Crowdfunding and ROI

[MisanoPayments]

If I remember correctly there was a general consensus when investing in firms via crowdfunding, that one should expect to have invested money tied up for between three and five years.

I appreciate that is a general statement, but as I ponder the fact that my latest investment is five years old next month, I wondered, has anyone invested in a firm to have [all/more/less than] their investment back when a company has been bought?

[AnotherUsername]

Which company did you invest in?
Has it been purchased?

99.9% of crowdfunded businesses are a pile of poo.

[LooneyTunes]

AnotherUsername said:

99.9% of crowdfunded businesses are a pile of poo.

... with investment generally promoted to those willing to pile in without the sort of due diligence/disclosure that a professional investor would require and often with "interesting" valuations.

That isn't to say that some won't work out, but there are going to be a lot that don't.

[MisanoPayments]

Nothing to shout about, token sums in Brewdog & Innis & Gunn.

Although in terms of spending the money it's best with them than in Premium Bonds!

[Panamax]

IMO the chances of "crowdfunding" and "investment" sitting happily in the same sentence are about the same as the chances of "old sports car" and "investment" sitting happily in the same sentence.

[Mr Overheads]

Did well from Freetrade, everything else is either a write off (i.e. gone bust), a long term hold I wish they would write off, or about 3 or 4 of them are I think growing well and could give a good exit eventually e.g. Cheeky Panda

[AnotherUsername]

Toooooo many companies are just zombies. They neither grow nor close.

[rpguk]

Interested to hear more on this. I've a few quid in some things on seedrs/crowdcube but have largely given up on the platforms now. There is some utter dross listed these days (seedrs sems to have become particularly bad for this) - and as they make money on volume they have little incentive for quality control.

As another poster says lots of zombie companies, the ones who are active are those drumming up interest for another funding round!

All that being said, we all know it's a high risk investment class, I don't mind the ones that just don't work out - it's the ones that seem to have just given up that frustrate me.

[LooneyTunes]

rpguk said:

All that being said, we all know it's a high risk investment class

They’re arguably not an investment class at all…

Crowdfunding is essentially a way to raise money from retail punters, who generally have no idea how to diligence an early stage company, at a valuation inflated by the fact that said punters are generally only chucking in relatively small amounts (and without the benefit of being able to gain access to the sort of disclosure/DD materials that other investors would demand).

IMO, you need to be very lucky indeed to see a proper return from a crowdfunded “investment”.

[dazmanultra]

I have/had about £100k invested through various EIS investments in Crowdfunding. I think I have probably lost about half of that. Approx £30k is bumbling on, not super successful but not complete failures. But, the value of those shares must be significantly less now it's clear there's a lot less growth. I might get a return on the remaining £20k if I'm lucky.

I also have a similar amount invested in EIS funds in MMC, Molten and Parkwalk. This is where the fund managers are finding and sourcing the deals and invest for you. I would say each fund is invested in between 10-15 companies. This is by far the more successful option. All have already returned pretty much the money I put in, with a significant amount still invested in companies yet to exit. Rather than the crowdfunded zombie companies, VCs will cut their losses and move on if things aren't working, which is much more preferable from a tax perspective.

I definitely won't be using crowdfunding in future, and I'll stick to letting the professionals do their job. They have access to the best companies, the best people, on the best terms. When a company crowdfunds, it's clear to me now that they are doing so because professional investors and VCs turned them down. It seems obvious now and perhaps an expensive lesson, but I didn't invest anything I couldn't afford to lose.

[dazmanultra]

rpguk said:

All that being said, we all know it's a high risk investment class, I don't mind the ones that just don't work out - it's the ones that seem to have just given up that frustrate me.

It's not even giving up necessarily, but the lack of communication and honesty with their investors. There was a lot of glamourisation of the founder/entrepreneur lifestyle over the last few years, and I am sure that this has contributed to that.

Companies raising significant money at ridiculous valuations well before they have a business model, product or even idea of their market... VCs obviously do get involved in seed rounds, but when I see similar stage companies doing crowdfunding pre-profitablity/pre-revenue, the valuations are ridiculous and they're giving up a tiny percentage of their business for hundreds of thousands of pounds.

I have also read through various insolvency practitioner reports on failed businesses and it's clear that some founders see this as a lifestyle, taking a large salary for a couple of years and not following through on what they said they would do from a business perspective.

[MisanoPayments]

Interesting notes, thanks all.

I agree with the point raised a couple of times from those who have invested but find the industry saturated now. I rarely log in to the Crowdcube site now (As above my portfolio is tiny so I don't need to sign in to remind myself how it's made up) but there seems to be loads of companies vying for people's funds now.

[LooneyTunes]

dazmanultra said:

Rather than the crowdfunded zombie companies, VCs will cut their losses and move on if things aren't working

It's not just that... many VC type investors (or at least those with "Operating Partners" or similar) will actively help their portfolio companies grow. You're right though that they may eventually move on if it's clear that things will never work, but getting a reputation for not supporting portfolio companies and/or throwing in the towel early isn't what the majority want.