Passive Aggressive

Seedrs posted what they’ve called their ‘Annual Update’ (a clandestine way to tell us they’re only providing one update a year?) this week, they were getting close to the top of my quiet list so its about time. They didn’t include any real financial numbers, apparently they’re waiting to file with Companies House before they circulate.

The update is essentially a review of 2016, going through things like investor numbers, a features review and office expansions/openings – Nothing too offensive.

One section did stand out, what they are calling ‘carry monetisation’. For anyone not already aware, Seedrs makes its money by taking a cut of funds raised and a cut of funds returned. Thus far they have obviously made a lot more money on the raise side as opposed to the return side. I don’t know the exact numbers but I’m pretty sure the number of Seedrs exits could be counted on the fingers of the average person and they go on to admit that they “would not expect to begin seeing a significant volume of exits for quite some time”. So with that in mind, they have managed to strike a deal that allows them to realise a monetary return today by pledging a portion of the return to an as yet unknown third party. We know that they’ve done this once during 2016 but that’s about all we know. What this means for investors is difficult to say, I would only hope that if a company with an exit on the cards has also had Seedrs’ carry monetised that this fact is declared to investors when the action is being discussed/actioned.

The only other thing of note to say about the update that it has prompted a discussion about the launch of a passive fund. Someone seems to think it would be a “very good idea” for Seedrs to launch a passive fund. I along with at least two other investors think this is a bad idea.

I personally think there are already people out there investing through Seedrs and CrowdCube in a pretty passive way, i.e. they punt on everything that’s listed regardless of valuation, the merits of the business or any other discernible criteria. Obviously I can’t prove this, but that is my hunch. I have an even bigger hunch that there are people investing in a slightly less passive way, whereby they invest in anything that seemingly funds quickly and/or goes into overfunding.

If you are just investing small sums and you really do know that you are highly unlikely to see any form of return then all this might be fine but I fear there are people out there pledging money, spreading their risk with an expectation that one or two investments will provide a return that outweighs all others. Exits so far haven’t yielded anywhere near the kind of multiples needed to offset the losses of a diversified crowdfunding portfolio and there needs to be many more exits before we can judge if they ever will.

Further to this, it is also my opinion that there are many funded campaigns that have come and gone where crowdfunding was the last or only resort in terms of raising money. If a company was truly as amazing as the some of the pitches would have you believe they would likely not be on a crowd funding platform in the first place. I will admit that there are exceptions to this rule with founders out there who truly want to give the crowd the chance to be involved either instead of or alongside VC investors and even then VC investment is no guarantee that the company will do any better.

There’s no way that I can see to effectively assess risk that would enable investors to set a risk appetite that would effect the makeup of a passively built portfolio – Perhaps the only thing such a passive fund should ask is “How much money are you prepared to throw away?” at least investors would be under no illusion as to their expected return.

Jeff Lynn and Seedrs seem to be pedalling so-called paper returns as positive news for crowdfunding and proof that it can be profitable, they took the passive fund discussion as yet another opportunity. This drives more people onto the platform who think they can do the same. With a limited number of pitches and a growing investor base, it’s no wonder all but the most questionable pitches get funded. The worse the company is in the first place the more likely it is to fail, the more companies that fail the more bad press there is for crowdfunding and the more noise investors make.

It’s a tricky one to solve, but I do have a few ideas that the platforms wouldn’t be happy with, I think I’ll let them develop and leave them for a later post.

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