Sunday, 24 July 2016

The Solar Cloth Company Crowdcube Fiasco illustrates the depths of the problems faced by Equity Crowdfunding.

Today's revelations in The Times about The Solar Cloth Company (SCC), which we helped to put together, reveal a dangerous absence of reality at Crowdcube and the FCA.

Dont get us wrong - we know that all success stems from failure. There is nothing wrong with failing, in fact it is the best proving ground. But its the nature of the failure and your ability to learn from it that counts. It seems, despite many examples of the same repeated problems, that equity crowdfunding is not learning anything.

A good business can fail for any number of reasons but fraud is not one that should be accepted. We and you, the investors, only get to hear about the problems once the company has closed and it can take a while to burn £500k or £1m. By then it is too late and many more pitches would have been funded using often similar deceits. 

SCC is just one case in many that illustrates clearly that the number one UK platform, Crowdcube, is simply not carrying out proper due diligence and never has. You can see the same patterns in other Crowdcube funded pitches that have either failed or missed targets by millennia. Here are few to make the point -

Water Babies the Musical
Front Up Rugby
Crumpet Cashmere
88 Delicious
Pizza Rossa
Bookbarn International
Rushmore Group
London Distillery
Zero Carbon Food
Wild Trail
Stakis Daycare Nurseries
Red Advertising
Green and Pleasant
Get Site Tracked
Seek and Adore
Share and Compare
Glassfit Inc
Hug and co
Bubble and Balm
Uni Fuels
Dr Jackson
7 Billion Ideas
Jam Vehicles
Frank Staks
Peach Lettings
My Barrister
Minor Figures
New Galexy
Crowd Mortgage

You get the idea, there are plenty more. Under this pile lie ten times as many, that have not yet filed accounts  to show how they have performed post investment.

Crowdcube, by their own admission, did not check SCC's future £4.5m sales pipeline, which we now know was fictitious. They did not check the immediate sales figures given by the company, which we now know were fictitious. They did not check out SCC's MD and his past record, which turned out to be verging on fraud. All they actually checked was that they had projections enticing enough to fool 400 investors into parting with their cash; a total of almost £1m.

Crowdcube picked up a 7% commission on that, so is it any wonder they dont bother to lift the covers? When the company goes tits up, Crowdcube get to keep their 7%, no matter how negligent they have been. It's a gravy train.   

We first contacted Crowdcube in early 2012, when it became apparent to us that their due diligence was very poor or non existent. We offered a remote service to them, FOC at first, to help them. They turned this down saying they had it all under control in house. Well, we can all now see what a whopper that was. Now they tell us that when SCC pitched last year, their systems were lacking (!) but now they have tightened them up. Haven't we heard that before, several times? 

What is more alarming is that you, the investors, seem to support this platform, whatever they get up to. Incredibly so far, to the tune of £6.6m in their latest cash grab on their own site. Maybe you do not realise that the failures we have seen so far will be as nothing compared to the failures which are backing up. Of course we expect some of Crowdcube's 426 raises to be successful - at some stage, later.....probably......well perhaps, possibly. In fact there is now a pitch on the site which we helped, MindGenius, which if funded could well go on to give investors a good ROI. We know this one has credible forecasts and a great pitch; we helped create them. 

But many of the 426 that have funded, it not all, are doomed to failure for the very simple reason that the platform encouraged them to pitch with totally unrealistic projections, valuations and expectations. And as we now know from the SCC debacle, they dont bother to check these out. Two good current examples are Sugru and Earlybird, both now trying to raise new capital on Envestors - having missed their Crowdcube projections by miles. See here- and here -

If you do not believe what we are saying and clearly many of you don't, then just look at the current case of Verto Homes.

The two founders were involved with Manor Rose, admittedly before Paul Moore took over, but nonetheless it is the same company - see here. You dont get that mentioned on Crowdcube.

Towan Heights LLP is a company so closely linked to Verto Homes that it has the same address and email and Verto own its website and sign off its accounts. Towan Heights LLP have overdue outstanding loans with Funding Circle which get no mention on Crowdcube - the amount is around £1.7m. We are told that if the money is not repaid by the end of July then FC may take legal action to get it back. You dont get that on the Crowdcube Verto Homes pitch, which is now at £1.5m raised of an original £1m target. The loans may well be paid back and yes Verto Homes are legally correct when they state that they have no exposure to FC directly. But in the FC loan documents, Towan Hieghts LLP talks about Verto Homes as the builders of the project being lent against. They are essentially one in the same.

All Crowdcube have to do is mention these facts - they are facts after all, so why hide them? Then investors can quite rightly make up their own minds. So why dont they do this? It seems that the urge to complete pitches, which is their main or only revenue source, is over powering. They just cant help themselves. They tell The Times that they have beefed up their DD since SCC; well here we find out otherwise. Unless of course they chose not to reveal these facts. Crowdcube's own DNA gives us a clue - they have dressed themselves up in some rather exaggerated claims - see here

When you build a company that is burning over £8m a year on its very existence and is backed by a GP of around £2m, then you need to cut corners. Ever since they started in 2011, the founders have ducked and dived like a couple of wide boys. Massive expenditure on PR is seen as far more important than any expenditure on the due diligence. Crowdcube employ interns to run their show; we know as some have spoken to us.

The conclusion has to be that Crowdcube is not fit for purpose. But the FCA are unwilling to touch them and now both Governemnt and large VC's have far too much at stake to admit it. Only the 285,000 investors can make the required change happen. Oh no wait, Crowdcube have corralled them into their own stable by making them shareholders as well, so they wont do anything either.

The arrogance of the Crowdcube founders is indicative of an era where arrogance has replaced the truth. We face the chance of being removed from the EU by the arrogant lies of Bojo, Dan Hannan et al and the chance of seeing a US President so arrogant in his ignorance, it beggars belief.

Just read the posts on this blog if you need convincing. 

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