November 7, 2016 • 25 mins
A handful of websites have launched in the U.K. over the last few years, allowing not only the rich but also the rest of us to invest in startups. How likely is it that you'll end up striking gold on the next Facebook? This week, Bloomberg Technology's Adam Satariano travels to Scotland to meet one man keeping track -- and at least so far, the results are not promising.
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Speaker 1 (00:07):
The steering wheels on the wrong side. Here all right,
first time driving on the right side. See how this goes.
The voice you're hearing, that's Adam Satriano. He's one of
the reporters on our team in London and he moved
there from San Francisco just a few months ago to
cover the European tech scene. And that tape we're listening
(00:30):
to I recorded that just as I was getting into
a rental car to drive to the eastern coast of Scotland.
I was about midway through the ninety minute drive from
Edinburgh Airport on a narrow two lane road in the
Scottish countryside, headed to the town as St Andrew's, and
I was thinking, how great is this job that I
get to travel here for a story like this? When
there was a bit of a snap foo, Well, I
(00:56):
got a flat tire. So I am in the middle
of the scott this countryside, have a few cows off
to my right here on the two lane roads some
and in this rental car there is no spare, so
I am waiting for a tow truck. Um, we'll be there,
(01:18):
we'll make it. We're gonna do this. Hi, I'm Brad
Stone and I'm Adam Sacian, and today we're traveling across
the Atlantic to explore a new way that startups are
raising money in the UK, not from venture capital firms,
not from banks, but from regular people like you and me.
(01:40):
And I was making this somewhat fraught journey to St
Andrew's to meet the guy who, through a blog, has
become one of the most vocal critics of this brave
new world of investing. These services that are making equity
crowdfunding possible. Are they matching the brightest minds of the
UK with much needed capital or are they making it
too easy for investors without enough experience and with incomplete
(02:02):
information to dump money into these startups that might never
have a chance of succeeding in the first place. Stay
with us as we hear from both sides. So back
in May I moved to London and soon after I
arrived I started noticing this peculiar ads in the underground
and online. Uh. These were ads encouraging ordinary people to
(02:23):
put their own money into funding startups. So what started
as a quick, easy way of paying for coffee is
beginning to reboot the world of payments. Now everybody has
the option of creating their very own secure economy free
of banks and fees. At Crowdcube fund raise target is
five hundred thousand pounds. This will enable us to invest
(02:46):
in marketing, PR and promotion, to continue to develop a
strategic partnerships for user acquisition, and to further develop the app.
Did you know that over half of pet dogs are overweight?
That's where we rease a re launched our first product,
just like a fitbit, but for dogs. The model is
(03:07):
similar to Kickstarter, which many of our American listeners will
know as the website that lets you donate money to
an artist or a young company and in return, if
the project raises the money at needs, you get some
sort of product at the end. The difference is that
with these funding sites in the UK, you're not investing
in a new fangled coffeemaker or a new health monitoring bracelet.
(03:28):
You're buying a piece of somebody's company. The biggest platform
is called crowd Cube, but there are others too, one
called Cedars and others called syndicate Room. And the idea
is that if you decide to back a startup and
then it turns into a successful business, and then it
decides to sell to another company or even files for
an I p O. You, brad Stone will get a
(03:49):
piece of the action. I can't wait. Ordinary people investing
in startups. That's something that only just became legal in
the US earlier this year. President obamallingly called it the
Jobs Act. Previously, you could only invest in startups if
you are really rich. But even with these d regulations,
there's still a lot of restrictions here in the US
(04:10):
that just don't exist in the UK, and crowdfunding just
hasn't taken off at this very early stage. In the UK.
On the other hand, policy makers have been eager to
embrace it and it's become a pretty big industry. And
the back drop here is that after the global financial crisis,
banks became reluctant to lend to small businesses. So the ideas,
(04:30):
let's allow small business to go directly to consumers for financing.
Some companies use crowdfunding along with traditional investors, and it's
kind of a marketing technique. You get your customers more
engaged with the company if they own a piece of
what they're buying. You can see how investors would be
drawn to this. You could park your money and government
bonds and basically earn zero interest, or you could take
(04:53):
this leap of faith and maybe just maybe make a
crazy return at Darren Westlake because the CEO of Crowdcube
described it to me as the democratization of investing. The
Internet has brought prominence to this kind of investing, and
VC investing has become kind of sexy, I guess, and
people see that stuff and they want to see if
(05:13):
they can get that little part of them. And here's
what one investor told me who I met at a
crowdfunding event. I'm Adam or Squake, and I've invested in
over a hundred ext charac funding campaigns, and in particular
I'm excited by extra crowdfunding because there are a lot
of problems and things to six in the world, and
starts to take components are one way to address it.
(05:39):
So listening to guys like Darren and Adam, it all
sounds really promising and it is. But like every good experiment,
you need to keep a close eye on the results,
and very few people are tracking what's actually happening to
these startups after they raised money on these websites like crowdcube,
except for the guy you tracked down on your ill
fated road trip to Scotland. Yeah, guy named Rob Murray Brown.
(06:01):
So we sent you there to meet him. I how
you doing right? Kind of day? Well, kind of sound
they didn't have the time. What do you what? I
met Robin a bench at the top of the cliffs
overlooking the north Sea in St Andrew's. It's a beautiful
point town with one of the world's most famous golf courses,
(06:23):
lots of stones, seventeenth century buildings, student cafes, golf shops, pubs.
And this guy Rob, you were telling me, he looks
a little bit like the British actor Bill Knight. Yeah,
you know, the guy from Love. Actually he also played
Rufus and Harry Potter. Anyway, it was a windy day
and he was bundled up in a thick tan coat.
And even before you got into your minor car crash,
(06:46):
getting to this interview was a little bit of a challenge, right. Yeah.
When I first reached out, Rob was understandably wary of
a journalist coming in using all his research that he
compiled on his blog and not giving him any credit.
I offered to fly to St Andrew's in Scotland to
meet with him. At his home, and I understand he
didn't want you to. He didn't, but after a couple
(07:07):
of days of back and forth, he agreed to meet
me for a beer and dinner in town. It's here
that Rob told me about how he stumbled into this
world of equity crowdfunding. Well. I got interested back in
two thousand and eleven when the equity crowd funding market
in the UK started and crowd Cube, who are now
(07:29):
the world's largest equity crowdfunding site, launched in the in
the middle of two thousand and eleven, and I started
following them U then I invested in a small company
which is still going um and I've got a bit
concerned about the way companies were being promoted on the
site and the amount of due diligence, and so I
(07:51):
asked him to look get into a little bit more
of the specifics. You just look at a company and
you read what they said about themselves as the founders,
and you check back through the records on the Internet
and find that what they were saying about themselves wasn't
entirely true. It was generally exaggerated quite often actually wasn't
(08:13):
true at all, And they never told you any of
the bad stuff, only the good stuff if there wasn't it.
And Rob, he's been running small businesses basically his whole life.
He knew how hard it was to borrow money from
the banks. He wanted crowdfunding to work, so he reached
out to Crowdcube. I sent them a very nice email,
I thought, saying, you know, I would. I said I
(08:35):
would offer them a free of charge service for six
months to do their due diligence. I would basically do
the job that I felt they weren't doing. I knew
they weren't doing it because I and according to Rob,
Crowdcube basically told him thanks, but no thanks, and then
ignored them. But Rob kept at it, so he was
told to go away, and of course that got him
(08:57):
more interested. So clearly this is a guy who really cares.
He really does. And I asked him why I have
spent my life running sms, and to be honest with you,
I really hate both. And I got really annoyed about it,
in fact that it annoyed him so much that he
kept looking into the company's raising money on these sites,
(09:18):
and his kids got tired of listening to him talk
about it, so they suggested that he set up a
blog that was in and this is the blog ominously
called The Truth about Equity Crowdfunding. That's made him a
tiny bit famous in the industry. Yeah, maybe a little
more infamous than famous. When I brought up Rob's website
to people in the crowdfunding industry, I got a lot
(09:39):
of tight smiles and grimaces. The website doesn't have a
big audience, maybe a thousand people per week, but it's
having an impact. Some London papers have picked up things
he's written, and it's even led to some new business
opportunities for Rob. Yeah. He's been getting the intention of
of startups who are trying to raise money this way,
and they've been reached out to him for advice. He
(10:01):
set up a little consulting business on the side. Yeah.
I could see how we'd get attention for the blog.
There's so much interesting stuff there and so much interest
in the industry. But how do you think the investors
feel about this? Are they worried like Rob about being
misled by these sites? That's what I asked the investor
we spoke to earlier. Some of them are going to fail. Um,
(10:22):
you know, if you treat early stage investment as part
of a balance and broad approach, then you know you
do risk yourself and it is at the high end
of of a risk profile. Um. And I'd certainly not
advocate putting everything having to startups. You know as an individual,
these investments you know of them could fail. Um. You know,
(10:44):
so that's the game. I don't have put anything in.
I would be to lose Adam as war Kick is
making the conventional wisdom point there about maintaining a balanced portfolio,
But the question is will investors heed that advice. Let's
take a quick break and when we come back, we'll
go through the juicy details of some of the startups
(11:05):
have never made it. We'll also tell you exactly how
many of these startups have actually made money for their investors.
Hey guys, it's Ocky. You heard from me an episode
three about the d n C hack and I helped
produce the show. I just wanted to say thank you
to everyone who's left us a rating and a review
on iTunes. It goes so far in helping us climb
(11:28):
up the rankings, which in turn helps put our show
in front of more people. If you'd like to leave
us a review to open your podcast sap on your iPhone,
tap the search button on the bottom right, type DECRYPTID,
tap on the show and then tap on the tab
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(11:50):
less complicated than it sounds. Now back to the show.
We've been talking about how startups in the UK are
using crowdfunding platforms to raise money from ordinary people. It's
something that's really starting to take off there, but at
least one person, Rob Murray Brown, who we heard from earlier,
(12:13):
has been watching the space closely and has some serious
worries about whether companies are disclosing enough information to us,
the people they are raising money from. So Adam, let's
dig into that some more. Let's take a look at
a few of these startups. Every few days, Rob publishes
fresh examples of a small company that he thinks is
headed for trouble. One of the more high profile flame
(12:35):
outs was a company called Pronto, which was a food
delivery startup. That's a great name for a food delivery company.
It actually makes me kind of hungry. It raised more
than a hundred thousand pounds from the crowd along with
another seven hundred thousand pounds or so from outside investors.
The company valued itself at five million pounds on Cedars,
which is one of crowd cues rivals. Here's what they
(12:55):
told potential investors in their pitch video. We're growing up
at the six and week on week over the last
twenty four weeks, but we've missed a majority of our
growth every single day because of our delivery area. And
this raises first and foremost all about growth, about rolling
out and expanding our fort here. It sounds exciting, right,
We're lucky to have some alone's top investors to went
(13:18):
out of business about three months later. I asked rather
about this. I mean, if you if you read the pitch,
which I have done it, you know it sounds good.
They talk a good game. It's all seems to be
take deboot. I think. I think one of the problems
with these companies is that they they come for money
before they've stress test tested their model, and and so
(13:44):
when when when they get the money and then they
hit the starting button, it all the wheels start to grind,
and the and the cogs come off, and they don't
know what to do. You know, I mean clearly, to
lose eight hundred thousand pounds and three moms is gone
an achievement. The frownder Pronto, the guy in the video,
(14:06):
declined to comment to us for the story. He did
write an apology letter to investors that said the company
didn't have the resources to scale and compete against larger rivals.
Or what other horror stories have you heard? Another company,
a clothing manufacturer went bus just the past few weeks,
as did a subscription snack business uh Rob's blog as
(14:28):
several mentions of companies financial results didn't live up to
what they were projecting. The report last year by Alt
five Uh, this is kind of a research firm that's
been looking into this. They said that one in five
of the companies that use crowdfunding from two thousand eleven
to two thousand thirteen have since gone bust. So, Adam,
none of this is unusual. There's a lot of risk
(14:48):
and start up investing. It's very typical for startups never
to make it. Even the big ones funded by tons
of venture capital can can eventually fold, like fab dot com,
which we profiled in our very first episode. Yeah, that's
something that Darren Westlake the CEO crowd Cube pointed out,
the most successful companies won't materialize until later. Failure comes first. Still,
(15:08):
the bigger question here is are there a couple of
breakout successes to balance out all the failures? Okay, then,
so stepping back, what is the tally of the more
than thousand companies that have used crowdfunding to raise money?
There's been three exits. One was a craft beer maker
called Camden Brewery that got sold. Investors there nearly doubled
(15:28):
their money. And I've had the beer. It's pretty tasty. Okay,
So not a gangbuster return if you're a venture capitalist,
but certainly respectable. Yeah. Another company was E Car Club,
which sold up for about three times what their initial
investment was, so also respectable. And the third was wool
in the Gang, a garment company. It's sold for a
(15:50):
touch more than what it raised. This one was cute.
They offered gift certificates instead of the small game it
generated for investors. So beer are sharing and garments and
and that's it. That's it. Three exits out of more
than one thousand startups. That's a little depressing. Here is
rab again, the model that the platforms put out is
(16:14):
that that you should spread your investment very sensible. So
what the model they give you is you need to
invest in ten companies, of which one will give you
a good return, too might give you a small return,
and seven will go bust, which as we're looking at
it now, I'd say it's quite optimistic. The problem is
(16:35):
that the one giving you the good return, if you
imagine it, has to give you almost ten times the
return to make up for the losses. And we're not
even there's no hint of that happening at all. And
yet there's more and more money coming into this industry.
I have some numbers here and when Adams showed them
(16:56):
to me, they were surprising. Two only and pounds were
invested in crowdfunding services last year, which was three times
the previous year, and one study said that about fifteen
percent of all early stage investments and UK startups came
from crowdfunding. I called professor of Saul Estron at the
London School of Economics. He spent some time studying the sector.
(17:19):
They're bound to be favored in this sort of area's
very early stage, so that you keep you know about
that you're investing, know that these whisky so there shouldn't
be surprises in failures in the fact that their failures,
I think more serious is that as yet they've been
very limited numbers of great successes. On the other hand,
(17:41):
it also relates to the early stage feature. I mean, um, um,
you know that the this really got going to any scale.
I suppose in early twenty fifteen it will be very
you'd be very lucky to get big successes in that
sort of time scale. So we don't start seeing first
of all, uh not that many of these figures, and
(18:05):
second of all, some really visible successes. I think the
last you know, the shine may go from this new idea,
but I don't think that has I don't think we're
exactly at the point where that is going to happen
now or in the next few months. I think, you know,
the window is in the next few years. It's a
tough call because the companies aren't doing anything illegal here,
(18:28):
but the material that potential investors see online might be
misleading or at least not representing the full picture. Like
last week's episode where you and Ellen talked to the
entrepreneur Antonio Garcia Martinez, Antonio said he lied to his
investors that he jacked up his growth projections and lowered
his company's legal costs in order to raise enough money,
(18:49):
and sure that was definitely unethical. In Antonio now admits it.
But in that episode, one of his investors, a guy
named Russell Siegelman, formerly at one of the big Silicon
Valley venture capital for Kleiner Perkins, told us he doesn't
even look at projections for an early stage startup. And
that's coming from Russ, a professional investor, incredibly experienced and
(19:09):
very savvy. These investors on sites like crowdcube and cedar
trying to hit the jackpot, though that might be a
different matter, and that's what's bothering Rob. He thinks these
platforms need to do more to weed out the bad companies,
to be more of an honest referee and make sure
the entrepreneurs, however well intentioned, aren't spinning fairy tales to
gullible investors. And he blinks it partly on the business model,
(19:32):
because the companies like crowdcube take a percentage of all
the money that gets raised on their site. And what
does crowdcube say about this? As you can imagine, the CEO,
Darren Westlake definitely disagrees well First of all, people investor
relatively small amossive money. Yeah, so people are best investing
betting that life savings on this stuff. The average investments
(19:53):
to two thou pounds and the other The other mile
point to that kind of argument is I think it's
quite patronizing to think that people don't understand the risk
and don't have the ability to pick and choose what
they want to invest in. And even vcs and professional
(20:16):
investors aren't that great to added them, and I'm taught
to this. It is worth noting that crowd cube makes
you take this test before you're allowed to be an investor,
so they make sure you're getting into this with some
level of knowledge about the risks. Adam, did you take
(20:38):
the test? I did? Tell us your score. It's a
series of multiple choice questions like what happens to most startups?
Do they fail? Or do they become big successes and
make investors lots of money? Or what happens if a
company fails? Will you lose your money? Or will crowd
cube Brian burst you for your losses? So I clicked
(20:58):
through all the wrong answers just to see what would happen,
and it said I didn't pass what they call the
sufficient knowledge test needed to become an investor. But then
they let me take it again. Did you take it again?
I did? I passed. So what does crowd cube think
about your friend Rob up in Scotland. When I first
(21:21):
talked to Darren, I wasn't planning on centering our story
around Rob, so I didn't ask him. But when I
went back to Darren recently, he declined to go back
on tape to talk to me for the story, but
he sent over a statement. Whenever you get the statement
from a company, you know that you're on sensitive territory.
So do you want to read it out loud? Yeah,
I'll read it, he said. Crowd Cube welcomes quote constructive
(21:41):
commentary on the industry. We're constantly improving our processes to
ensure investment opportunities are presented fairly and our investors are
aware of the risk. And so he goes on to
say that investors know about the risk involved here and
that the that the problems are are made clear. Reading
between the lines see suggesting that Rob's criticism is not constructive. Well.
(22:05):
Crowdcube has been a particular target for Rob Cedars, which
was started by a former corporate m and a attorney
has a bit of a tougher due diligence process and
serves as a representative for the investors with the funded companies.
And when I reached out to Cedars, it's CEO Jeff
Lynn said, failure is inevitable. He expects sent to fail.
He said, anybody who doesn't know that shouldn't be investing.
(22:27):
And there was one other company you mentioned earlier in
the program, Syndicate Room. Yeah, that's one requires people to
put more money in. Is a way to ensure that
there are more sophisticated investor and only list companies that
have money from a an angel investor or another accredited backer.
Can you can you crowdfund investments into the crowdfunding companies themselves?
(22:49):
You know, I think that's a good idea. I did
see a company that has that. It is now scoring
crowdfunding companies. So there are a lot of different variations
popping up. So I guess what rob is pushing for
is a combination of more vetting from the websites as
well as better regulation. The UK government is taking recommendations
(23:10):
from the public right now. In industry groups are also
putting in their ideas for tightening the system. In the meantime,
the platforms are looking to expand into China, India, and
some even have their sites set on the US. So, Brad,
let me get your take. Would you invest through one
of these platforms? You know, I'm gonna come at it
from a Silicon Valley mentality, and we don't have these
(23:30):
crowdfunding investment sites here. Any entrepreneur you know, with experience
or with a great idea is going to go to
professional investors, and so my sense is that you'd be
getting the kind of bottom half of the opportunities on
these services. And given that there is inherently so much
risk in startup investing to begin with, uh, coupled with
(23:53):
the fact that we are here at them all on
journalist salaries, I think I might skip it. How about you?
I tend to agree. I like the idea that there
are these alternative forms of finance, and not all companies
need to end up being a unicorn or a multi
billion dollar business. There are a lot of others that
(24:13):
just need a bit of seed capital to get off
the ground. There are a lot of restaurants or other
types of companies that are taking advantage of this. But
I do think that Rob makes Uh is laying out
a pretty good argument about some of the problems, and
so I would tread very carefully. Well, that's it for
(24:41):
this week's episode of Decrypted. Thanks for listening and let
us know. Would you consider becoming an investor on an
equity crowdfunding site or if you've done it already, tell
us what you got out of the experience. I'm on
Twitter at at Bradstone and I'm at at Satriano, And
if you have an iPhone, be sure to subscribe to
the show on iTunes or in any of your favorite
(25:02):
podcast apps out there. And while you're there, please take
a moment to rate and review our show. It really
helps get our show in front of more listeners. This
episode was produced by aki Ito, p I gut Kari,
Magnus Hendrickson, and Liz Smith. Aaron Black assisted with recording,
and Alec McCabe as a head of bloom Bird Podcasts.
We'll see you next week.
The steering wheels on the wrong side. Here all right,
first time driving on the right side. See how this goes.
The voice you're hearing, that's Adam Satriano. He's one of
the reporters on our team in London and he moved
there from San Francisco just a few months ago to
cover the European tech scene. And that tape we're listening
(00:30):
to I recorded that just as I was getting into
a rental car to drive to the eastern coast of Scotland.
I was about midway through the ninety minute drive from
Edinburgh Airport on a narrow two lane road in the
Scottish countryside, headed to the town as St Andrew's, and
I was thinking, how great is this job that I
get to travel here for a story like this? When
there was a bit of a snap foo, Well, I
(00:56):
got a flat tire. So I am in the middle
of the scott this countryside, have a few cows off
to my right here on the two lane roads some
and in this rental car there is no spare, so
I am waiting for a tow truck. Um, we'll be there,
(01:18):
we'll make it. We're gonna do this. Hi, I'm Brad
Stone and I'm Adam Sacian, and today we're traveling across
the Atlantic to explore a new way that startups are
raising money in the UK, not from venture capital firms,
not from banks, but from regular people like you and me.
(01:40):
And I was making this somewhat fraught journey to St
Andrew's to meet the guy who, through a blog, has
become one of the most vocal critics of this brave
new world of investing. These services that are making equity
crowdfunding possible. Are they matching the brightest minds of the
UK with much needed capital or are they making it
too easy for investors without enough experience and with incomplete
(02:02):
information to dump money into these startups that might never
have a chance of succeeding in the first place. Stay
with us as we hear from both sides. So back
in May I moved to London and soon after I
arrived I started noticing this peculiar ads in the underground
and online. Uh. These were ads encouraging ordinary people to
(02:23):
put their own money into funding startups. So what started
as a quick, easy way of paying for coffee is
beginning to reboot the world of payments. Now everybody has
the option of creating their very own secure economy free
of banks and fees. At Crowdcube fund raise target is
five hundred thousand pounds. This will enable us to invest
(02:46):
in marketing, PR and promotion, to continue to develop a
strategic partnerships for user acquisition, and to further develop the app.
Did you know that over half of pet dogs are overweight?
That's where we rease a re launched our first product,
just like a fitbit, but for dogs. The model is
(03:07):
similar to Kickstarter, which many of our American listeners will
know as the website that lets you donate money to
an artist or a young company and in return, if
the project raises the money at needs, you get some
sort of product at the end. The difference is that
with these funding sites in the UK, you're not investing
in a new fangled coffeemaker or a new health monitoring bracelet.
(03:28):
You're buying a piece of somebody's company. The biggest platform
is called crowd Cube, but there are others too, one
called Cedars and others called syndicate Room. And the idea
is that if you decide to back a startup and
then it turns into a successful business, and then it
decides to sell to another company or even files for
an I p O. You, brad Stone will get a
(03:49):
piece of the action. I can't wait. Ordinary people investing
in startups. That's something that only just became legal in
the US earlier this year. President obamallingly called it the
Jobs Act. Previously, you could only invest in startups if
you are really rich. But even with these d regulations,
there's still a lot of restrictions here in the US
(04:10):
that just don't exist in the UK, and crowdfunding just
hasn't taken off at this very early stage. In the UK.
On the other hand, policy makers have been eager to
embrace it and it's become a pretty big industry. And
the back drop here is that after the global financial crisis,
banks became reluctant to lend to small businesses. So the ideas,
(04:30):
let's allow small business to go directly to consumers for financing.
Some companies use crowdfunding along with traditional investors, and it's
kind of a marketing technique. You get your customers more
engaged with the company if they own a piece of
what they're buying. You can see how investors would be
drawn to this. You could park your money and government
bonds and basically earn zero interest, or you could take
(04:53):
this leap of faith and maybe just maybe make a
crazy return at Darren Westlake because the CEO of Crowdcube
described it to me as the democratization of investing. The
Internet has brought prominence to this kind of investing, and
VC investing has become kind of sexy, I guess, and
people see that stuff and they want to see if
(05:13):
they can get that little part of them. And here's
what one investor told me who I met at a
crowdfunding event. I'm Adam or Squake, and I've invested in
over a hundred ext charac funding campaigns, and in particular
I'm excited by extra crowdfunding because there are a lot
of problems and things to six in the world, and
starts to take components are one way to address it.
(05:39):
So listening to guys like Darren and Adam, it all
sounds really promising and it is. But like every good experiment,
you need to keep a close eye on the results,
and very few people are tracking what's actually happening to
these startups after they raised money on these websites like crowdcube,
except for the guy you tracked down on your ill
fated road trip to Scotland. Yeah, guy named Rob Murray Brown.
(06:01):
So we sent you there to meet him. I how
you doing right? Kind of day? Well, kind of sound
they didn't have the time. What do you what? I
met Robin a bench at the top of the cliffs
overlooking the north Sea in St Andrew's. It's a beautiful
point town with one of the world's most famous golf courses,
(06:23):
lots of stones, seventeenth century buildings, student cafes, golf shops, pubs.
And this guy Rob, you were telling me, he looks
a little bit like the British actor Bill Knight. Yeah,
you know, the guy from Love. Actually he also played
Rufus and Harry Potter. Anyway, it was a windy day
and he was bundled up in a thick tan coat.
And even before you got into your minor car crash,
(06:46):
getting to this interview was a little bit of a challenge, right. Yeah.
When I first reached out, Rob was understandably wary of
a journalist coming in using all his research that he
compiled on his blog and not giving him any credit.
I offered to fly to St Andrew's in Scotland to
meet with him. At his home, and I understand he
didn't want you to. He didn't, but after a couple
(07:07):
of days of back and forth, he agreed to meet
me for a beer and dinner in town. It's here
that Rob told me about how he stumbled into this
world of equity crowdfunding. Well. I got interested back in
two thousand and eleven when the equity crowd funding market
in the UK started and crowd Cube, who are now
(07:29):
the world's largest equity crowdfunding site, launched in the in
the middle of two thousand and eleven, and I started
following them U then I invested in a small company
which is still going um and I've got a bit
concerned about the way companies were being promoted on the
site and the amount of due diligence, and so I
(07:51):
asked him to look get into a little bit more
of the specifics. You just look at a company and
you read what they said about themselves as the founders,
and you check back through the records on the Internet
and find that what they were saying about themselves wasn't
entirely true. It was generally exaggerated quite often actually wasn't
(08:13):
true at all, And they never told you any of
the bad stuff, only the good stuff if there wasn't it.
And Rob, he's been running small businesses basically his whole life.
He knew how hard it was to borrow money from
the banks. He wanted crowdfunding to work, so he reached
out to Crowdcube. I sent them a very nice email,
I thought, saying, you know, I would. I said I
(08:35):
would offer them a free of charge service for six
months to do their due diligence. I would basically do
the job that I felt they weren't doing. I knew
they weren't doing it because I and according to Rob,
Crowdcube basically told him thanks, but no thanks, and then
ignored them. But Rob kept at it, so he was
told to go away, and of course that got him
(08:57):
more interested. So clearly this is a guy who really cares.
He really does. And I asked him why I have
spent my life running sms, and to be honest with you,
I really hate both. And I got really annoyed about it,
in fact that it annoyed him so much that he
kept looking into the company's raising money on these sites,
(09:18):
and his kids got tired of listening to him talk
about it, so they suggested that he set up a
blog that was in and this is the blog ominously
called The Truth about Equity Crowdfunding. That's made him a
tiny bit famous in the industry. Yeah, maybe a little
more infamous than famous. When I brought up Rob's website
to people in the crowdfunding industry, I got a lot
(09:39):
of tight smiles and grimaces. The website doesn't have a
big audience, maybe a thousand people per week, but it's
having an impact. Some London papers have picked up things
he's written, and it's even led to some new business
opportunities for Rob. Yeah. He's been getting the intention of
of startups who are trying to raise money this way,
and they've been reached out to him for advice. He
(10:01):
set up a little consulting business on the side. Yeah.
I could see how we'd get attention for the blog.
There's so much interesting stuff there and so much interest
in the industry. But how do you think the investors
feel about this? Are they worried like Rob about being
misled by these sites? That's what I asked the investor
we spoke to earlier. Some of them are going to fail. Um,
(10:22):
you know, if you treat early stage investment as part
of a balance and broad approach, then you know you
do risk yourself and it is at the high end
of of a risk profile. Um. And I'd certainly not
advocate putting everything having to startups. You know as an individual,
these investments you know of them could fail. Um. You know,
(10:44):
so that's the game. I don't have put anything in.
I would be to lose Adam as war Kick is
making the conventional wisdom point there about maintaining a balanced portfolio,
But the question is will investors heed that advice. Let's
take a quick break and when we come back, we'll
go through the juicy details of some of the startups
(11:05):
have never made it. We'll also tell you exactly how
many of these startups have actually made money for their investors.
Hey guys, it's Ocky. You heard from me an episode
three about the d n C hack and I helped
produce the show. I just wanted to say thank you
to everyone who's left us a rating and a review
on iTunes. It goes so far in helping us climb
(11:28):
up the rankings, which in turn helps put our show
in front of more people. If you'd like to leave
us a review to open your podcast sap on your iPhone,
tap the search button on the bottom right, type DECRYPTID,
tap on the show and then tap on the tab
in the middle of the screen that says reviews. Then
you can tap on the purple link a little lower
down that says write a review. And I promise it's
(11:50):
less complicated than it sounds. Now back to the show.
We've been talking about how startups in the UK are
using crowdfunding platforms to raise money from ordinary people. It's
something that's really starting to take off there, but at
least one person, Rob Murray Brown, who we heard from earlier,
(12:13):
has been watching the space closely and has some serious
worries about whether companies are disclosing enough information to us,
the people they are raising money from. So Adam, let's
dig into that some more. Let's take a look at
a few of these startups. Every few days, Rob publishes
fresh examples of a small company that he thinks is
headed for trouble. One of the more high profile flame
(12:35):
outs was a company called Pronto, which was a food
delivery startup. That's a great name for a food delivery company.
It actually makes me kind of hungry. It raised more
than a hundred thousand pounds from the crowd along with
another seven hundred thousand pounds or so from outside investors.
The company valued itself at five million pounds on Cedars,
which is one of crowd cues rivals. Here's what they
(12:55):
told potential investors in their pitch video. We're growing up
at the six and week on week over the last
twenty four weeks, but we've missed a majority of our
growth every single day because of our delivery area. And
this raises first and foremost all about growth, about rolling
out and expanding our fort here. It sounds exciting, right,
We're lucky to have some alone's top investors to went
(13:18):
out of business about three months later. I asked rather
about this. I mean, if you if you read the pitch,
which I have done it, you know it sounds good.
They talk a good game. It's all seems to be
take deboot. I think. I think one of the problems
with these companies is that they they come for money
before they've stress test tested their model, and and so
(13:44):
when when when they get the money and then they
hit the starting button, it all the wheels start to grind,
and the and the cogs come off, and they don't
know what to do. You know, I mean clearly, to
lose eight hundred thousand pounds and three moms is gone
an achievement. The frownder Pronto, the guy in the video,
(14:06):
declined to comment to us for the story. He did
write an apology letter to investors that said the company
didn't have the resources to scale and compete against larger rivals.
Or what other horror stories have you heard? Another company,
a clothing manufacturer went bus just the past few weeks,
as did a subscription snack business uh Rob's blog as
(14:28):
several mentions of companies financial results didn't live up to
what they were projecting. The report last year by Alt
five Uh, this is kind of a research firm that's
been looking into this. They said that one in five
of the companies that use crowdfunding from two thousand eleven
to two thousand thirteen have since gone bust. So, Adam,
none of this is unusual. There's a lot of risk
(14:48):
and start up investing. It's very typical for startups never
to make it. Even the big ones funded by tons
of venture capital can can eventually fold, like fab dot com,
which we profiled in our very first episode. Yeah, that's
something that Darren Westlake the CEO crowd Cube pointed out,
the most successful companies won't materialize until later. Failure comes first. Still,
(15:08):
the bigger question here is are there a couple of
breakout successes to balance out all the failures? Okay, then,
so stepping back, what is the tally of the more
than thousand companies that have used crowdfunding to raise money?
There's been three exits. One was a craft beer maker
called Camden Brewery that got sold. Investors there nearly doubled
(15:28):
their money. And I've had the beer. It's pretty tasty. Okay,
So not a gangbuster return if you're a venture capitalist,
but certainly respectable. Yeah. Another company was E Car Club,
which sold up for about three times what their initial
investment was, so also respectable. And the third was wool
in the Gang, a garment company. It's sold for a
(15:50):
touch more than what it raised. This one was cute.
They offered gift certificates instead of the small game it
generated for investors. So beer are sharing and garments and
and that's it. That's it. Three exits out of more
than one thousand startups. That's a little depressing. Here is
rab again, the model that the platforms put out is
(16:14):
that that you should spread your investment very sensible. So
what the model they give you is you need to
invest in ten companies, of which one will give you
a good return, too might give you a small return,
and seven will go bust, which as we're looking at
it now, I'd say it's quite optimistic. The problem is
(16:35):
that the one giving you the good return, if you
imagine it, has to give you almost ten times the
return to make up for the losses. And we're not
even there's no hint of that happening at all. And
yet there's more and more money coming into this industry.
I have some numbers here and when Adams showed them
(16:56):
to me, they were surprising. Two only and pounds were
invested in crowdfunding services last year, which was three times
the previous year, and one study said that about fifteen
percent of all early stage investments and UK startups came
from crowdfunding. I called professor of Saul Estron at the
London School of Economics. He spent some time studying the sector.
(17:19):
They're bound to be favored in this sort of area's
very early stage, so that you keep you know about
that you're investing, know that these whisky so there shouldn't
be surprises in failures in the fact that their failures,
I think more serious is that as yet they've been
very limited numbers of great successes. On the other hand,
(17:41):
it also relates to the early stage feature. I mean, um, um,
you know that the this really got going to any scale.
I suppose in early twenty fifteen it will be very
you'd be very lucky to get big successes in that
sort of time scale. So we don't start seeing first
of all, uh not that many of these figures, and
(18:05):
second of all, some really visible successes. I think the
last you know, the shine may go from this new idea,
but I don't think that has I don't think we're
exactly at the point where that is going to happen
now or in the next few months. I think, you know,
the window is in the next few years. It's a
tough call because the companies aren't doing anything illegal here,
(18:28):
but the material that potential investors see online might be
misleading or at least not representing the full picture. Like
last week's episode where you and Ellen talked to the
entrepreneur Antonio Garcia Martinez, Antonio said he lied to his
investors that he jacked up his growth projections and lowered
his company's legal costs in order to raise enough money,
(18:49):
and sure that was definitely unethical. In Antonio now admits it.
But in that episode, one of his investors, a guy
named Russell Siegelman, formerly at one of the big Silicon
Valley venture capital for Kleiner Perkins, told us he doesn't
even look at projections for an early stage startup. And
that's coming from Russ, a professional investor, incredibly experienced and
(19:09):
very savvy. These investors on sites like crowdcube and cedar
trying to hit the jackpot, though that might be a
different matter, and that's what's bothering Rob. He thinks these
platforms need to do more to weed out the bad companies,
to be more of an honest referee and make sure
the entrepreneurs, however well intentioned, aren't spinning fairy tales to
gullible investors. And he blinks it partly on the business model,
(19:32):
because the companies like crowdcube take a percentage of all
the money that gets raised on their site. And what
does crowdcube say about this? As you can imagine, the CEO,
Darren Westlake definitely disagrees well First of all, people investor
relatively small amossive money. Yeah, so people are best investing
betting that life savings on this stuff. The average investments
(19:53):
to two thou pounds and the other The other mile
point to that kind of argument is I think it's
quite patronizing to think that people don't understand the risk
and don't have the ability to pick and choose what
they want to invest in. And even vcs and professional
(20:16):
investors aren't that great to added them, and I'm taught
to this. It is worth noting that crowd cube makes
you take this test before you're allowed to be an investor,
so they make sure you're getting into this with some
level of knowledge about the risks. Adam, did you take
(20:38):
the test? I did? Tell us your score. It's a
series of multiple choice questions like what happens to most startups?
Do they fail? Or do they become big successes and
make investors lots of money? Or what happens if a
company fails? Will you lose your money? Or will crowd
cube Brian burst you for your losses? So I clicked
(20:58):
through all the wrong answers just to see what would happen,
and it said I didn't pass what they call the
sufficient knowledge test needed to become an investor. But then
they let me take it again. Did you take it again?
I did? I passed. So what does crowd cube think
about your friend Rob up in Scotland. When I first
(21:21):
talked to Darren, I wasn't planning on centering our story
around Rob, so I didn't ask him. But when I
went back to Darren recently, he declined to go back
on tape to talk to me for the story, but
he sent over a statement. Whenever you get the statement
from a company, you know that you're on sensitive territory.
So do you want to read it out loud? Yeah,
I'll read it, he said. Crowd Cube welcomes quote constructive
(21:41):
commentary on the industry. We're constantly improving our processes to
ensure investment opportunities are presented fairly and our investors are
aware of the risk. And so he goes on to
say that investors know about the risk involved here and
that the that the problems are are made clear. Reading
between the lines see suggesting that Rob's criticism is not constructive. Well.
(22:05):
Crowdcube has been a particular target for Rob Cedars, which
was started by a former corporate m and a attorney
has a bit of a tougher due diligence process and
serves as a representative for the investors with the funded companies.
And when I reached out to Cedars, it's CEO Jeff
Lynn said, failure is inevitable. He expects sent to fail.
He said, anybody who doesn't know that shouldn't be investing.
(22:27):
And there was one other company you mentioned earlier in
the program, Syndicate Room. Yeah, that's one requires people to
put more money in. Is a way to ensure that
there are more sophisticated investor and only list companies that
have money from a an angel investor or another accredited backer.
Can you can you crowdfund investments into the crowdfunding companies themselves?
(22:49):
You know, I think that's a good idea. I did
see a company that has that. It is now scoring
crowdfunding companies. So there are a lot of different variations
popping up. So I guess what rob is pushing for
is a combination of more vetting from the websites as
well as better regulation. The UK government is taking recommendations
(23:10):
from the public right now. In industry groups are also
putting in their ideas for tightening the system. In the meantime,
the platforms are looking to expand into China, India, and
some even have their sites set on the US. So, Brad,
let me get your take. Would you invest through one
of these platforms? You know, I'm gonna come at it
from a Silicon Valley mentality, and we don't have these
(23:30):
crowdfunding investment sites here. Any entrepreneur you know, with experience
or with a great idea is going to go to
professional investors, and so my sense is that you'd be
getting the kind of bottom half of the opportunities on
these services. And given that there is inherently so much
risk in startup investing to begin with, uh, coupled with
(23:53):
the fact that we are here at them all on
journalist salaries, I think I might skip it. How about you?
I tend to agree. I like the idea that there
are these alternative forms of finance, and not all companies
need to end up being a unicorn or a multi
billion dollar business. There are a lot of others that
(24:13):
just need a bit of seed capital to get off
the ground. There are a lot of restaurants or other
types of companies that are taking advantage of this. But
I do think that Rob makes Uh is laying out
a pretty good argument about some of the problems, and
so I would tread very carefully. Well, that's it for
(24:41):
this week's episode of Decrypted. Thanks for listening and let
us know. Would you consider becoming an investor on an
equity crowdfunding site or if you've done it already, tell
us what you got out of the experience. I'm on
Twitter at at Bradstone and I'm at at Satriano, And
if you have an iPhone, be sure to subscribe to
the show on iTunes or in any of your favorite
(25:02):
podcast apps out there. And while you're there, please take
a moment to rate and review our show. It really
helps get our show in front of more listeners. This
episode was produced by aki Ito, p I gut Kari,
Magnus Hendrickson, and Liz Smith. Aaron Black assisted with recording,
and Alec McCabe as a head of bloom Bird Podcasts.
We'll see you next week.
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