Category Archives: investment
Winners and Losers
As promised in my last post, the stories of my recent winner and loser, with hints at possible lessons to be learned.
The Loser
When I invested in the first funding round of the Den, a startup developing a home automation product, the company was already attracting quite a lot of coverage in the national media and some serious backers. Since then it has raised a further five million from the Crowd (more from bigger investors including a major distributor), won various awards and endorsements, and developed and marketed its product. On the downside, lots of delay, unrealistic promises, and often-poor communication with investors. Then the company ran out of money and went into liquidation.
At the time of the liquidation, it was launching a crowdfunding campaign to raise yet more money, but that was pulled by seedrs – the platform. I don’t have the gory detail – like what the company’s prospects might have been if it had successfully raised further funds – but it seems to have been pretty bad. Very probably one or more bigger prospective investor had turned the tap off. An ex-employee joined the investors forum and was very bitter: apparently she and others had gone unpaid for some time, while the proprietor continued to live the high life. OK, we’re getting a picture here: a young proprietor showing a cavalier attitude but getting loads of publicity and awards: clearly an accomplished bulls***ter. An aspiring Stuttley, with the character to go far in life, and perhaps make a big success (for someone) of a future venture.
This was my third crowdfunding flutter to go belly-up, but the first where the Crowd didn’t quietly accept it and shrug off the loss. There was quite a lot of anger that they had raised (more) funds less than a year earlier, and had been due to do so again without communicating how bad it was (that’s of course speculative: we can’t know for certain what the campaign would’ve told us). The word fraud has been mooted, though I suspect that may be naïve.
I think the core of investors’ disquiet over this has been the lack of timely information about the state of the company. The idea that a further funding round would have been throwing good money after bad (how was this even contemplated?), and the questions it raises over the last fundraising, as recently as February 2019. This was exacerbated by a history of poor communication from Den management to investors – although they were by no means the worst offenders there. It also cast a grim light on seedrs’ valuation, on which subject more below.
But this story isn’t just about a bust and questionable circumstances. This was a company with real assets – albeit severely damaged by the bust, and not least the turning off of IoT cloud services that affects existing customers. There was speculation about a pre-pack administration in bad faith: the kind where you wipe out debts and cannon-fodder investors and carry on as if nothing had happened. A rescue bid was discussed, and an individual from the Crowd with relevant entrepreneurial experience stepped forward to lead an effort. But whether a team from the investor crowd (for example, I was far from the only person who might have contributed on the techie side in reviving those IoT cloud services) could have made a go of it, we’ll never know.
For in the end (or at least the current state of the story), is that a pre-pack/rescue did happen, but it was led not by the crowd, but by an individual much bigger investor. I don’t know where he’ll be taking it, nor what relationship he may have had with the failed management team. But most interestingly, it’s been announced that existing shareholders (including the Crowd) will get 50% equity in the new company – which seems on the face of it to be putting us ahead of creditors – unless they’re being implausibly-well-treated. Our working assumption is that he’ll be looking to raise more funds from existing investors including the Crowd, though how many will consider it is unknown.
The Winner
The happier investment was Pod Point, a company in the business of charging points for electric vehicles. They are (now) a major vendor to consumers – EV owners wanting to be able to charge at home. They also have quite a lot of chargers in public places such as car parks of supermarket chains Tesco, Lidl and Sainsburys. Apart from the Crowd (both seedrs and crowdcube platforms), Pod Point’s investors include mainstream Venture Capital from Draper Esprit, and a major investment from Legal&General, both of which had large parts of their stake in preference shares (convertible, I think) that were not offered to the Crowd.
Press reports in the autumn speculated that EDF – a major provider of energy to consumers as well as a major generator of electricity (and indeed, my recent nemesis) – was in talks to buy out Pod Point. A deal was recently confirmed: EDF will pay approximately 24p per Pod Point share. I expect EDF will now be marketing deals to consumers with electric vehicles, including a home charger along with tariffs that’ll suit their usage patterns and perhaps help balance the load.
Given that my original investment five years ago was at 8.53p/share – or 6p including EIS tax relief – this represents a profitable exit for me. But not everyone has been so fortunate. The seedrs secondary market[1] trades a company at a fixed price, and that was set at 27p after the Legal&General investment at that price. Investors who paid 27p in the expectation of long-term growth are now forced to sell at a loss. I’m not entirely clear on whether L&G’s preferred shares are getting a guaranteed price: I suspect they are getting their 27p.
Now secondary market trading of Pod Point was suspended several months ago, presumably when seedrs was notified of the buyout talks with EDF. But there’s a big unanswered question over seedrs’ book price for Pod Point:
Seedrs Valuation £95.3m. Reported sale value £110m. So that’s a 15% premium. Ordinary shares should presumably be getting a lift of at least 15% from that, right?
Sale price for shares: about 24p. Seedrs “market” price 27p. A loss of 11% for recent investors on the seedrs secondary market.
In other words, a realisation at both 15% premium and 11% discount to an implied book value! And that’s discounting any gearing due to the existence of preferred shares!
It would appear that Pod Point shares were trading well above their book price. Seedrs must have known – they have more information than we do – but they allowed it to happen and made no efforts to point out the discrepancy. No wonder there’s disquiet amongst investors!
[1] I’ve always considered the seedrs secondary market defective. There’s no mechanism for price discovery – which means that a company that is underperforming and needs to be valued downwards will never trade. And there’s a lack of information on prospective investments – except those in which one is already invested and might top up. And now evidence of discrepancies in valuation. But I accept, the market is a work-in-progress and will hopefully improve in time.
Governance for crowdfunding
I don’t think I’ve blogged about it before, but over some years now I’ve made a few crowdfunding investments in (near-)startup companies. I regard them as a bit of a flutter: some people bet on the horses, I bet on companies. With the added bonus that when a bet comes good and the company prospers, I’ve supported a company’s growth, benefiting more than just its investors. And for (most) UK investments, there’s the added bonus of EIS tax relief.
In recent weeks, two of my investments (coincidentally both originating from the same time, March/April 2015) have reached sharply contrasting outcomes. A winner and a loser, the one bought out by a big company, the other went bust. Actually neither outcome is quite that simple, and maybe they offer useful lessons in the fledgeling business of crowdfunding. Both have – in different ways and for different reasons – left at least some investors deeply dissatisfied with the experience.
In the interests of brevity I’ll separate out the stories of the two companies into another post. But from these and others, I think it may be time to learn some lessons about crowdfunding. It’s an emerging phenomenon: each platform works differently, and there is no universal governance model. A generation ago the then-new VCT industry – arguably a good precedent – produced some big winners but a greater number of big losers for investors; since then it’s stabilised and consolidated and for a while became quite a gravy-train. Now it’s the turn of the new kid on the block seeking a successful model.
When a VCT invests, they typically appoint a Non-Executive Director to the board of an investee. Ideally he/she not only represents the VCT’s interests as investor, but brings a depth of experience to the board that complements the business founders’ expertise in their own field. Crowdfunding comes without such representation, so an inexperienced entrepreneur may be left without that guiding hand. One mainstream crowdfunding platform, SyndicateRoom, always has a Lead Investor with skin in the game – typically (I think) an experienced business angel investing much larger sums than my little flutters. Elsewhere many individual companies have their own lead investors/advisors filling a comparable role. But that’s ad-hoc, and in any case they don’t represent anyone but themselves.
Now here’s the interesting thought. It’s not (in general) realistic for the Crowd to appoint a NED to represent us, but perhaps we can do better than that?
The platforms provide a forum for discussion of each investee and communication between investors and management. At best, companies engage actively with investors, and some investors bring valuable expertise and ideas. Better still, the best investor engagement is not lost in noise: in most cases noise is low, and the best ideas are readily appreciated. Sometimes an investor also asks searching questions: if an investee’s reporting leaves unanswered questions, there will be an investor whose own job description is financial controller of a small company who has exactly the expertise to ask the right questions.
At worst, companies don’t engage at all, nor even report to us. As of now there seems to be nothing we can do about it when that happens (or should I say doesn’t happen)?
So to my thoughts about governance in crowdfunding investments. We have no NED, but we have an engaged and interested crowd, with a range of expertise. What we should be thinking about is formalising the interaction between crowd and investee, building on what works well and spreading Good Practice more widely.
One approach to that would be to mandate scheduled shareholder meetings as a contractual requirement for raising funds on a platform. These would be held online and could be chaired by a representative of the platform, and held either at regular intervals (e.g. every six months) or alternatively appended to a company’s board meetings. They should be sufficiently formal to have an Agenda, to accept Resolutions and (non-binding but indicative) Votes, and be empowered to request (though not force) Actions on a management. Being online, every meeting will be archived and referenced, just as campaigns and discussion are.
That is, of course, in addition to the informal engagement through ad-hoc discussion boards, which work well and serve a useful purpose if (and only if) a company’s management engages constructively with investors there.
Powering the future
I have a few quid invested in the well-known forms of renewable energy. The more successful investments are in managed funds which benefit from venture capital tax breaks.
But I’ve hitherto been missing what is surely the UK’s best renewable energy resource: the sea that surrounds us. In particular the tidal flows that raise and lower vast amounts of water around our coast, completely reliably, every day.
Back in the 1990s when I worked with satellite images, one striking set showed the shallow waters of the North Sea off the Essex and Suffolk coast, where the phase of the tide can be seen from space due to the surface wave patterns caused by the rapid tidal flow in and out. Mile after mile of shallow water and powerful, reliable flows: westward as the tide rises, eastward as it falls. Why are we not installing underwater turbines to harness all that energy? In places there are wind turbines harnessing an altogether more fickle source, so there is presumably even the infrastructure to erect turbines and harvest energy!
Well, I haven’t found anyone building tidal stream technology in the North Sea, but there is a credible alternative suitable for certain coastal locations and capable of generating substantial amounts. And there is a project to build a tidal lagoon in Swansea Bay. It looks like a win-win: they’ve gone to a lot of trouble to design a facility that serves not only to generate substantial power, but also to make an environmental and recreational virtue of it. It appears to have a good level of local support, judging by what I can find in sources such as comments at the local paper’s website.
And the project is open for investment. And it’s offering EIS tax breaks, which are even better than the venture capital breaks I enjoy on other investments[1]. And due diligence gives me confidence in the management, not least the man in charge who has a very impressive track record and a lot of his own money at stake.
That’s a lot of very positive boxes ticked. Today I finally got around to filling in the application form and writing my cheque. I’m investing in our best future energy source.
[1] 30% tax break up-front, with a lock-in of just 3 years, compared to 5 for Venture Capital. And further downside protection in that if the investment fails I can offset any losses against tax all over again.
New year, new regime
The tax year just ended is the third and last in which I had substantial PAYE earnings to worry about. So I’ve used the same three tax-saving measures as in the last two years, including my biggest ever venture capital investment. I seem to be one day late for my annual review, so here goes.
I also need to consider better measures of performance. As portfolios mature, so naïve measures of current value vs money paid in become increasingly meaningless. But that’s beyond the scope of anything I want to publish here. So how am I faring?
The ISA is the most conservatively invested, and is cumulatively showing +26%, against 24% last year. Net of new money invested, that’s a modest 5% actual rise over the year (tax-free), so I guess it’s treading water. Not complaining too loudly, since my priority there has been to preserve value and save tax.
The SIPP is up either 126% or 36%, depending on whether or not we include the tax breaks in the calculation. That’s a moderate advance on last year (112%/27%), and better when you factor in the fact that most of the new money was put in at the end of the year and so is showing no gains beyond the tax break. It’s now reached a level where, if I have a house by then, I can expect to be quite a lot richer as a pensioner than I have in my working life. Even factoring in the demographically-inevitable loss of pensioner tax breaks and perks! But it’s still worth building the fund, because the tax-free lump sum is my most likely route to paying for a house (or paying off a mortgage), and if I’m still paying rent it wipes out the pension and more!
Finally, the Venture Capital portfolio. On paper it’s a capital gain of just over 27%, though due to liquidity issues I wouldn’t expect to be able to realise the whole of that paper gain. More important is the rising dividend stream: over £1100, plus ex-divs worth another £300+. That’s more than double last year’s income, and I expect another significant improvement this year as more investments mature (though the chances of all the funds contributing are remote). Most encouragingly, the government has improved VCT rules in this year’s budget (along with even bigger EIS improvements, that I suspect will lead to EIS schemes being offered to retail investors alongside VCT).
As before, the element of ‘green’ in my portfolio is showing mixed results. The ‘dark green’s continue poor, though losses have been much smaller than before. The ‘light green’ portion continues to show excellent returns. In terms of ‘dark green’, the government may already have pulled the rug out from under my latest substantial investment, by slashing the FITs scheme for investors and turning it into (almost) just another homeowner perk (hey, if I were rich enough to own a home, I’d’ve spent that money on my own solar panels – I only invested it in a fund because I’m too poor for that). I’m no great fan of FITs (charging a more realistic and rising price for non-renewable energy would be a much better incentive), but I’m not happy about the government moving the goalposts retrospectively with regard to already-committed investments.
What of this tax year? Well, I’m back to being my own boss, and I’ve no idea whether I’ll get any significant income. If I do, I can once again take advantage of small-company tax management, so I should have much less need of tax-saving investments regardless. Unless I end up in another PAYE job.
Training to be a victim
A couple of weeks ago, I received two essentially-identical letters in the post. They claim to be from Capita Registrars. There’s a Capita logo, and a footer referencing contact details for Capita Registrars. So far so good, but does that mean they’re from Capita? A competent fraudster might very well impersonate them to get my identity details and a foot in the door of my finances (whatever they may be).
The letters run:
IMPORTANT: Protecting your shareholding against fraud
Dear [me]
We have recently received an instruction to change details on your holding.
The following details have been changed:– The way you receive your payments
If you did not ask for any changes, please contact us immediately by telephoning 020 8639 3312 or +44 8639 3312 if you are outside the United Kingdom.
This letter is sent in the interest of shareholder security so you can let us know if we have made any changes you did not ask for.
Yours sincerely
[scrawl]
For and on behalf of
Shareholder Security Team
I haven’t instructed them to make any changes, but I do have two new shareholdings with instructions to pay dividends direct to my bank account. If it’s genuine it’s good they’re taking care of security, but I can’t verify it.
- There is no reference to what shareholding they might be talking about.
- I can’t verify that phone number. Google finds it not on Capita’s pages, but in a list of 0208 numbers that have had complaints against them, which doesn’t exactly inspire me to ring it[1].
This is almost as bad as Verified by Visa. Not quite as bad: the fraudster still has a way to go from convincing me to ‘phone their number to getting their hands on my assets. But it’s the same principle: as soon as I respond to a letter, I’m doing exactly what a fraudster needs me to do to fall victim. And of course, when I ‘phone the fraudster’s number, they will naturally need to ask a bunch of sensitive questions to verify I am really me: sufficient to identify me, and if they’re good at blagging they might get a whole lot more.
To follow this up, I started with Google and Capita, through which I established to my own satisfaction that the Capita Registrars website was genuine. Searching it for contact information I could safely use, I found the choice of a couple of email addresses, or ‘phone numbers. Or could I check it all myself online?
I tried signing up for Capita’s online shareholder services: if I can verify my shareholdings and associated payment details, I can see for myself whether the letters really need following up! I’ve tried that before, but this time I carried it through. I am indeed similarly signed up with other registrars: ComputerShare’s online service which works to a satisfactory level, and Equiniti’s which is amazingly bad but might at least have been sufficient to follow up these letters.
Signing up for this online service, I first gathered together all my Capita-issued share certificates. Ten of them (seven distinct holdings; eight distinct stock codes). Following the signup procedure, I entered the details for one of them and created an account. From there I was able to verify that that shareholding was in order, but I was completely unable to access any other holding.
After trying every bloomin’ path in the system, I logged out, and tried logging back in using another share certificate. It rejected the username/password I’d just created! Seems the system requires me to create a separate account for every holding. Indeed, not merely create it once, but log in eight separate times – each a complex process – any time I get a shareholder security letter in future.
Well, bugger this: surely I must be missing something???? OK, try emailing. That got me an automated reply promising attention within 48 hours. The following day a human reply, offering to ‘phone me and follow up on points I’d raised. Great, I’m getting somewhere!
I took up the offer and they duly ‘phoned. We were quickly able to trace the matter of the two letters to my new shareholdings, thus resolving the original issue. I also raised my concerns about their system: letters indistinguishable from phishing, scarce information with which to follow up, and is their online system really as useless as it seems?
Encouragingly, the lady I spoke to sounded good: she wasn’t some call-centre drone reading from a script, and she sounded receptive to my points about phishing and unverifiable information. She told me they were proud never to have suffered fraud, but that begs the question of how you count responsibility for a phishing victim who subsequently suffers identity theft but not loss of the specific shares. I stressed that if it hasn’t happened yet, it can only be a matter of time.
On the question of their online services she confirmed yes, amazingly, they really are that bad!
Let’s see if anything changes following my call ….
[1] By posting here I’m creating another google result for anyone seeking to verify that number. If you found it at random through a search, you probably don’t know me. Am I who I seem, or part of the fraudster’s operation?
Saving tax, the environment, and the economy!
Traditionally in the UK, one of the biggest aids to starting or growing a business is to own your own house. That’s because in our upside-down economy, you can borrow money on much more favourable terms for an unproductive mortgage than to invest in productive business. So you would use that to finance your startup, or be at a disadvantage.
With house prices crashing and mortgage lending turned suddenly more cautious, that’s no longer the case. Indeed, if you want to finance a business, you might (almost) just as well tell the bank manager the truth and present a business plan. Or maybe not the bank manager at all: there are other sources of funding. With unfair competition[1] from the banks taking a knock, suddenly there’s a whole new niche for venture capital and other such investors.
In the UK, that include Venture Capital Trusts (VCTs), which offer significant tax advantages to investors, in return for investing in unlisted smaller businesses. The tax breaks reflect the fact that they’re traditionally higher-risk than big PLCs, and that they have low liquidity. But a VCT, like a unit trust, serves to spread the risk. I decided some time ago to invest some money in VCTs, towards the end of the tax year.
For those of us who care about “green” issues, a VCT that stands out is Foresight, which specialises in environmental businesses. I just wrote the cheque to subscribe to their current offer. That’s three boxes ticked: save tax, save the environment, help small business. And hopefully a fourth: make good money for me.
I expect I shall subscribe to one more VCT within the current tax year, but I have yet to decide which amongst those with current offers open.
[1] Fractional reserve banking – the bank lends money that doesn’t actually exist, on the premise that it comes into existence as repayments are made. Works until bad money drives out good and it becomes a pyramid.
niq's soapbox 