Category Archives: Investing

Crowdfunding – shark-infested waters?

I wrote a couple of months ago about my own first tentative steps into crowdfunded investments.

There is some real momentum behind this relatively new alternative finance phenomenon, technology and awareness giving entrepreneurs access to a large pool of potential individual investors.

Crowdcube is the largest platform, providing a bridge between the entrepreneur and investors. As of today, it has 283k investors on its books, and £165m has been pumped into 406 successful fund raises. It may be an unfair comparison, but Crowdcube could be considered the Tescos of equity crowdfunding, piling the deals high and selling them off cheap.

But at what price to investors…?

The Solar Cloth Company used the Crowdcube platform to raise £967k from 400 individual investors just 17 months ago. The Directors projected the business would be valued at £100m in just 3 years after the funds had been raised.

The Times has reported today that the Solar Cloth Company has just gone into administration, blaming a downturn in the solar power industry, and cuts in government subsidies.

Another significant failure with Crowdcube’s name all over the fund raising was Rebus. A claims management company, it raised £816k from 100 investors just months before it collapsed in February 2016. Investors through Crowdcube were not aware that Rebus had previously engaged a restructuring expert to advise them how to plug a cash flow chasm.

Crowdcube – and other equity crowdfunding (“ECF”) platforms – must start performing proper due diligence before listing investment opportunities. Otherwise the FCA should step in to ensure there is sufficient investor protection. The current “hurdle” – someone signing up to an ECF platform has to self-certify that they are either already a sophisticated investor, or a high net worth individual – is about as low as a limbo-dancing snake in a BHS store.

Crowdcube should also be much more transparent on their site about previous fund raises. I’d like to see a detailed summary of all businesses that have successfully completed ECF rounds, showing the timing, amount raised, key commercial milestones relative to business plan projections, any subsequent capital raising efforts….and all very clearly linkable from the Crowdcube home page.

And its failures should be even more transparent, giving investors a much louder warning that their hard-earned cash is at significant risk.

ECF is growing fast, and has the potential to be an even greater weapon in the fund raising armoury for start-up and early stage businesses. It would be a real shame if the platforms blew that opportunity.

Crowdfunding – risky business

I wrote back in November 2015 about my first tentative foray into investing through crowdfunding platform Crowdcube.

I’ve now made several small punts on the following businesses, all of whom raised funding through the Crowdcube platform:

  1. Alexi – a curated book app
  2. Vulpine – cycling apparel brand
  3. Chilango – Mexican fast food
  4. Cauli Rice – healthy food
  5. One Rebel – funky gyms
  6. Five Point Nine – coffee subscription
  7. Simply Cook – recipe kits

And one through the Syndicate Room platform:

  1. Lobster – digital photo marketplace

These are all equity crowdfunded investments. Separately, I’ve also put small amounts into a couple of crowdfunded mini-bonds, debt funding for businesses a little further along the growth curve:

  1. The Bondi Bond – a chain of Aussie style cafés (11% interest rate)
  2. Brewdog – craft beer (6.5% interest rate)

I’ve also been to investor events at Crowdcube and Syndicate Room, to meet the management teams and to network (ugh!) with other investors and some of the entrepreneurs pitching their businesses and investment opportunities.

I’m under no illusions about how risky this brave new world of crowdfunding is, as I noted in my November article. But you’d expect Crowdcube – and all the other crowdfunding platforms – to carry out a minimum level of due diligence before putting opportunities in front of investors. Especially as they’re regulated by the FCA.

But stumbling on this blog from Rob Murray Brown – fantasy equity crowdfunding – reveals some serious concerns about this brave new world of crowdfunding. It’s not surprising that he shines the brightest light on Crowdcube – the oldest and largest UK platform – which as of today claims to have raised £148.5m for 378 completed campaigns, from 267,169 investors currently registered with them.

If some of RMB’s accusations have merit, crowdfunding could be the next financial services disaster in the UK. So far, I’ve only invested small amounts that I’m prepared to lose. I hope one or two successes exceed the inevitable losses on most, and I have a bit of fun along the way, but – if I take off my rose-tinted glasses – that’s probably unlikely.

With the current levels of publicity and momentum behind crowdfunding – and historically low interest rates on traditional savings vehicles – there’s a real risk that naive investors might lose a significant proportion of their wealth.

I’m thinking about starting a separate blog myself to dig deeper into this burgeoning world, so that I can understand it better and to try and help others along the way.

What do you think? Potentially interesting and useful….or will everyone just continue to follow the crowd?

Peer Pressure

The Bank of England base rate has been fixed at its historical low of 0.5% since March 2009.

Just last week the Financial Conduct Authority, the body that regulates our financial services industry, announced plans to force traditional banks and building societies to tell savings customers when they reduce rates on accounts. Often, these dinosaur institutions attract new customers through headline-grabbing rates, but then quietly lower the rate without the same fanfare.

The FCA are calling their initiative sunlight data. Never mind the euphemism, how about fining the opportunistic banks?

Shoddy treatment indeed, with some so-called savings accounts earning as little as 0.01%.

Ever since the financial crisis of 2008, savers have been punished by governments and the traditional financial institutions looking to shore up the mess created by benign lending conditions and over-extended borrowers, in a lax regulatory environment.

So it’s no wonder that there’s an ever increasing number of Peer to Peer (“P2P”) platforms, leveraging advances in technology and leaner overhead structures to match borrowers with lenders at much better rates than being offered in the conventional markets.

Ratesetter was one of the first movers in this space, and is now reckoned to be a Unicorn, the beguiling name being given to tech start ups exceeding a valuation of $1 billion. Nice.

P2P platforms are proliferating. But if something goes wrong, you do not get protection from the FSCS, in the same way as you would if your old-fashioned High Street bank fails. Yet.

Ratesetter have benefited from their clever early differentiator, the Provision Fund, though. Anticipating lender/investor caution, they established a ring-fenced fund – currently standing at £16.48m – in the event of borrower defaults. To date a total of almost £935m has been lent through their platform, and not a single penny has been lost. That’s no guarantee you might not lose some of your money in the future, but it sure does give a measure of comfort.

My parents, both now in their 80s, are quite financially savvy but also naturally cautious and – understandably – reluctant to invest in the longer term equity market.

A few years ago, they became fed up with the risible return being earned on their life savings from the banks and building societies they had been faithful to for decades. They drip fed some of their hard-earned savings into Ratesetter, and also Zopa.  They have become increasingly comfortable with Ratesetter, and have gradually invested more in an effort to eke out a better return.

You can currently achieve 3.3% lending for 1 month through Ratesetter; 4.1% for 1 year; 4.5% for 3 years; and up to 6.1% if you’re willing to lend over 5 years. Pretty attractive rates given the base rate outlook and the curmudgeonly rates offered by banks and building societies, still beefing up their balance sheets and annual bonuses.

ArchOver is another interesting P2P option. It’s a crowdlender, lending investor funds (min. £1,000 individual investment) to established businesses (min. £100,000 borrowing), rather than individuals. Their comfort blanket to investors is multi-layered….any loan is secured by assets (the accounts receivable book of the business, for example); it’s insured; and the credit rating of the borrower must be A+ (ArchOver’s own rating system).

You can currently earn 5.5% to 9% lending through ArchOver, depending on borrowing terms and other usual variable factors.

But with all these interesting newcomers to the P2P party, how can anyone accurately assess their potential rewards relative to  the risk in using these Johnny-come-lately platforms? And how do you know who your money is actually being lent to, and what it’s being used for?

Enter my old colleague from The Motley Fool days, Neil Faulkner.

Neil Faulkner, co-founder and MD

He has set up 4thWay, a comparison and risk-ratings service, allowing you to compare rates being offered by all the main P2P platforms and – more importantly – to see an objective ratings score for each platform.

It’s more complex than I’ve just summarised, but check out the website and you’ll find the full story.

I think you’ll be hearing a lot more about 4thWay, given the emergence of P2P platforms as a viable long-term alternative finance provider for savers and investors fed up with interest rates as low as a snake’s belly.

 

Investing strategy….where next?

An economic slow down in China. The Syrian crisis. Sabre rattling from Putin. Will the UK stay in the EU, or retrench to an independent – but uncertain – future?

These macro issues and many other concerns have driven down the FTSE 100 from a peak of 7,097 in April this year to the current 6,400 level, via a drop as far as 5,899 in August.

(chart courtesy of ADVFN)

Of course there will always be volatility in stock markets, but the scale and speed of current movements seems out of the ordinary. And frankly nail-biting and stomach-churning if your life savings are fully invested in shares and funds that move largely in direct correlation with the broader market indices.

I wrote a while ago – when Gill and I stopped full-time work – about our pension position. We’ve missed out on the golden generation of final salary/defined benefit schemes. Annuities are so low that the income you can derive from them is not a viable option for us. So our pension pots – saved from our own earnings, employer contributions  and tax relief – and our other savings & investments have been at the mercy of markets and factors way outside our control.

Up until recently, all our investable assets and pension pots were placed with Hargreaves Lansdown. I’m very comfortable with HL, but I thought we needed to protect against the risk of stock markets collapsing further and for longer. We don’t have an income at present, so we need to preserve our capital.

Thanks to a friend of my brother, I was introduced to Connection Capital.  They “help clients build a portfolio of self selected,  direct investments in private equity, commercial property and alternative asset funds, as part of an organised syndicate“.

I’ve taken some funds out of HL and made some small investments in 6 separate opportunities through Connection Capital, 4 in private equity deals and 2 in commercial property.

The property investments are in long leases on assets let to a Virgin Active gym, and to a Travelodge hotel. The private equity investments are businesses in very different sectors, but they are historically profitable and have raised growth capital through CC.

These are all high risk investments, particularly the private equity businesses. But CC have a good track record and I’ve made what I hope is a balanced decision. My aspiration is that – on average – we’ll get back 2x the original investment in a time scale of 4-5 years. But with no guarantees at all on the amount or timing of any return.

More risky again are the opportunities on crowd funding platform CrowdCube. These are invariably early-stage start-up businesses looking for seed capital. Some have been trading for short periods, some are even at the pre-revenue stage, still testing products or developing technology. Few are already profitable.

I’ve made a couple of very small investments in different businesses showcased on CrowdCube. Each will have gone through some due diligence hoops before going live on the crowd funding platform, but I’m under no illusion how risky most of these opportunities are. Conversely, if they’re ultimately successful, the returns should be proportionately greater.

And then there’s the fun investment in BrewDog, the craft beer business that is taking the world by storm. I bought my shares for £950, at an already frothy valuation. I’m not expecting to make much, but with a 20% shareholder discount I’ll be able to drink myself into oblivion when all our capital has disappeared and we’re looking for the next hot meal…..

So that’s where we are, as they say on Dragon’s Den. Flying by the seat of our semi-retired pants. A decent amount of capital saved over a lifetime of hard work. But needing a reasonable income – or capital growth – to finance a standard of living that we don’t want to be forced into diminishing.

Welcome to the brave new world of pension freedoms, investment opportunities and fluctuating global stock markets.

Fasten your seat belts, it could be a bumpy ride…..

 

Investing in coffee futures

Our embrace of coffee culture continues unabated. Every High Street is dominated by The Big 3 – Costa, Starbucks & Caffe Nero – and the back streets increasingly proliferate with ever funkier artisan shops providing the perfect espresso.

I’ve succumbed to the addiction, seeking out the individual caffeine havens tucked away in the lanes of London, Paris & Australia, and anywhere else we explore. Poor Gill….she’s a tea person.

I actively avoid The Big 3, despite being a small shareholder in Costa owner Whitbread. Apart from when they emailed me a free £5 download voucher, obviously.

And now I’ve also invested in a bundle of Starbucks outlets, through a franchise operator who was the first UK franchisee and which is now looking to further expand its portfolio of home counties shops.

Yes I know, Starbucks are the work of the devil, vilified a few years ago for their minimal UK tax payments. But I’m afraid I’m not a particularly ethical investor and besides, they’ve addressed a lot of their corporate shortcomings.

I can’t see us being weaned off the caffeine addiction any time soon, and this franchisee looks like a slick operator. This is part of an attempt to de-risk our pension portfolio away from direct equities, and – if the investment goes according to plan – should result in a profitable exit a few years down the track.

So keep on ordering those skinny lattes, espresso macchiatos and flat whites. And who needs more clothes shops when you could be drinking coffee?

BrewDog – so do you feel lucky, Punk?

BrewDog only started up in 2007, north o’ the border in Fraserburgh, as a small ground-breaking craft beer brewer. Their inspiration was to be everything that the global brewing behemoths weren’t.

And blow me, they’re making amazing progress.

I’ve heard of them over the last year or so, and may even have subliminally seen some of their beers on sale somewhere, but now I’ve actually invested in their latest Punk Equity round.

Why?

For a start, the current equity raising round of up to £25m is being crowdfunded, raised by themselves rather than through a generic crowdfunding platform. And certainly not via the traditional  investment banking establishment. As a result their total costs will be only £200k, compared with a possible £1m+ if they were using the banking community. I love this way of leveraging the power of the interweb thingy.

But more importantly, from an investment appraisal perspective:

  1. they’re already profitable, with an operating profit of £3.9m and post-tax profit of £2.7m in 2014, with healthy gross & net margins
  2. the top line is growing strongly, from £18m in 2013 to £29.6m in 2014, with massive growth potential in this country and overseas
  3. the senior management team includes the founders, who are clearly passionate about the BrewDog philosophy, brand and product. They’re also heavily aligned with shareholders’ interests to succeed
  4. their beers – and increasing number of own-branded bars – sound very cool, popular and positioned to succeed where traditional pubs are failing (younger, hip nephews who have been to one of their bars agree)
  5. the prioritised list of what they’ll spend the newly raised funds on is exciting and compelling
  6. I love their energy and innovation. They feel like an early-days Virgin, or pre-corporate Ben & Jerry, genuinely wanting to stay true to their values but not afraid to chase aggressive growth. Although only time will tell, of course….

Take a look at their Prospectus. I love it. It’s persuaded me to buy 10 shares for a total investment of £475. Yes, it’s at an aggressive valuation of the business based on a heady multiple of current profitability but, what the hell, this is fun and I’m happy to just go along for the ride.

They may appear edgy and anti-establishment, but they also look very professionally managed. From their track record, from the Prospectus and within seconds of investing, I had access to my shareholder page, with great discounts on beers ordered online and in their bars, and a huge range of other mouth-watering fun benefits.

BrewDog are not quoted on any public exchange yet, but they have an annual internal market  if you ever want to exit. And there’s always the chance of an IPO, or trade sale. I’m guessing that the founders will want to keep control for a while yet though.

I’d love to have got in on an earlier round and a lower valuation, but I can see these guys conquering the world with their great products, service, brand, innovation and management.

And even if they don’t, as a shareholder I’ll get a free beer every birthday.

And who else has the chutzpah to raise money via Equity for Punks?

As with any other equity investment, there are clearly risks involved. These are listed succinctly in the Prospectus. The minimum investment in Equity for Punks IV is 2 shares @ £47.50 = £95.

Cheers, BrewDog.