Mad Money #63 - Crock of Gold or World of Pain?


Equity crowdfunding has been around for a while now and some results are starting to emerge. However, it’s still too early for anyone to really know what the returns on investment are like – especially when compared to traditional style investments.

But now one platform has tried to rectify this by analysing their on-paper gains. But just where is this paper trail leading us?

Most people agree that Seedrs are one of the better equity crowdfunding sites. They were one of the first, are realistic about the companies they take on and are generally open about how they do business. With 375 deals completed since 2012 involving over £140m of funding, they’re clearly here to stay.

Recognising the dearth of statistics, Seedrs have just published their second analysis of the investments made via their platform and on first glance it looks great. In fact they suggest you might have made an IRR (Investment Rate of Return) of 14.4% before tax – well above the average return you would expect by leaving your money in the bank! This rises to 49.1% with the UK’s excellent tax reliefs.

Now before you all rush out, or rather rush on line, to get these fabulous returns there are a few catches. To be fair, Seedrs make these crystal clear in their report.

First of all these gains are all on paper. There have been almost no exits so a large crowd of investors are holding illiquid shares. That is to say shares which have a largely unknown value as they are not traded on any stock market.

What Seedrs have done is to use some industry standard and sensible rules to assign an arbitrary value to these shares. If the company has had a later funding round, then this sets the new value (up or down). If the company has ceased trading, then the value is written down to zero. For the other investments some research is carried out to figure out a value.

This is all very much above board and indeed the entire process has been reviewed by Ernst and Young and confirmed as being in line with the relevant industry guidelines.

So you get a value. But it’s only on paper. You still can’t cash in until something dramatic happens like a company sale.

And there’s another snag. To work out these figures, they have assumed that you invested in every one of the 375 deals. People just don’t do this. In practice they will choose the ones they believe may do better and build their own portfolio.

However, understanding these limitations, they still show very encouraging signs of a new asset class where above average (and way above bank) returns are possible.

If you dig into the report further there is more interesting stuff. It confirms for example that investing in 10 or more companies improved the returns, in this case to an IRR of over 20%.

And when the purely digital businesses were compared with the non-digital and the hybrid businesses, it was the ones combining digital and traditional which fared best.

So, lots of interesting stuff to reflect on as some early indications of the good side of equity crowdfunding – but of course it’s all on paper.

Only it isn’t. At just about the same time, news came through about FreeAgent. A company funded via Seedrs which has successfully launched on AIM. So suddenly a chunk of the crowd who invested in the company can sell their shares at any time. They can have their money when they want it, or they can sit tight and see where the ride takes them.

But don’t get too excited. The last round on Seedrs valued the company at £30m and it floated at just above this at £34.1m. Not a huge killing, but not bad when you take the tax relief into account and a great big first for crowdfunding.

So we are still largely following the crowdfunding paper trail and are yet to find out if it leads to a crock of gold or a world of pain.