So Seedrs have now produced a follow up to their initial portfolio report and according to the figures presented, on average, they are showing paper gains for investors.
We were curious about how Seedrs find out the information that enables them to place each company into each category. These categories are the mainstay of the report - they are Appreciated, Depreciated and Even. They are self explanatory.
So for example it is quite easy to see if a company has 'appreciated in value' post a Seedrs funding round, if it then raises more money at a higher paper valuation. We get that bit. And we assume it takes into account the dilution factor.
How though, do you go about assessing if a company is in the Even or in the Depreciated section? Depreciated includes those that have closed.
We asked Jeff Lynne the CEO of Seedrs and he was quick to respond - he said that where they believe a company is a zombie company they mark it down to zero and put it into the depreciated segment. He was also quick to point out that the methodology they use has been passed by EY.
But how do they 'believe' that a company is a zombie? For this post a zombie company is one that is still open at CH but is trading at a very low level or not trading at all.
We find it quite hard to believe that these companies, if asked, will come clean and admit that their plans have gone west and they are treading water. Why would they do that?
We gave Jeff a specific example, which will remain nameless for now, but he declined to comment on it. The company has done little since raising finance on Seedrs in 2014.
Where is the information this Seedrs report is grounded on actually coming from? Jeff says if they 'believe' a company is a zombie they will write it down. But that isnt a fact, it's a guess. According to the information provided they have 3 ways of achieving 'Fair Value'.
1. If a company (they call them investments) has raised new funds since its Seedrs' round, then the new valuation is taken and indicates an Appreciation.
2. If a company has not taken on a new round, but was Seedrs funded in the last 3 years and it is believed it is still trading, then it is considered Even.
3. If a company has not taken on any funding within the last 3 years, then Seedrs carry out what they call a substantive valuation - they dont say what that means. This group are then marked as Declined. The explanation here goes on to say that none of 375 companies have been subjected to this analysis. This is hardly surprising given that 3 years ago takes us back to September 2013 and Seedsr was only a year old.
Seedrs go on to state that because of the share structure they operate, they have access to all the latest trading information from these companies. What they mean is they have access to the information that these companies want to give them.
So the whole Report is based on paper values made up around whether a company has refunded or not. If you havent then you go into the Even Section - why? Well because you havent refunded of course. Eh? But why does a new funding round indicate a real increase in value and equally why does not having a new funding round indicate you have not increased in value.
We have examples of companies that have refunded at increased values and then gone bust. In this report, they would be in the Appreciated section if they were trading in September 2016. We also have examples of companies that have not refunded but are clearly doing quite well, ie they would be worth more if they chose to re-fund. In fact they dont need to re-fund precisely because they are doing well. Re-funding, unless it was in the plans, is often a result of a miscalculation by management - not a success story.
In the entire Seedrs Portfolio, 375 deals in total, Evens represents 56% of the total, so over half of all the companies are in this segment. They are there simply because they funded in the last 3 years on Seedrs, have not re-funded and have not gone bust.
If you take the three segments and move some of the Evens over to the Declined side, you get a very different picture to the one Seedrs conclude with. You could also move them to the Appreciated side - after all they are only in Evens through their lack of new funding activity. You cant hide this fact behind the corporate massif that is EY. Its mainly all pure guesswork.
To conclude the most interesting diagram in the whole report is on p24. Here they have divided up the three segments discussed above into 4 aged sections. This very clearly shows that as time progresses, the Evens section is initially by far the largest, then recedes and we end up with a fairly even split between Appreciated and Declined - for the figures we have so far. So Evens are totally distorting the real outcome.
We like Seedrs and think they are doing a much better job than Crowdcube. But this type of PRing is really unhelpful.