Startup investing

dividendhero

Genuine question about crowd funding...Does anyone know of anyone who's actually managed to take cash OUT of a crowd funding venture?

Nardge

dividendhero wrote: »

Genuine question about crowd funding...Does anyone know of anyone who's actually managed to take cash OUT of a crowd funding venture?

Not personally, but see my above links where those investing in Revolut allegedly received x 19 returns. Something similar occured for those who got in early with Monzo and Brewdog. They will be the exceptions to the 'rule' though!

With Kind Regards

Nardge

Good afternoon,

I'd be very grateful if you could offer your thoughts for me on the 'Chip Financial Ltd crowdfunding' thread:

https://forums.moneysavingexpert.com/discussion/6047673/chip-financial-ltd-crowdfunding

Thanking you in advance

With Kind Regards

Perhaps Martin Lewis could write a piece on Crowdfunding/Start-up Investments with an allied discussion thread as he did for both the Stocks and Shares and Innovative Finance asset classes? Just a thought.

MaxiRobriguez

Nardge wrote: »

Not personally, but see my above links where those investing in Revolut allegedly received x 19 returns. Something similar occured for those who got in early with Monzo and Brewdog. They will be the exceptions to the 'rule' though!

With Kind Regards

Is that paper or real though given that they're not easy assets to shift?

Most regular people would be sensible to do cheap index trackers and diversify. Take the small and consistent (usually) gains rather than play blackjack on the next big thing against people infinitely more knowledgeable about micro cap companies. Rule number 1: Dont lose money.

Nardge

MaxiRobriguez wrote: »

Is that paper or real though given that they're not easy assets to shift?

Good question, I'd be keen to know the answer!

With Kind Regards

eskbanker

Nardge wrote: »

Perhaps Martin Lewis could write a piece on Crowdfunding/Start-up Investments with an allied discussion thread as he did for both the Stocks and Shares and Innovative Finance asset classes? Just a thought.

It would be the shortest piece ever written on MSE, consisting of the single word "Don't"!

Seriously, anyone who feels they'd get valuable insight from a dumbed-down MSE Dummies Guide article on high-risk specialist niche investments is really not in a position to commit any of their money to something as risky as this, so it's a self-defeating paradoxical argument, a bit like Groucho Marx's refusal to join any club that would have him as a member....

Nardge

eskbanker wrote: »

It would be the shortest piece ever written on MSE, consisting of the single word "Don't"!

Seriously, anyone who feels they'd get valuable insight from a dumbed-down MSE Dummies Guide article on high-risk specialist niche investments is really not in a position to commit any of their money to something as risky as this, so it's a self-defeating paradoxical argument, a bit like Groucho Marx's refusal to join any club that would have him as a member....

Personally I don't see the harm but rather the sense in an acknowledgement and discussion of what crowdfunding is. Rather like the Which? website, in and of itself that would not constitute an endorsement.

I for one don't feel Martin Lewis has written Dummies Guides. I suspect 7 million or so other UK citizens would chime with me on that. Such a sentiment as "Dummies Guides" might be deemed rather patronising. I remain very grateful that this website's articles both drew my attention to and discussed the S&S, Lifetime, Help-to-Buy, and Innovative Finance ISAs etc, and assisted with many other topics besides, from where I could enter the discussion forums and educate myself further with the assistance of others. The fact that a patient may not have gone to medical school should not preclude them from taking an interest in their illness and asking questions of the Doctor and Specialists.

In short, that crowdfunding investments are dangerous is not a reason to not discuss them and/or have an allied thread. Ultimately this isn't a nanny state, and intelligent people should and will know to take ultimate responsibility for themselves and their choices.

With Kind Regards

eskbanker

Nardge wrote: »

I for one don't feel Martin Lewis has written Dummies Guides. I suspect 7 million or so other UK citizens would feel the same way as me. Such a sentiment might be deemed rather patronising. I remain very grateful that his articles drew my attention to and discussed the S&S, Lifetime, Help-to-Buy, and Innovative Finance ISAs etc, from where I could enter the discussion forums and educate myself with the assistance of others further.

To me there's a massive difference between high-level pieces explaining the mechanics of mainstream savings or investment vehicles (but not the underlying investments themselves) and getting involved in highly specialised matters where a simplistic overview wouldn't really add any value and would arguably be counter-productive.

Nardge wrote: »

The fact that a patient may not have gone to medical school should precluded them from taking an interest in their illness and asking questions of the Doctor and Specialists.

Indeed, but a little knowledge can be very dangerous if the patient then considers themselves capable of diagnosing or medicating....

Nardge wrote: »

That crowdfunding investments are dangerous is not a reason to not discuss them and have an allied thread.

Of course it's perfectly acceptable for such matters to be discussed on the forum, which also regularly features threads and posts about cryptocurrency, gold, binary options, CFDs, hotel rooms, car parking spaces, etc, but that doesn't mean that MSE should be expected to provide any editorial content in these areas, that might be perceived as tacit endorsement.

Nardge wrote: »

Ultimately this isn't a nanny state and intelligent people should and will know to take ultimate responsibility for themselves.

While I agree with the sentiment, the house style of MSE undoubtedly reflects the fact that articles can't assume high levels of intelligence among their entire readership, hence the chummy but essentially superficial tone. Those who are intelligent enough to be capable of identifying niche investment opportunities are unlikely to be looking for ideas from Martin Lewis IMHO....

bowlhead99

eskbanker wrote: »

To me there's a massive difference between high-level pieces explaining the mechanics of mainstream savings or investment vehicles (but not the underlying investments themselves) and getting involved in highly specialised matters where a simplistic overview wouldn't really add any value and would arguably be counter-productive.

Indeed, but a little knowledge...

...perfectly acceptable for such matters to be discussed on the forum ...

While I agree with the sentiment, the house style of MSE undoubtedly reflects the fact that articles can't assume high levels of intelligence among their entire readership, hence the chummy but essentially superficial tone. Those who are intelligent enough to be capable of identifying niche investment opportunities are unlikely to be looking for ideas from Martin Lewis IMHO....

I agree with all of that, and my post on the same topic today in response to Nardge on another thread had the same conclusion at https://forums.moneysavingexpert.com/showpost.php?p=76269654&postcount=37

bowlhead99

In case it is of use for people looking into crowdfunding for the first time, I have used my train journey home to come up with a basic 'article' as requested by Nardge in relation to crowdfunding / startup investments.
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Some companies which do not have access to public stock markets or debt markets may seek funding by making equity or debt investment in their business available to people whom they don't know but might like to help them out.

As a private investor who has some money that you can afford to permanently lose, after first building your emergency fund, short term and medium term savings and portfolio of long-term investments, you might like to give some of it to help them out, as they 'crowdsource' funding.

The company making a 'pitch' or marketing scheme to attract your investment -through a crowdfunding website - will hope to use your money in their operations or to repay other people who have previously provided them with capital or debt finance, and they hope it will go some way to helping them with their objective. In exchange for the money they will either offer you some ownership stake in their business (equity participation) or in some cases they will offer that if they can afford to repay you they will give your money back together with interest (debt participation).

They may also give you some perks or merchandise or discounts on their products - conditional on you giving them a certain level of investment. It is important to recognise that the investment amount you pledge is money that you may never see again.

In addition to the risk of the company failing to stay in business or your being forced to sell your interest for less than you paid for it, you may find that your ownership is substantially diluted - against your hopes and wishes and protests - when funds are sourced from other investors in future to try to keep the business afloat. If you invest your capital through a crowdfunding website and have them hold your shares in their capacity as a nominee, and the website closes down, you may later have practical issues asserting your rights and it may be uneconomic to do so. Likewise it may be uneconomic to pursue a business that has fraudulently or incompetently lost your money.

Certain risk factors may be highlighted in the pitch, but as the companies are not pitching to a regulated public market, they might be economical with the truth or entirely disingenuous.

A subset of equity crowdfunding offers - for businesses with certain specific characteristics - might attract EIS or SEIS relief. This is a government tax relief scheme which may go some way to compensate you for the fact that a large proportion of people participating in crowdfunding offers will lose their money or make much lower returns than they might have been led to believe could be available.

The investments you make may not qualify for such reliefs even if the promoter tells you that they expect them to be available, and if you do not continue to hold the investment for some minimum period, or the company ceases to qualify for the relief, you will have to pay it back. Further information on EIS is generally available at https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors though the rules are subject to change from time to time and not all investors will be able to make any practical use of the EIS scheme depending on their personal circumstances.

When you see a fundraising pitch on a crowdfunding website, the people looking to raise the money will state what they value their business at, using their own valuation model which they do not need to 'prove' or have independently validated. If you participate in the funding, your ownership share of the business (if an equity fundraising) will be determined as a function of the amount that you contribute and the value that they choose to assign to the business. The higher their valuation, the lower ownership stake you will obtain for an investment of £x that you plan to make which you may never see again.

Sometimes a crowdfunded business may raise further funding at a later date using a higher or lower theoretical value. That subsequent stated value does not mean that you are able to exit your existing investment at that valuation, and merely determines how much of the total business is given away to new incoming investors.

You can see some of the factors that participants in the private equity industry consider when valuing and reporting a position in an unquoted investment, using guidance at , e.g.
http://www.privateequityvaluation.com/Portals/0/Documents/Guidelines/IPEV%20Valuation%20Guidelines%20-%20December%202018.pdf?ver=2018-12-21-085233-863&timestamp=1545382360113 or
https://www.aicpastore.com/Accounting/Standards/FASBStandards/PRDOVR~PC-AVGPCI/PC-AVGPCI.jsp

However, even if you comprehend 800 pages of valuation and reporting theory, it is highly unlikely that you will be able to obtain sufficient recent and reliable financial or operational data or projections, or information about the confidential activities of competitor businesses, suppliers or major customers to conduct your own assessment of fair value of the financial investment that they make available to the crowd.

With limited data it will be difficult to carry out a sensitivity analysis to understand the potential range of returns that the business might make, or the probability of any of them, or whether those returns will be reached during your ownership period - instead of after you have already been diluted out of the business with nothing to show for it, while it continues without you.

What can be said about the range of potential returns available from a crowdfunded debt or equity investment is that regardless of what you pay for a share of the business or whatever interest rate you agree on your loan to them... the bottom end of the range of returns is a 100% loss and is not an uncommon result.

It may be that in exchange for your investment commitment you receive some perk or discount on goods or services you were going to buy anyway, in which case the effective loss is not quite as large as the 100%. This can provide an incentive to invest, improving the potential upside or reducing the downside, though it should be noted however that perks or rewards which are sizeable in relation to the amount invested may cause your EIS tax reliefs to be disallowed.

It is quite likely that 99% of the ten million people receiving the MSE weekly newsletter will lack either the financial literacy, commercial insight or knowledge and experience to properly evaluate the strengths, weaknesses and market positioning of a private business and determine its viability and fair value, even if provided with good quality financial information and unfettered access to the business's management team.

The other 1% could give it a good go but will generally find it very difficult to get access to that detailed management information and evaluate projections without spending large amounts of time and money relative to the amount of capital they are willing to invest in a single business via a crowdsourced fund-raising. The information available as part of the fundraise is typically limited to a short marketing document, perhaps with a video, unless you are a business angel providing substantial capital.

Therefore whether you are in the 99% or the 1%, any money invested in such investment opportunities should be seen as purely speculative and a bit of a punt, with the pitch and valuations taken with a pinch of salt. Some crowdfunding sites provide discussion areas amongst anonymous strangers where features of the business can be discussed. These are open to participants whose personal interest in making comments on the pitch are not always transparent.

The fact that other people are investing at the company's demanded valuation does not provide assurance that money will be made, or at least not lost, when participating in the funding round - as huge numbers of people will 'follow the herd' without rigorously assessing whether the herd is competent. It is not possible to know whether the personal circumstances of another person (including the capacity for, and tolerance for, investment losses) matches your own, and in most cases you won't be able to determine for yourself when your unquoted investment will be wholly or partially exited.

Investors who have already built a broad portfolio of mainstream investments to generate long term returns may be familiar with the concept of diversification to lessen the impact of losses or poor performance in any one investment holding. This is relevant for privately crowd-funded investments too, and members of the public should not allocate any significant proportion of their available investible wealth to any one deal or portfolio of private deals.

However, while broad indexes of large stock-exchange- listed companies tend to deliver overall positive returns over the long term, it is a fact that many more early-stage businesses fail than succeed. As it is difficult to evaluate such businesses' prospects ahead of time, it is likely that the more crowdfunding pitches in which an investor participates, the greater number of failures they will experience. Their overall success may rely more on luck than judgement as it is difficult to make good judgements with limited information.

Viewers of BBC's "Dragons' Den" or overseas equivalents may like the idea of providing seed or expansion capital to early stage businesses, imagining that it would be fun to play the role of Dragon, by signing up with a website and deciding to which PowerPoint pitch they would like to allocate their money. Some of the reasons why they should not consider 'playing' at this role other than as a complete gamble would include:

- the Dragons are experienced at evaluating a broad range of commercial arrangements;
- they can likely afford to lose a greater proportion of their capital than you;
- they will have the ability to help the business and bail it out with follow-on capital if necessary and can call on a vast professional network for support and resources if something goes wrong in the business as well as control over how they exit the arrangement
- the vast majority of pitches do not make it to the TV screens and the ones that do, 'make good telly'. Meaning they will either be credible, laughably bad or just a nice story, making it look relatively easy to sort good from bad.
- the entrepreneur's initial pitch valuation will generally be considered to be 3-10x overstated and the business angel will haggle it down while making the terms of their agreement more investor-friendly.

As this is a money-saving site, and it has been made clear that debt or equity crowdfunding is a 'bit of a punt' and speculative gamble even if you are an experienced investor, it should be obvious that the MSE team does not recommend it as a way to grow your savings, family wealth or retirement funds. However, as some people are stupid, stupid, stupid... and given the high likelihood of investor losses from the average individual crowdfund pitch selected at random... it is hereby clarified for the avoidance of all doubt that it is not appropriate for MSE to draw attention to, or comment positively on, specific investment opportunities or endorse particular crowdfunding pitch venues or forums.

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This is one forum user's opinion and not at all sanctioned by MSE as representative of their views, just some common-sense observations they could make if they were to write their own article. As this is first and foremost a money saving site not an investments site, I expect they would not really want to touch the topic with a bargepole other than to warn against it for non-sophisticated (FCA definition) investors.

Unfortunately, the general public do not like to be told they are not 'sophisticated' or 'wealthy enough' to access things that might make them money, and will typically avoid reading an impenetrable forum post of such length; while if you keep the guidance shorter and sweeter it is hard to convey the "100% risk of loss" issue.

You could of course convey the message, as Eskbanker suggests, with a short article in large font just saying DON'T! 100% risk of loss! Buyer Beware!, but I take the point about a Nanny State and the futility of aggressively protecting people from themselves.