Monday, 28 September 2015

The truth about Crowdcube's sophisticated investor claims



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.

2 comments:

  1. Haha, you really don't like these guys...
    I'd say the vast majority of crowd investors is not different from stock market investors, they want to see the value of their investment (i.e. the share price) increase. Unless you hold a substantial amount of voting rights it really doesn't matter if your ownership gets diluted from let's say 0.0002% to 0.00015%.
    Only thing you should worry about is if new shares are issued to selected investors far below 'fair value', but this seems not the case here since you like to point out all those rounds are overpriced.

    ReplyDelete
    Replies
    1. thanks for the comment. Maybe i didnt make it plain but this case had a round in between the public 1 and 2 that did indeed offer a preferential deal to one investor. you should also consider that when your holding is diluted it does not mean the associated nominal value of the shares will get you back to square one. That is the whole point - you invest and get 0.15 of the company. they then issue shares that dilute you 3 times - you now have only 0.05% of the total and if the real value (ie what you can sell them for) has not gone up at least 3 times you are stuffed.

      Delete