Equity Crowdfunding: Megathread

I’ve taken a look at this one: There are problems that need to be be solved in that space so it has potential. Concerns:

  • It’s a B2B service: Why crowdfund?
  • No numbers in the (very thin) deck - I’ve asked them to share numbers to date and projections
  • No evidence they’ve done anything so far (case studies) on their website
  • Ditto based on accounts filed
  • But they’ve been going since Jan '17

Anyone invested in Goodbox? Looking pretty ugly with pre-pack likely, shareholder disputes and some rather worrying governance issues.

UK start-up paid taxpayer cash to investor who helped it raise the money - Subscribe to read | Financial Times via @FT

This would be better posted on the Crowdfunding graveyard thread

The majority of listed companies share prices have taken a hit during this latest downturn (as all the red in my portfolio confirms!).
Established private companies have also taken a valuation hit, with even Stripe’s valuation dropping over 10%.

I don’t see any sign of a significant (or any) fall in the valuations of startups raising on Seedrs and Crowdcube.

I just took another look at “THIS!” on Seedrs, but £150M seems way too high with the current market conditions. There’s also Cuvva raising at a £108M valuation.

I’ve decided to mostly stop any new investments on those platforms for the time being, but continue to support companies that I already have in my portfolio. Has anyone else taken a similar view?

7 Likes

I slowed down a while ago.

The valuations are bananas. Most of the pitchers are chancers, and some are outright fraudulent. There are a few gems but they are few and far between.

Seedrs have started this new imitative whereby one of the Senior Investment team emails you if you have not paid for the investment before it closes. They used to just let it slide and cancel.

I slowed down too, cancelled a couple.

That said, someone is selling some shares in Pipe on seedrs soon which I’m interested in. Pipe.com makes recurring revenue tradable, so the company gets cash pulled forward and the investor gets something that looks a bit like a corp bond. My questions: will their growth continue as same rate, and would they do well or badly in a recession.

1 Like

InvestEngine - Cooling off period ends at 23.59 on 27th June 2022.

I noticed in their last public Crowdcube update from a month ago they said that they now have over 10,500 funded users with £65m in AUM which is a chunky uplift from March 2022. That’s also a very healthy average portfolio size for each of the customers.

Does anyone have any new or old takes on InvestEngine?

I worry about their route to profitability. They’re trying to thread the needle between Freetrade (et al) & Robo Advisers. I don’t know how much scale can be gained, their fees are going to have to rise sooner or later.

1 Like

Their pitch deck mentioned a subscription product, and collateralised lending.

1 Like

I think this is basically saying bet on founders, not product, for early stage investments.

2 Likes

I’m not sure that’s really a good idea tbh. I have a few friends who’ve founded reasonably successful companies and they’ve all done it by taking their specific skills, noticing a gap in their market, creating a good product and going for it. They might all be good founders and I wouldn’t bet against them I their own respective areas but if you swapped them around then I think all the companies would tank. You need to have a good product that you understand not just a good business person imo.

I’m not surprised, what’s not to like?

Sign up bonus and then no fee for the ISA on the unmanaged ETF’s, people would have been loading up this years ISA allowances.

I guess they feel that they have a large TAM between self-managed and Robo advisor, while I don’t think it’s wide enough.

A tortured analogy if you will. ETFs are salads, we all know we should be eating the right amount of simple salads with our meal but probably don’t. This is either because -

You are eating enough salad but you’re overpaying to get organic gimmicks. Robo Advisor

You put all your meals together yourself and end up sticking a few too many of the exciting (individual stocks) bits on when you know you shouldn’t. Self-managed investors

You don’t eat any because you know you should but can’t really be bothered to learn. Non investors

This leaves (pun intended) the healthy eaters who eat the right amount of boring salad every meal.

1 Like

The problem is that venture capital and crowdfunding are very very different and so trying to apply VC thinking to crowdfunding doesn’t work. If you’re a venture capitalist doing early stage investing then there is a huge amount of value in building a network of talented founders: as a venture capitalist, an investment blowing up and returning nothing is standard operating procedure, it’s expected, the goal is not for every investment to provide good returns but for a minority of investments to provide incredible returns and the rest to blow up trying to deliver those incredible returns. A venture capital investor succeeds when they get early into big winners, big failures are just a cost of doing business.

A founder can get funding for their company and fail spectacularly and in the process demonstrate to the investor(s) that they have huge potential to generate incredible returns in future: and when there’s a talented founder with great potential, they have easy access to capital and so it becomes competitive for investors to get into the early rounds. A good investor is valuable far beyond the cheques they write.

Conversely, if you’re a layman participating in crowdfunding then you’re just dumb capital, you as an individual are worthless to founders, in fact you’re a liability, and so the investment case for participating in a crowdfunding round has to be very tightly coupled to the company you’re investing in… because when the company blows up, you’re left with nothing: the founders couldn’t care less about you, they don’t know your name, and you probably won’t have the opportunity to invest in them again.

The value of crowdfunding beyond capital for credible companies (credible is a big caveat here, since most crowdfunding opportunities are from founders who can’t get capital from sophisticated investors) is that the crowd has a vested interest in ensuring the success of the business, which is essentially the company being paid to have brand advocates. Unfortunately, the majority of crowdfunding companies will not succeed just by virtue of having a few hundred brand advocates, and so in almost all circumstance, “marketing” as a justification for crowdfunding is a hand-wavey explanation used by companies that just desperately need capital.

If you want to have a chance of generating meaningful returns from crowdfunding, you need to invest like a sophisticated investor: forget about the minutiae of the company, focus on the bigger picture, invest early in companies that have a path to delivering at least 100x returns (which involves, in part, believing in the founders). Most will fail, but as long as 1 in 10 succeed at 100(0)xing, you’ll see meaningful returns.

A good exercise to get a better understanding of venture capital is to pick a successful fund (say, Andreessen Horowitz (a16z)) and then look at the investments they’ve made and then look at the ratio of success to failure. For example, according to crunchbase, a16z has ~1500 investments and ~200 exits, that’s a 10:1 ratio of failure:success (of course, not all non-exits are failures (they might be on the path to a great exit!) and not all exits are a success, so this is a pretty handwavey estimation but you get the idea!).

Personally, if I was trying to craft an investment strategy that involved crowdfunding, it’d be simple: invest in the early rounds of every company that has a substantial investment from a reputable fund. I wouldn’t even look at the companies.

So returning to the question(s) about InvestEngine: they’re raising at a £15m valuation, an investor applying the venture capital model would ask themselves “do I see InvestEngine allowing me to realise profits at a >£1.5bn valuation?” and be investing in a dozen other 100x-potential companies at the same time.

9 Likes

Fantastic post! Thanks @s_m

So I guess the question is can invest engine get to a £1.5bn valuation?

Nutmeg got to £3.5bn AUM and sold for about £700m.

Pension Bee has £2.2bn and a valued at £275m

Freetrade has £1bn and is valued at maybe £450m/£500m.

Yes, it feels like they don’t want to commit to a down round yet and try to do some bridge financing on crowdfund platforms to extend runway couple of months and increase negotiation power for their institutional round. Huge adverse selection red flag

To add on current private market valuations, one example as one of the first SaaS deals in the new valuation environment, Zendesk was recently sold for $10bn instead of the $17bn offer beginning of the year (which was even rejected by the board). It was sold for ~6x EV/Revenue, with strong market position, 30% historical annual growth, etc etc. It’s a different league but if PE is now paying these multiples for the stars, that’s down 40-50% from beginning of the year tops when 10+ EV/Revenue wasn’t unheard of for SaaS companies. I definitely take this into consideration for crowdequity raises; whether the valuation has truely adjusted to the new normal. I don’t believe they have at the moment and my last investment also has been couple of months ago.

2 Likes

Currently looking into RareCan on Crowdcube. Love the team, market is great - lots of clinical activity in rare oncology & pharma dry powder from COVID, traction seems decent given they are onboarding worlds largest CROs and patients, with latter generally having strong motivated to participate/contribute.

Currently I’m digging into the product-solution fit & growth potential. Hard to underpin the effectiveness of their platform and how good it is at converting platform patients to enrollment into trials & how much revenue it could create at scale. Have asked a couple of questions on this. Valuation of GBP 3.5m.

1 Like

Does it strike you as odd to have a full-time CFO yet CTO & COO being part-time.

Agreed. Would say that it’s not uncommon at their stage to have 3 main founders (here CEO/CSO/CFO). Tech side remains a weakness though. As much as I like the mission, return criteria have to fit too. I’m not yet fully convinced but from face value I see it as one of the interesting ones on market atm with attractive valuation. Worth spending some time on for me.

Definitely appreciate all opinions on RareCan, helps me with diligence :grinning:

1 Like