This morning Seedrs officially announced their intention to open a secondary market on their platform. Whilst this will hopefully stop the increasing number of discussion posts from investors looking to off-load their positions, the announcement does raise some interesting questions.
Seedrs look to be treating the roll-out as a ‘work-in-progress’ starting “this summer”, in its initial form (labelled the beta phase) the market will be ‘open’ for one week, starting the first Tuesday of each month – At the moment we’re not sure if that’s going to be 6th June, 4th July (get ready for a predictable marketing campaign) or 1st August (hopefully their definition of summer doesn’t stretch further than that). On that Tuesday, sellers will be able to offer their shares up for sale for the duration of the week. Potential buyers will have to already hold shares (presumably via Seedrs) if they wish to buy, in other words, they can only increase an existing position. As far as valuation is concerned, shares will be offered at Seedrs’ definition of fair value – Effectively, this is the value of the company at their most recent fund raise. The release goes on to note that some companies will be ineligible for listing at some times to deal with significant corporate actions.
With these constraints I feel this initial launch has limited appeal, I can only think of a handful of scenarios that would result in someone putting their shares up for sale:
Investors wanting to liquidate because they need the money. Despite the warnings, we’ve already seen this on the forums. If you need the money, you have to question why you are investing on the platform in the first place. I’d have to be in serious trouble for me to even contemplate listing for this reason and even if I did, I don’t think I’d admit to it.
Investors who have the foresight (or think they do) to know that the 7.5% hit they’ll take (yes, Seedrs are charging their fee to the seller any sale) is the best they can hope for as far as any return is concerned. Having thought about this, I’m going to go through my portfolio to see if there are any I think fit this category, even if I do find some – I’m still going to need to find a buyer.
Investors in companies who’ve raised multiple times with increasing valuations and bought in early rounds. This is the only way that a seller can make a positive return through the mechanism at launch. Whilst multiple raises seem to be on the up they are far from the norm so the number of companies falling in the ‘viable for positive return’ category is immediately limited. The percentage return on total investment is dictated by a combination of the level of dilution and the investment decisions taken on subsequent rounds. I did some quick sums on my Seedrs investment; if I’d stuck with my original investment I’d be up 85%, however with my investment in the later round I’d be up 35% if I sold my entire holding. There is actually scope here for me to leave myself with a small completely risk free position, even taking Seedrs’ fees into account. I’ll review my portfolio tomorrow to see if any of my other investments give me this option.
Whilst we’re on the subject of subsequent raises and Seedrs’ valuation policy, I believe the valuation policy would allow a company who have subsequently raised on competing platform CrowdCube to have their valuation set at the level at which the funds were raised on the CrowdCube platform. CrowdCube are getting a bit of a name for themselves for their high valuations and we’re seeing more companies turning to them for follow-on raises. So we’re now in a slightly dubious position where the biggest returns could come from companies that have switched platforms.
Finally we come to investors who want to balance their portfolio, nothing much to say here other than the fact that portfolios should (if Seedrs’ advice is being followed) be pretty well balanced anyway. As already mentioned, sellers will need to pay 7.5% for the privilege.
I have much more to say on the subject, but it’s getting late. This is certainly an interesting development and it’ll be interesting to see what happens as the secondary platform matures. With its ‘beta’ model, the only winner I can see is Seedrs themselves, they’re effectively automating a presently disjointed and clunky revenue stream. There will be a few wins for those who invested in multiple rounds but the majority of sales will mean losses for the sellers and we haven’t even talked about the buyers yet. Needless to say, I’ll be looking long and hard at anything listed on the secondary platform and making sure I’m confident in the current state of any company I’m considering. As to whether I’m going to be listing anything to sell, I’ll be reviewing my portfolio over the next few days – It’ll certainly be interesting to see the platform working first hand but I need to work out what the tax implications are before I do anything – A subject for a later post methinks.