the Q&A (which Crowdcube reminds everyone is not vetted!) the founder gives out what is at best highly misleading information about the company in its previous form, which was liquidated. This new company has already raised on CC and is back for more - just a month or so before their accounts are due out. So why you might ask have they not been required to provide these accounts now; they must be ready.
Another pitch back for more cash seems to find figures a little challenging. Claims made about customer retention and accumulation certainly do not stack up withe the figures provided. But hell, who would let some figures get in the way of good story; certainly not Crowdcube.
And so it goes on...........and on and on.
Newgalexy Services, which raised money on Crowdcube in 2013, has still not filed accounts which were due almost 3 months ago.
Pitches which have only a day to go suddenly have 14 days to go - no way of telling this unless you have been watching. If the time frame is entirely flexible, why have one? Well because Crowdcube know that pitches often get a surge towards the end of their run. It is essentially a marketing con. It most certainly is not transparent.
Crowdcube needs pitches to complete - its their revenue. They now run an outfit which is burning £2m pa minimum in overheads. They will essentially go to any means to get those completions. Over valuations are the norm, misinformation is riff and its all a bit of a mess. But people are still investing - why?
There is still no evidence they will see a penny of their money back. So it must come down to the SEIS or EIS tax reliefs and the lottery mentality. All seekers of the Holy Grail are required to be a little nuts - as it doesn't exist.
Saturday, 19 September 2015
Unquoted is offering 75% of its equity for £100,000. No really. They are asking for 500 investors to put in £200 each for B shares in their not quite new investors information platform for ECF.
Before you all jump in like mad things, just check out the history of Unquoted and its directors. No not the one they give you, the real one.
How is this firstly eligible for SEIS - in other words of the £200 you invest you get £100 back from HMRC instantly you fill in your next tax return - so essentially we are all paying half of what you invest via tax deficits.
Secondly given the record of the directors, how is this all sanctioned by the FCA - unless this now stands for Falling Calmly Asleep. According to Unquoted's site they have 93 investors but there is no way of checking this - it could be pure fiction to entice the lemmings - ie you lot.
In answer to the question above - VERY Stupid.
Unquoted have now announced they will be ending their ECF campaign early - in truth it's ending because only a few fools backed it. They will be raising their capital via a French site who one supposes are not regulated by the FCA.
Friday, 18 September 2015
We reported on a new pitch on Crowdcube, Rocksolid Life, which had an incorporation date of 1970 according to Crowdcube. This was before the founder of the company had been born.
They have now corrected this but the blithering ijiots have still got it wrong - it was 2015 not 2014 numb skulls. Too much time spent PRing guys.
Thursday, 17 September 2015
It seems news travels fast in the CF community. This was posted on the Telegraph article about Crowdrating.co.uk -
The latest me too venture to hit ECf is Crowdrating. The idea is that this company will help remove the uncertainty of obtaining real information on pitching companies by producing a report for them before they pitch. They charge £2000 for this service although it is not clear if you get a poor report what you can do about it - see this article http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11868437/Crowdfunding-charlatans-to-be-named-and-shamed-by-new-rating-start-up.html
The problems we have with this are many -
1. In their own PR, Crowdrating do exactly what they claim they are trying to stop others in ECF doing - exaggerate. Mr Heath's stories are fictional or at best highly glossed.
2. The current system in this country allows SMEs with a turnover of less than £6m to file a single page balance sheet for their annual accounts. This is filed nine months after YE (even later for start ups) and is for the purpose of due diligence almost worthless. So Crowdrating will have to rely on the honesty of the information provided by the companies who agree to take up their services. This is pretty well where we came in.
3. What happens to companies that do not agree to pay for the service is not made clear - do they get a bad report and what could the legal position be if the company were to suffer commercial damage as a result. Likewise if you are being paid to produce a report, which to be of any worth to investors must be rigorously independent, what are the chances that it will be? What happens if you find the claims of the company are not quite as they might be - interpretation is a wonderful screen for hiding the facts? The site doesn't tell you if the report you are reading is paid for or not.
4. From 4 years of research, it is clear to us that it is almost impossible to be sure about any 'facts' at Companies House, on the internet or at any of the other information points Crowdrating will use. So given the need to produce data for their clients - who is going to guarantee its truth? Certainly not Crowdrating I will bet.
5. Finally you might expect one of the founders to have a real grounding in start ups and SMEs - consulting does not count! They appear to have none.
It just isnt possible to offer this service at any meaningful level - not doubt it will be a resounding success.
So what is the expected rate of growth for UK start up?
If you look at nearly all the companies that use ECF, you see that over their 3 year projections,the growth rate is a minimum of 500% and a maximum of over 3000% - yes thats three, zero zero zero percent or 30 times.
Recent work by Deloitte's Fast 50, a collection of the UKs highest growth tech start ups, gives us some clue as to what might be expected. Of these 50, the average 5 year growth rate was a real 1300% or if you take an annual average about 250% pa. Of course there are many other factors that make this simple growth percentage almost irrelevant but you have to start somewhere. If a company has a turnover in year 1 of 1p and by year five has reached £5, its 5 year rate would be 5000%. It wouldnt make it a success however.
When presented with projections showing growth from a standing start of 1000% over 3 years, what are we make of it? The sector the business is in is highly relevant, as are its market conditions and the expertise behind the company to drive this growth. Even if all of these are in a good place, to beat the average of 250% or a 2 and half times increase pa, would need something very special.
Most companies that raise ECF predict growth rates in excess of this norm (3 or five year) even if they are not in the high growth tech sector. This clearly is a mistake. So what are the consequences?
Encouraging companies that pitch in this way to sell their equity, using fantastic projections, will have negative consequences. For starters most of the Fast 50 are well financed and part of the entry criteria is that the business has to have been trading for 4 years. Unrealistic expectations can lead to over trading - a situation which might mean overselling a service or product without sufficient funds to deliver, resulting in often fatal order cancellations and customer loss. So setting yourself up for a 3 times revenue growth pa without sufficient capital to deliver this is just as stupid and dangerous as holding stock with too few customers to buy it. In fact over trading is a main reason for the collapse of SMEs.
All new businesses will make mistakes - read books on Branson or Roddick or any other successful entrepreneur. The difference between them and us is that they made mistakes at times when they were not critical - be it by design or luck. If you are going to force your business revenues from £100,000 to £400,000 to £1.6m and then £4.2m in three years then you had better have stress tested your systems beforehand. Losing an engine when cruising at 30,000 ft is not fatal, losing one when on the final descent to land will be.
Another important factor is the resource available for this growth. You see time and time again on platforms like Crowdcube, expectant companies project growth of 400% pa with sales and marketing budgets only increasing by 50% pa or less. Quite a few even show this resource diminishing. Likewise personnel and administration costs tend to rise in years one and two and then plateau - never taking into account the different strains a £3.5m turnover will place on the workings of a small company compared to a starting £100k.
All of the above helps to explain the dominant feature of nearly all of Crowdcube's 'successes' - their failure to get anywhere close to the revenue projections they promoted on the platform when they were selling their equity. The forums have been filled to bursting with entrepreneurs saying that their sales growth is on the conservative side. Then later, when they run out of cash and return for more, they never mention these projections.
Of course Crowdcube would say that no one is being forced to invest. That is so. If you ever needed proof that the sorts of people who are investing know very little about how business is run, then the success of the platform is just such evidence. They dress the whole charade up as some sort of Dragons Den game show and this is allowed by the FCA. But we have people talking to us who have invested and lost money and clearly do not understand the first thing about what the risks are. So somewhere the message is being missed and we believe it is the platform's responsibility to engage more honestly with investors. Of course that would mean sensible projections and fewer investors so the chances are really very small.
Wednesday, 16 September 2015
Will Investors ever see a return from UK Equity Crowdfunding?
Equity crowdfunding started in the UK in 2011. So what have we to show for it?
Equity Crowdfunding (ECF) was launched in the UK in 2011. The first platform and now by far the largest, is Crowdcube; established by two PR entrepreneurs. It has to date supplied funds to almost 300 companies, raised a total of over £100m and this year alone has exceeded £50m in funding. The question now is when will investors start to see returns ?
In order to see these returns, investors need to off load the shares they have bought. There is no secondary market, so exchanging them for cash requires either the business to be sold or floated via an IPO. These decisions, should they be available, will be made with no reference to the Crowd who invested.
One company, E-Car Club has sold out and investors apparently took a return of 3 times their investment – the details were kept secret. This is a slightly odd case as the company agreed to sell a major stake to Europe's largest car rental firm, Europcar, thereby giving this tiny loss making electric car club an instant pan European platform – something it had failed to deliver flying solo. Investors were forced to sell their shares as a drag along clause in the Crowdcube deal was activated. Clearly with these new backers, this company is likely to be worth a lot more than 3 times in a few years. Unlike most ECF pitches, this one was not eligible for the UK Government's generous income tax rebate scheme - a scheme that has proved the main driver for ECF's growth.
It is to date, the only return.
It pales into insignificance when measured against the mounting losses. E-Car Club raised £100k and therefore returned £300,000. To date investors in all the UK ECF platforms have lost in excess of £5m. Without fail, pitches on a platform like Crowdcube promise returns in 3 or 4 years, so we really should be seeing some by now. There is absolutely no evidence that that we will. Our research, based on Crowdcube and a few pitches from other sites since 2011, shows that 99.9% of the companies that have raised money this way, have missed their projections for all years since. Some have missed them by over 1000% .
These are the projections promoted by the platforms and used by punters to decide to invest. Under the current regulations this is all totally legal. Given the illiquid nature of these shares and the poor performance of these businesses, the chances of realising any return look very remote – they are locked in for eternity or until closure. Throw into this mix the dilution suffered by B share holders, when the inevitable unscheduled second and third raises occur and you have a gloomy picture. Caveat Emptor only works if you have information symmetry and that does not exist here. The reporting systems we operate for businesses with a turnover of less than £6m (most of the companies raising ECF) only require them to file a very sparse balance sheet for their annual accounts. These are quite often wrong and can be adjusted at any stage in the future. These filings are being used by investors to make decisions; so is it any wonder they get it wrong.
One recent development highlights the problem of ECF as practised in the UK. Mara Seaweed raised over £500,000 on Crowdcube and valued itself at £3.5m, pre money. When asked how they had come to this value, they replied they had used the Discounted Cash Flow method. As most people know this method is favoured by VC firms but cannot be reliably used for start ups, as the historic data just isn't available. Mara is a start up. Despite this the company was successful in its pitch. The punters are just that – punters. Ask a car parking attendant to position a military strike drone and you can expect collateral damage; blind fold him and anything could happen.
Does it matter? Well yes because despite the attempts of the platforms to cripple ECF in its infancy, this could be a very valuable source of funding for SMEs. Sooner rather than later, investors will wake up to the fact that throwing money at Crowdcube and the others for zero return is actually pretty foolish and the well will dry up just as suddenly as it appeared. Reaching a £100m investment milestone is rather pointless if all that money achieves is failed businesses and angry creditors. It seems very likely that finding such an easy source of cash, many companies that partake are over trading – with the usual dire consequences. A more responsible approach to promotions and to due diligence with the financials would help alleviate these problems. A model more along the lines of Australia's ASSOB would be better than the one we have now.
Tuesday, 15 September 2015
Plus Ca Change!!
New pitch, new set of misleading information.
The opening remarks of Crowdcube's Fashion For Change pitch states ''Isla is an experienced entrepreneur'. The vagueness and the fact that she never mentions what experience she has, rings alarm bells.
And hey presto those boys in the DD room at Crowdcube have been asleep again. This woman has no experience of building a successful company - none, nada. She has been involved in 5 in total - all of them dissolved with 3 never trading and the other two hardly breaking into a walk. It's just paff.
Now this is not large enterprise but if you are going to claim something you really should be expected to prove it. It's just another example of shoddy unprofessionalism on Crowdcube's part. It will lose them investors. It will eventually lose them their business.
Monday, 14 September 2015
We wrote about JustPark a while ago, as their customer ratings appeared to have been fiddled.
Fiddled as in there were over 1000 reviews but the vast majority of these were from a very short period and were all 5 star. Most of the remainder were naturally spaced out and were very poor.
Anyone who invested in this outfit through Crowdcube should take a look at this - https://uk.trustpilot.com/review/justpark.com. The last year has seen mainly 1-3 star reviews and yet the overall rating here is still 5 star because of the nuanced block of 5 star 'reviews'.
We think the problem may be that the people offering their spaces are not really too bothered by the level of service they offer - why would they be, they just offer the space to JP and expect them to do the rest. Justpark have absolutely no control over this crucial issue - their parking customers' interface with the parking space and owners of that space. Angry customers do not make a multi million pound business.
Sunday, 13 September 2015
If you needed any more evidence that Crowdcube don't bother with due diligence - here it is.
A new pitch on the site - Rocksolid Life - claims in its opening remarks to be a company that has been going since 2013. If you then go to the Company page of the pitch it states that Rocksolid Life Ltd, reg # NI630400, was incorporated on 1st January 1970.
If you bother to check the contradictory information Crowdcube supply with Companies House, you will find that it is all wrong. Rocksolid Life Ltd - the company you are being asked to invest in, was incorporated in 2015. There is another Rocksolid Life (Eur) Ltd which was incorporated on 13 March 2012 and is owned by the same person as the owner of the Crowdcube pitch company - but this date doesn't feature in the Crowdcube shambles. In turn, this company is wholly owned by Aj Locum Solutions Ltd, founded in 2009.
So what we have here is a Government backed platform, who spend enormous sums on their own promotion claiming that they carry out thorough due diligence on the pitches they offer to punters - providing information that is total rubbish and has not a shred of truth about it. Can you trust Crowdcube - simple answer is no.
The pitch business itself has little to recommend it and as it's almost impossible to know who you are investing in, will almost certainly complete its funding round as so many others have before it. When will people wake up.
Friday, 11 September 2015
We made the point when the Brewdog pitch opened - it is way overvalued for equity investment.
Now someway into its pitch period, the uptake is very very slow considering the final target is £17m.
We are not alone - punters on the platform and as we reported commentators, have all made the same point - this is not a sensible investment at this level.
Over valuations are the latest trend on Crowdcube and will not help them in their task of making the platform profitable. Sure there will always be the punters who just want some free beer but you need a lot of them to get to £17m.
It must be worrying for both existing Brewdog shareholders and Crowdcube shareholders that common sense is not being applied here. Using the wrong metrics to calculate your valuation is pretty well guaranteed to come out with the wrong answer boys, even if you deny it until you are blue in the face. But then that is the bulldog spirit.
Sqaureknot take the crowd out of Crowdfunding.
The Glasgow based site has been going for almost 3 years and yet the pitches on the site have very little resemblance to anything we know as equity crowdfunding. The few pitches that have completed, have between 7 and 3 investors each, putting in amounts from £60k to £100k. That is barely a group let alone a crowd and is almost certainly just friends or even the company's own directors investing. Pitches have been known to last over a year here - who knows, maybe longer.
All this is carried out with the sanction of the FCA via a third party called Kession Capital Ltd. There is clearly something wrong with the FCA, their system of verifying the quasi licenses these third parties hand out or both.
Thursday, 10 September 2015
Hab Housing Ltd broke the record books when they raised almost £2m on Crowdcube on 2013.
The brainchild of TV presenter and architect Kevin McCloud, the firm has suffered some very poor PR recently -
Lets hope they manage to sort out their operation before the Crowdcube investors are left homeless.
GF Foods (York) are back - hard to believe but they are. This business, whose first incarnation was eventually dissolved in 2011, 2 years after going into administration with creditor debts of £350,000, has used Crowdcube before.
It now values itself at £2.5m having only shown losses to date in its two years of trading. It seems impossible that people will be stupid enough to give them money but then you would think that Crowdcube would have been sensible enough to have declined their approach. The mess the last GF Foods left behind has cost £80,000 in fees to sort out and left a lot of very angry creditors. Whats more the two directors now asking for our money on Crowdcube, had taken out loans from the old GF which despite legal attempts by the administrators to reclaim, were never repaid.
You have to ask given the history of this company and its directors, why this is being allowed 3 months before their next set of accounts are due to be filed for YE 03/15 - why are they not told to file them now? Even Mac could be forgiven for blowing up over this one!
Wednesday, 9 September 2015
Scanning the internet for stories on E-Car Club's sale to Europcar we came across this piece in City AM - http://www.cityam.com/222021/ignore-snobs-why-crowdfunding-bringing-diversity-back-business
Reading it, it began to feel like it was written with a slightly one sided view. Guess what, it was. The author works for a major Crowdcube backer and although the piece acknowledges this, it is still just a piece of very obvious and not very intelligent PR.
Quite apart from anything else, the sale of a major stake in their company by the directors of E-Car Club to Europcar was not all that Crowdcube have made it out to be. The 65 Crowdcube investors - most of them B shareholders - were forced to sell their stakes in line with Crowdcube's standard drag along clause. E-Car Club had up to now made almost £500k of losses and had failed to gain a foothold in its target South East market. In desperation it had started opening bizarre hubs in the north like the one on the outskirts of rural St Andrews, Scotland.
Why would shareholders sell their holdings when Europcar had given the company instant access to pan European hubs - something it would never have achieved flying solo. The company will now go on to make its founders rich, whilst shareholders can only imagine the returns they might have made.
The article of course ignores the many total failures that Crowdcube have helped promote, the loss of all the investment and the large numbers of creditors hung out to dry. Still he has to look after his company's interests and wouldnt want the truth to get in the way.
Monday, 7 September 2015
Wool and the Gang value themselves at around £8m. Not bad for a company that has never made a profit and showed a loss of almost £1m in 2014. All but one of the original directors have resigned, as has another who joined a year after the start.
Now you wouldnt know this from the Crowdcube headline introduction to this outfit.
The headline names Jade Harwood, one of the founders, as still being a driving force - yet she resigned in 2013.
The 2014 performance was in fact a spectacular success - turnover up by 35% etc etc. No mention of any losses. Of course having Index Ventures as your dad helps, its a bit like having Oxbridge on your CV. I suppose they used DCF to get to £8m despite having no history of the company's cash flow to work off.
This is not the first time that Index Ventures have used Crowdcube to promote one of their fledglings and it wont be the last. But just remember who you are dealing with and do some serious DD before jumping onto this one. I never like it when more than 50% of the management jump ship.
People put opaque glass into buildings to hide what is happening behind it.
Escape the City raised £600k on Crowdcube in the summer of 2012. Their latest accounts to YE12/14 show a loss of £100k for the year. What is slightly more surprising than this loss, which of course was not what was in the projections used to sell their equity, is that the paid up share capital is only £457,000. This is someway short of the £600k raised on Crowdcube and you would expect the total to be far higher than this £600k anyway.
All a bit of a mystery but as it happened behind the glass we will never know the truth.
Saturday, 5 September 2015
We love ponds but some of the life in them is not too desirable. The Great Diving Beetle and its larvae for example, will extinguish all other pond life if you let it - attacking and consuming creatures 4 times its own size.
Out of the blue recently we were approached via email about a new business trying to raise money via its own crowdfunding campaign. So we thought we should check it out.
Unquoted claims to be a new way of building trust in what is fast becoming, lets face it, the murky world of equity crowdfunding. That sounds like a great idea and they are offering the first 500 investors who put in £200 each, a very large slice of the company.
The only slight problem we have with this outfit is that its previous incarnation - Unquoted Limited is in liquidation with money owed to shareholders and trade creditors of around £500k. This position had been achieved before any accounts were due to be filed. What's more, the name of the company was changed to Unquoted Realisations plc, 5 days before it was put into liquidation, which strikes us as nothing if not odd.
The team they claim to have comprises the same two who were involved in the now waiting to be liquidated company.
Caveat emptor my brave investors - into the the pond with you!
Bottomless chasm are dangerous things. Before you can react they are upon you and its all too late.
Looking at Crowdcube's latest accounts, to YE Sept 14 and comparing these to the projections they used to sell their equity on their own site, one might be tempted to yell ''LOOK OUT!!''.
It is not so much the loss for the year of £1.35m but the fact that this loss is on a turnover of just over £1m. The company is in no immediate danger with investors piling in over £6m. The interesting bit is the fact that the company now (2014) runs administration costs at an annual £2m which by end 2015 may well be nearer £4m. Taking a 5% commission on successful pitches means that to 'turnover' enough money to cover costs of £4m would mean raising £80m pa - ignoring the listed direct costs of 30%. That's before the company makes a penny. In five years it has just managed to raise a total of £100m. Now the truth is beginning to hit home with investors - you aint ever going to make any money this way, investment will become increasing tight. So is £80m in one year really possible?
Quite apart from all of the above, what is so amusing here is that their very own projections - the ones used to enthuse all that investment, have turned out to be more inaccurate than any of the others used by the 1000 plus pitches that the platform has promoted. We are talking about stella differences here not a close miss.
What also might be of interest to those who have their faith in this outfit is that the notes to the accounts state that they have, under the Companies Act, not declared a P&L - but there it is on the very first page; a full P&L. What's more they go onto declare a profit of £1.35m in these notes not a loss - !! Management, what management?
If we were amongst their shareholders, we would be looking out for the first cracks before the big drop opens up.
Friday, 4 September 2015
Firstly apologies for going on about Mara Seaweed, but it is a case that has some very curious elements.
Two days ago Mara looked sure to miss their £500k target. The pitch opened 45 days ago with a startling £300k already in from one investor. This turned out to be a group of Scottish investors who had agreed to invest off the Crowdcube platform but Crowdcube had worked out that by opening with over 50% completed, this would help the pitch succeed.
In fact a mix of the Dragons Den debacle, a management in meltdown and a valuation based on a total misuse of DCF, turned the Crowd very firmly against the pitch. By the time one day was left they had only raised another £98,000 on top of the pre arranged £300k. Then out of the blue they reached £500k. Whats more they have now extended the time period for another 14 days to 'overfund'. Why?
We know that the final £100,000 was invested by a Jim Fallon, a non executive board member of Mara. Of course Mr Fallon could always change this investment amount if, say for instance, the overfunding brings in another £50k he might reduce his £100k to say £50k. He gets a week to confirm his investment once the time is finally up. I dont suppose he will but you get my drift. Mara have themselves stated that this whole process has been difficult and taken up valuable time but they have decided to ride the Crowdcube wave or 'overfund' - looks more likely to be a backwash to us.
As reported earlier, the reaction from some Crowdcube members has been very hostile to these happenings. It certainly isnt very transparent.
Anyway that is probably enough on Seaweed, until the accounts reveal what has really happened over the next few years.
Thursday, 3 September 2015
Well done to Mara Seaweed. Having seen very little activity over the past few weeks and being over £100,000 short of their £500k target with 3 days left, in the blink of an eye, or 24 hours, they are now 'overfunding'.
It will be fascinating to follow their progress and to see if they can really deliver a NPM of 35% on £8m sales, as they claim.
From what the crowd have been saying for the past month, this £100k investment must have come from existing sources - we all agreed that the management was lacking and the valuation was ridiculous. From the numbers of investors it is clear that this last minute funding has come from one source so of the £500k sought, only about £98k was crowdfunded.
There is even a now a comment on the forum about it all being a little bit fishy - not for the first time we might add!
Tuesday, 1 September 2015
Crowdcube's conundrum appears to be that it cant make the real Crowdfunding work - the one for start ups and it cant make its latest attempt to recreate it for more established businesses work either - because there isnt enough in it for investors to get excited.
Take the latest two examples of the latter option. Emoov at £20m and Brewdog at over £300m are valued to prevent the Crowd being interested at the levels they require - £1m and £25m respectively. Despite Emoov starting out with £250k already pre arranged - when will the FCA sit on this practice, it just doesnt seem to make sense to have a punt at these levels. It's a bit like the Lottery offering you a 20% chance of winning but only winning small - you just wouldnt bother. It's just not in our psyche.
Of course the main problem is the fundamental one that will eventually bring this all crashing down. Crowdcube has raised almost £100m for nearly 300 businesses over the last 5 years. With one tiny little and to be frank slightly forced return of £1m or 3 times the investment versus losses heading fast towards £5m, the picture isnt a good one. Add to this all the dross in between reporting accounts that show what we all really know - that very very few businesses return the sorts of value that Crowdcube has and still is promoting in its glossy sales pitch.
What the appearance of the big boys like Brewdog will do for the many struggling pitches is obvious - it will soak up any investors who have only just noticed this platform. Leaving the small hopefuls to die on the outskirts of success. You do have to wonder if any of Crowdcube's claimed 200,000 'investors' have been fast asleep for two years if they hadn't already heard of Brewdog's own crowdfunding campaign.
Brewdog were self crowdfunding but it seems that the target of £25m may have been a little too far out. They raised the first £5m in weeks but then only another £3m in the 3 months to August this year. Of course you wont hear them talk about this - their positive energy jive is all consuming.
On Crowdcube now they have a double offer - equity and or a fixed rate bond. The bond is raising £6m and the equity seems to going for £25m although it is all a little unclear. There is no 'target' as with mere mortal's CF pitches, just a number of investors. Presumably this is to protect against any ridicule if the barrels turn out to be empty.
The company is the UK's fastest growing food or beverage company and made operating profits of almost £4m in 2014. There is no dount about its success to date but what about the plans for the future and the valuation being offered today to investors. The company is already valued at around £300m in terms of this offer, or a staggering 100 times earnings.
Still with phrases such as 'crazy awesome' being used by the founders to highlight their positivity who knows what will happen.