Fair Value

The Seedrs secondary market opened for the third time today and with it a listing for Blue Crow Media. I have nothing particularly interesting to say about Blue Crow as a company, only that it publishes maps and turned a modest profit for the y/e 31st July 2016. No, what makes the Blue Crow lot interesting is Seedrs’ valuation.

Blue Crow completed their one and only raise on 29th May 2014 or 3 years, 2 months and 3 days ago. With this, as the opaque Seedrs ‘fair’ valuation model goes, because they haven’t raised for more than three years they are subject to “substantive valuation analysis”. I’m not too sure how substantive this analysis is, the lots available are offered at the same price as at the last raise.

If we then compare Blue Crow’s current ‘fair’ value with that of Bird Cycleworks which currently stands at zero (yes I’m moaning about that again) then it calls into question what exactly Seedrs are doing to keep their valuations fair and current? Both companies made a small profit last year (£17k for Bird and £6k for Blue Crow), they have similarly sized balance sheets with positive net current assets (£35k for Bird and £7k for Blue Crow) and have both filed accounts recently. The pre-money valuations at raise weren’t even that different with £450k for Bird and £950k for Blue Crow with Bird giving 10% away for £45k and Blue Crow £58k for 5%. With that information alone, in my opinion, Bird is arguably worth more than Blue Crow.

I think it’s about time Seedrs start publicising their valuation strategy for companies that fall into the ‘3 years since raise’ category. In theory, the number of companies falling into this category is going to increase, are Seedrs just going to leave the values alone so that lots can continue to be listed on the secondary market? If so, what’s to happen to companies who were valued before the launch? I’ve been asking Seedrs to clarify via email and Twitter to no avail, I will keep pressing.

Pick a number

Someone made the excellent point today that Bird Cycleworks is currently valued at £0 by Seedrs if their ‘fair-value’ model is to be believed. Yep, that’s the same Bird Cycleworks who posted their company accounts a week or two ago highlighting a modest profit.

“We calculate fair value by looking at two share prices: the share price at which the investor invested; and the most up-to-date fair value of the shares (which we calculate when we obtain relevant information about the company in question).”

Bird Cycleworks fail to receive any value because they didn’t do their initial raise in the last three years, they haven’t had subsequent raises in the last three years. They have presumably produced a zero valuation because they “have conducted a substantive valuation analysis with a presumption of decline in value” . I’m not sure what this substantive analysis is based on or when it was performed – I presume it was around September 2016 when Seedrs produced their extensive valuation report and started publishing these valuations alongside the IRR.

This issue highlights a few more important points about the Seedrs valuation model.

How is ‘relevant’ information being used to determine a valuation when a company doesn’t meet the 3-year criteria? With the 3-year rules, at least the valuation method is transparent, regardless of whether it is accurate.

Are Seedrs actively seeking information from companies who’ve raised money on the site, particularly from those who fall outside the 3-year rules?

If Seedrs are using CH filings to determine valuations, this raises yet more points. How can accounts that are up to 9 months out of date when published possibly indicate the value of a company particularly when they are more than likely in the form of micro accounts that contain only a simple balance sheet?

If all companies who fall outside the 3-year rules received zero valuations I don’t think I’d mind so much, but there are other companies with positive valuations whose only raise(s) took place more than three years ago, here’re the first two I could find, there are many more:

  • Daredevil Project – Raised in Feb 2014, nothing on their Twitter feed since March 2016, nothing on Facebook since 2015, a website under ‘re-design’, recently filed accounts showing mounting losses. Shares currently available on the secondary market @ £0.61 per share.
  • Times Place Brasserie – Raised in Jan 2014, (still) unclear ownership, mounting losses. Shares currently available on secondary market @ £10 per share.

A couple of final points.

Does a successful trade on the secondary market constitute validation of the valuation and effectively override the 3-year rules?

Are the rules of valuation helping or hampering the ECF arena? At the moment you can sell a company you bought last week, but you can’t sell one that you bought more than three years ago if Seedrs’ opaque valuation model says it’s worthless… Go figure.

Second Secondary

The Seedrs secondary market trading window is open again. As predicted, there are more listing this time with 292 lots listed (vs. 111 last month). Because there are more lots, I haven’t had the chance to do any real analysis yet – a quick skim through the various listings suggests there are companies on offer that weren’t available last month but I can’t say much more than this about what’s happening.

From a technical point of view, there look to have been a few tweaks to the way the listings are displayed with new sort order functionality (which doesn’t quite work correctly) and a drop-down but no changes with regard to the way the market actually functions – you can still only by lots in companies you already hold and you can ‘register interest’ (whatever that actually means) in the rest.

A Final Flourish

Tonight sees the close of the first secondary market trading window on Seedrs – I presume the absolute deadline is midnight but given Seedrs reputation for removing pages that show them in anything but a positive light and my lack of interest in staying up that late I thought I’d do a quick round-up now before anything disappears (10pm Monday 12th June).

If you read my last update you’ll know things stagnated after the opening day with only a handful of new transactions. Things look to have picked up a little over the closing weekend, with another £4k worth of transactions between 8th and 12th bringing the total to approximately £14,700 representing an overall take-up of 37% in monetary terms.

The main takeaways from the final figures suggest both Glentham Capital and Torch should be avoided at all cost, they had the highest value of shares on offer (£3,804 and £3,600 respectively) with the lowest take-up in percentage terms (0% for both).

At the other end of the scale we have seen some movement over the course of the 7 day window. At the end of the first day, just £154.20 of the £3,153 available Wriggle shares (split over 6 lots of varying sizes) had been snapped up, take-up increased as the week progressed, with an additional lots being reserved on both 7th and 8th. As of this evening, all lots in Wriggle have sold making them the biggest seller in value terms. Wriggle have raised three times on Seedrs between February 2014 and April 2016, I’m guessing with an ever-increasing valuation – I suspect this is a case of early investors cashing out and later investors seeing a degree of potential in the underlying company. I’ll have to do some more in-depth research on this one!

As mentioned in my first article, bother Swogo and Adludio F.KA Future Ad Labs proved popular. Perhaps a little more surprisingly a single lot valued at £1,000 in Times Place Brasserie went through in the final days – As a (very small) holder I can’t really see the attraction, my recent article called into question the makeup of the shareholders and whether Nicola Horlick was still involved, the company provides naff all in terms of updates and I see little in the way of opportunity for positive returns – I feel only Seedrs are going to make any money on this one.

It’ll be interesting to see what happens next month… There’ll almost certainly be more lots available now that people have had a chance to test the water. Hopefully, Seedrs will do something about the platform to improve things for buyers and sellers – in its current form, it’s little more than a minimum viable product. As a minimum, we need:

  • The ability to bid on partial lots.
  • The ability set bid/offer prices.
  • The ability to buy/sell outside our current holdings.
  • The ability to see full prior campaign details, forum posts and communications for all lots on offer.

I feel the last two are wishful thinking at the moment, the issue transparency still remains. I very much doubt Seedrs will offer us a chance to buy outside existing holdings without some very big caveats.

A Second (and Third) Look

The Seedrs seven day secondary market trading window has now been open for three days. I gave a round-up of the first day of activity on Tuesday. Since the initial flurry of activity, the tumbleweed has started rolling with just four more lots being snapped up since my initial analysis.

There’s been some take-up on two lots in Wriggle and one lot for both Stamplay and Moteefe taking the total value of all trades to approximately £10,890 (up from £9,060 on Tuesday evening).

It seems all the perceived bargains are now gone, I don’t think we’re going to see much movement over the remaining four days except for maybe a few toe-dippers wanting to get involved for no other reason than to be involved.

Secondary Analysis

It’s just after 9pm on Seedrs’ first ‘Trading Tuesday’ – The 7-day secondary market is open for business. Those wishing to sell had until a few days ago to make their intentions known so their listings would appear first thing this morning, sellers who missed the boat will have to wait until July.

Seedrs members received an email from Thomas Davies boasting of 111 live buying opportunities – let’s take a look what’s happened since launch.

Of the 111 lots listed, 49 (>44%) are currently marked ‘Under Offer’, however lots can only be bought in the blocks in which they are offered by the seller and they range in value from £10 to £1,000 so the number of blocks sold tells us nothing.

Based on Seedrs’ idea of market prices, the 111 lots are offered at a total of more than £39,000 (Euro denominated offerings have been converted to GBP @ 0.87), the sum of those that are currently ‘under offer’ totals just over £9,000 (just over 22%), not quite so impressive.

Looking at the companies on offer we can glean a few things some of us probably already know. Glentham Capital takes the prize for most shares on offer (£3,804 worth), they also win the prize for fewest shares under offer (zero). They are followed closely by Torch with £3,600 on offer and again zero under offer. There are plenty more with zero take-up, but none as bad as these – the next in line would be UnderTheDoormat with £1,483 on offer.

At the other end of the scale Adludio F.KA Future Ad Labs (snappy name) have 100% take-up on the £1,695 of shares offered, the same goes for Swogo (£1,486) (as predicted), Wonderush (£993), Veeqo (£766), No Agent (£522), Hummos Bros (£493), Frenzi (£492), Pap (£492), Gearbox Records (£200) and YellowDog (£177).

When looking at these numbers its worth keeping in mind that the degree of take-up is unlikely to be driven by price alone – the number of shares on offer in each lot and consequentially the total lot value is likely to have a significant impact with smaller lots more likely to sell than large (average value of those under offer is just over £184 vs £493 for those that remain on the table). So those companies with zero take-up mentioned above may just represent one big block – I can tell you that this isn’t the case, in fact Glentham Capital rules the roost in terms of number of separate lots on offer with seven, torch again takes a close second with six lots available.

Once you’ve digested all of that, don’t forget Seedrs are set to recognise over £600 in revenue and have lined themselves up for multiple bites of the cherry by keeping everything within their platform. It’ll be interesting to see what the next six days bring and if anyone is brave enough for those Glentham Capital shares on the table.

 

 

Secondary Thoughts

I’ve been thinking a lot about this secondary market thing Seedrs announced the other day. As described in its ‘beta’ model, Seedrs are dictating prices based on their own valuation model, effectively valuing shares at the price of their most recent raise, assuming the raise took place in the last three years.

In my opinion, this model is wrong on several levels. We’ve seen businesses raise significant funds, blow the lot and wind up in well under 3 years, I’ve been burnt by Hokkei, Delivery Club and Read Bug myself – all raised on Seedrs less than three years ago and are either winding up or have already been dissolved. These are the companies who’ve been relatively honest about their shortcomings or have just completely run out of money very quickly. There are plenty more companies still burning through their money, missing their targets and going nowhere.

By limiting buyers to companies they already hold, I think Seedrs are trying to say that existing investors should have a better view of the company, by having access to the original pitch and the subsequent updates and discussions. For some companies, this might be true, but if you read this blog you’ll know that getting updates from some of the companies I’ve invested in takes a degree of public shaming and even when they do materialise they are often vague. It’s worth noting that these updates are completely unvetted, Seedrs have a big box saying as much at the top of every ‘updates’ page, there is nothing to stop a company adding a shiny gloss to these updates or worse still just plain lying. The only thing any of these crowdfunded companies are obliged to do is file accounts 9 months after their year-end, and we all know a lot can happen in the space of 9 months.

This is simply not enough to form a view on price. If there are questions about the state of the company through a lack of updates or disappointing accounts have been filed then the price should arguably be lower than the Seedrs ‘fair value’ but we won’t get the option to sell at that lower price.

We also have the issue of transparency and privileged information – I was thinking about this issue a few days ago and have asked Seedrs directly to respond to a few questions, since then a similar question has been asked on the Seedrs discussion board. Jeff’s response:

“we can’t (and wouldn’t want to) regulate the communications between investors, but as you say, we can make very clear that it is not regulated, and there will be other things in the relevant documentation to make clear that, if the seller misleads the buyer, the buyer could potentially have a right of action against the seller.”

So they admit that communications between different investors in the companies can vary and they immediately cover themselves by citing the fact that these communications are unregulated. They also state that anyone who might have been misled may have the ability to take action, whilst that may be true I’m not sure it’s the sort of action the average small-scale investor might want to take given the potential cost, complexity and uncertainty around the outcome. There seems to be a disregard for the damage this sort of thing might do to their reputation if and when questionable trades hit the platform, there’s certainly no suggestion that Seedrs would even help out in such a case.

Whilst we’re on the subject of the discussion boards, it’s worth noting that Seedrs’ discussion board is only available to Seedrs investors – There have already been a lot of useful discussions that I think all Seedrs members would benefit from – Let’s see what they think of publishing to a wider audience.

More thoughts soon.