Thursday, 24 September 2015

What are the dangers of over funding?

A recent trend in the ECF world is over funding. Nearly all pitches that get over their stated goal do it. Quite often they even extend the period of the pitch just to over fund.

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.

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