Crowdfunding

Crowdfunding has become a ‘monster’ argues its greatest critic

By Oliver Smith 21 August 2017
Summary

Rob Murray Brown says "Crowdcube is the Woolworths of equity crowdfunding".

Equity crowdfunding is a market in bloom.

Tens of thousands of ordinary investors are funnelling millions into young businesses via platforms like Seedrs and Crowdcube in return for shares in the companies.

These platforms boast of having portfolios with high annual returns and several high-profile exits (albeit with some caveats).

But not everyone is convinced.

Read more: Crowdfunding? This is where to put your dough

A thorn in their side

Two years ago Rob Murray Brown began to grow weary with what he was seeing.

A veteran businessman, keen golfer and an advisor to small and medium-sized companies, Brown saw basic business errors and deceitful behaviour taking place on crowdfunding platforms like Crowdcube.

When he tried to expose them, he claims he was banned from posting on Crowdcube’s forums.

Today Brown’s blog, The Truth About Equity Crowdfunding, has become the source of a steady stream of coverage of the worst aspects of the industry.

Every time an unsuccessful pitch quietly disappears, Brown flags it up, a funded company collapses under mountains of new debt, he’s on it, something genuinely good happen… yep, he might just offer some praise.

Brown has become a thorn in the side of this blossoming industry, even more so as it’s clear his blog is now even read by regulators at the Financial Conduct Authority.

The Memo sat down with Brown to find out whether he thinks crowdfunding can become respectable.

Oliver Smith: In your opinion, how risky is equity crowdfunding today?

Rob Murray Brown: Currently, if you consider the two sides of crowdfunding – investors and companies – then you are looking at a match akin to schoolchildren vs Man United.

If an ordinary investor is someone with little knowledge of how start-ups and early stage companies function then, out of 100%, I’d say around 99% in terms of risk.

Investors get locked in and companies and their directors can do pretty much what they like with the money… and they often do.

This is certainly nothing like investing in a standard market. For one there is no way to see a return unless the company exits via IPO (none yet) or sells (a few, but nothing too exciting).

We have seen a healthy chunk go bust, some with strong issues around honesty and transparency.

But most of the 600+ companies that have funded on Crowdcube, which is the platform we follow most, have become what we call zombies i.e. they trade at a level that gives the owners an income, but never any hope of a return of the initial investment or sometimes just become dormant, but don’t close.

Most companies never bother to keep investors abreast of events. And by this stage the glossy sales pitch you see on the London Underground has all but disappeared.

OS: What behaviours in the industry concern or worry you most?

RMB: I think the most alarming aspect of equity crowdfunding is the lack of transparency and the twisted PR, which it seems most media outlets take as gospel.

This has created a monster.

If you are going to tell the public that they don’t want to miss the next Facebook, and that the whole system is backed by the Government (via S/EIS) and that the Financial Conduct Authority approves it all – then hey, they’re going to believe you.

What they’ve done is tap into the natural human trait of wanting to be the next Bill Gates or Zuckerberg.

The bit they forgot about is trying to ensure the companies seeking investment had some shelf life.

Many of these are not businesses that require or could even use investment. They make money for the owners and staff and, as we have seen on so many occasions, trying to make them into the next Facebook just blows them up.

If someone is determined to invest some of their savings in equity crowdfunding, what’s your advice?

Only invest what you don’t mind losing, in something you understand or where the rewards make it worthwhile.

Do the due diligence and then use any platform… Seedrs are better but not perfect, and then the more serious platforms like SyndicateRoom, Growthdeck are the best.

These three offer businesses less likely to go bust, but any return will not be in 3 years and it will not be 1,000x.

How would you like to see this industry reformed?

We should go as far as having a driving test for new directors – it is far too easy to set up a business and go bust, and then rinse and repeat.

Likewise research has also shown that if you can get 30%+ invested in the first third of your campaign, then you have far better chance of success.

But right now punters have no way of telling where the money originated.

So a £300k pitch should really have a statement saying they are raising £150k and that £150k extra has already been raised – that is simple and clear.

The sole reason the platforms do not do this is because it is the hype of the game – the progress bar gets the punters excited.

That’s fine for gambling halls, but not for sensible business creation.

And altogether hardly transparent.

How likely do you think it is that equity crowdfunding will ever become a more respectable investment?

I think that some players have to go first.

The best model is definitely the more serious less glitzy SyndicateRoom, Growthdeck one.

Seedrs use of nominee accounts – so the shareholders have more power and are, via Seedrs, better informed on a company’s progress – helps but this is too often got around by majority shareholders changing the articles of association.

For me there is no hope for Crowdcube. The stack ’em high sell ’em cheap model took down Woolworths and Crowdcube is the Woolworths of equity crowdfunding.


In response to Brown’s comments Seedrs told The Memo:

“The power of aggregating the crowd’s investment through a nominee is that it allows us to sign onto shareholder agreements with other investors in the company. This allows us to ‘bake in’ certain protections for the crowd, and these can’t be amended without our consent.”

“In most cases this also means that companies will require our consent to amend their articles of association.”

In response to Brown’s comments SyndicateRoom told The Memo:

“Investing into early stage companies is risky by nature. However, the platform used shouldn’t be part of the risk and all online investors should do their own due diligence about which platform to use to ensure they use the best platform available to them. After all, all platforms are free for investors so why not choose the best one?”

In response to Brown’s comments Crowdcube told The Memo:

“Independent research from AltFi Data has found crowdfunded businesses have performed ‘impressively’ and Crowdcube has the highest internal rate of return for investors in the industry.”

“We enable young businesses to raise capital to create growth, which is not short term, but judging by the 430,000 Crowdcube members and the number of businesses being funded through our platform we think our investors understand that.”

“To say that most companies never bother to keep investors abreast of events is simply not true. Over 90% of Crowdcube funded businesses have sent at least one update to shareholders since fundraising.”