What caught my eye this week.
One thing crowdfunding investors should be used to is losses. At least 75% of start-ups fail, and I haven’t seen any evidence of those firms that turn to a whip round from ordinary investors bucking the trend.
Unfortunately, my sense is that most crowdfunders who chip in to back a company – especially those who put more money in than they should – too often don’t appreciate such statistics.
That’s partly because every person I’ve ever spoken to about their crowdfunding only backs a few companies. Often only one!
And as I’ve written before about venture capital investing, spreading your money around is the best way to try to get any sort of credible return. At least in financial terms.
What other kind of returns are there, you might retort?
Indeed it’s a fair – if I’d suggest rather too narrowminded – view to say there aren’t any.
However it’s obvious that many of the people who invest in the likes of supposedly-alternative beer company Brewdog do so for non-financial reasons.
Perhaps it’s for the investor perks and freebies. Maybe they like feeling they’re part of something, or that their money is helping to build a brand new company rather than just shuffling share ownership around.
With Brewdog case I’m sure some even believed they were sticking it to the man…
Downward dog
Alas, Brewdog was flogged off this week for parts. According to the BBC:
US beverage and medical cannabis company Tilray has bought the company’s UK brewing operations, brand and 11 pubs in a £33m deal.
Administrators said the sale had preserved 733 jobs – but that 484 jobs had been lost and 38 bars had closed after they were not included in the rescue deal.
And they said no equity holders – including those who invested in the brewer’s Equity for Punks scheme – would get any return from the deal.
Now there are several aspects to this story that do stick in the craw.
Unite says workers were treated very shabbily. Management of the company has been controversial for years, and neither the decline in Brewdog’s fortunes nor its ignominious end will have repaired any reputations.
As for investors, as the BBC tells us:
In 2009, the firm launched a fundraising scheme called Equity for Punks.
About 200,000 people put money into the scheme, which offered a stake in the company, discounts and perks. The investors typically spent about £500 on shares costing £20 to £30 each, although others invested larger sums.
Before it closed to new investors in 2021, Equity for Punks is said to have raised £75m which was used to expand the business into an international brand. In 2017 a US equity firm TSG Consumer Partners acquired a 22% stake in Brewdog.
But unlike the Equity for Punks’ “ordinary” shareholders, TSG was given “preference shares”.
That meant that if Brewdog was sold, TSG was first in the queue to get back its investment plus any return owed, possibly leaving little or nothing for small investors.
One thing not mentioned in this summary is Brewdog’s 2020 valuation – the last time it secured ‘Punk Equity’ money – of £1.8bn. This raised a further £30m.
From nearly two billion quid to a fire sale in six years is some going – even for a post-Covid collapse.
Dog days
I’m not going to dissect Brewdog’s swan dive today. Another BBC article offers an even-handed overview.
I would note though that Brewdog is far from the only then-bright-and-shiny company to have achieved a batshit valuation in the weird pandemic era, only to shortly afterwards see things turn south faster than Scott of the Antarctic on the whiff of a Norwegian.
However I do get a bit dismayed by the various stories of woe from Brewdog shareholders.
Of course I’m sympathetic. Nobody likes to lose money, and Monevator is a site for ordinary investors that tries to help them make it, not lose it.
For what it’s worth I had £500 in Brewdog, too. I’d guess I enjoyed about £100 to £150 in perks and discounts. Carrying the capital gain loss forward will save me another £100 or so some day. Call it £300 down the tubes.
Would I rather I hadn’t invested in Brewdog? Yes, of course.
But does losing a few hundred quid on it upset me? Not really – and not because I can’t think of much more entertaining ways to dispose of £300.
Spread manure around
Rather, I’ve invested in dozens of crowdfunded startups (and follow-on rounds) and I fully expect a lousy result from most.
VC returns notoriously go to a few winners. That is what I am seeing in my own portfolio and what shapes my strategy.
As a counterpoint to Brewdog, I recently liquidated a portion of a private company holding that – after tax relief – has returned over 30-times my investment. That sort of return covers a lot of failures.
This isn’t to brag. Not least because I haven’t a lot to brag about! As I said, there have been a lot of failures to cover. Before this recent disposal I was slightly underwater on a ‘money out’ basis.
My ongoing portfolio however is valued at 2-3x the money I invested. Moreover I judge most of those valuations to be pretty sound after a tough few years. (War shocks notwithstanding.)
Time will tell, but for me this experimental allocation of a small portion of my capital is looking like it’ll deliver tracker fund returns for a lot more work – but, for me, more fun and interest too.
How to lose money responsibly
We can debate whether I should get out more, given that I consider this sort of thing to be fun.
My point though is that this isn’t how most people do their crowdfunding.
A majority probably plump a couple of hundred quid into one or two companies, and that’s fine.
But judging by the stories that emerge when things go wrong, too many seem to stick meaningfully large-for-them lump sums into start-ups that they feel some affinity for, and they often don’t appear to anticipate the downsides. As such they take on far more risk than they should. Sometimes with woeful outcomes.
That is dispiriting. It has me wondering if individual investment sizes should be capped, say, on top of the existing ‘sophisticated investor’ tests that supposedly restrict the sector.
However I wouldn’t like to see crowdfunding regulated away. I think there’s something to be said for democratising capitalism in its rawest sense this way.
And for what it’s worth there are (a small number of) backers in the likes of Revolut who have made truly life-changing sums of money. I know some read this blog.
But if you’re tempted to try crowdfunding I’d suggest you:
- Invest only what you can afford to lose in any one company. Because you probably will.
- By all means back firms you find inspiring or fun. But understand that is part of your return.
- Ditto the perks and discounts. They are nice to get but they also might be all you get.
- Either invest very small amounts of money (for you) in a few companies you really like, or adopt a VC approach and spread it widely. Don’t put big chunks of your net worth into companies that are statistically very likely to go bust.
- Don’t get involved with crowdfunding unless you’re already sensibly saving and investing for your future.
Money for nothing
Plenty of Monevator readers would say my bullet point list should start and end with ‘Don’t Do Crowdfunding’ and I understand that point of view.
From a personal finance and investing perspective, crowdfunding is entirely superfluous. It will more than likely leave you needing to find and save more money to make up for the losses it delivers.
But I still see a place for it akin to a carefully budgeted night out in Las Vegas for those who think it seems like an exciting way to lose money – and as a potentially modestly lucrative hobby for a minority.
Just please please don’t confuse it with proper investing for your long-term financial security.
Have a great weekend!
From Monevator
Tax-efficient investing in the UK – Monevator
Share classes and conversions – Monevator
From the archive-ator: Crisis investing – Monevator
News
Energy price cap could rise by £160 a year with Iran conflict – Guardian
UK construction hit by worst slump since financial crisis – This Is Money
OBR’s latest fiscal and monetary outlook [PDF] – Office of Budget Responsibility
What the Spring Statement forecasts could mean for your money – BBC
Britain bears the brunt of bond sell-off triggered by Iran war – This Is Money
Number of ISA millionaires will soon outnumber lottery jackpot winners – MSN
Car finance mis-selling compensation: what you need to know – Which
US non-farm payrolls unexpectedly fell by 92,000 in February – CNBC
Ranked: the world’s most indebted countries [Infographic] – Visual Capitalist
War, oil, and the world economy – Paul Krugman
Products and services
Disclosure: Links to platforms may be affiliate links, where we may earn a commission. This article is not personal financial advice. When investing, your capital is at risk and you may get back less than invested. With commission-free brokers other fees may apply. See terms and fees. Past performance doesn’t guarantee future results.
HSBC, Nationwide, and Coventry hike fixed-rate mortgages – Guardian
Protect your pension in the face of declining life expectancies – Which
Co-op Bank offers £175 to switch current account – This Is Money
Get up to £3,000 cashback when you open or switch to an Interactive Investor SIPP. Terms and fees apply, affiliate link – Interactive Investor
Lost pensions: the tracing services that can help you find them – Which
Does bank switching affect your credit score? – Be Clever With Your Cash
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link. Terms apply – Charles Stanley
Santander switch offer: get £200 – Be Clever With Your Cash
Are life insurance ‘perks’ worth it? – Which
Phishing software as a service – Oblivious Investor
Homes for sale in new commuter hotspots, in pictures – Guardian
Comment and opinion
How much should you allocate to safer assets? – Morningstar
Treat yourself to a luxury to make investing worthwhile – Financial Samurai
Invest like tracker-champion Burton Malkiel – Interactive Investor [Affiliate link]
10 rules for dealing with uncertainty – A Wealth of Common Sense
How the UK mortgage market became so unstable [Paywall] – FT
Bonds are still safe, if you know how to pick them [US but relevant] – Bloomberg via FA Mag
Concentrating on [stock market] concentration – Elm Funds
Stamp duty is Britain’s quiet growth killer [Paywall] – FT
Do emerging and frontier markets really diversify? [Research] – Klement on Investing
The Total Portfolio Approach [White paper, PDF] – Alliance Bernstein
Naughty corner: Active antics
Should you invest in semi-liquid funds? It depends why – Morningstar
The inflation outlook doesn’t look good – Carson Group
How to engineer skill in investing – Polymath Investor
After Buffett: Greg Abel’s first Berkshire Hathaway letter… [PDF] – B.H.
…and a vow to use all his salary to buy Berkshire stock – Yahoo Finance
Lessons from 59 market peaks – Man Group
Global Private Equity Report 2026 – Bain
How to win a bidding war – Seth Godin
Kindle book bargains
The End of Reality by Jonathan Taplin – £0.99 on Kindle
Boomerang by Michael Lewis – £0.99 on Kindle
Money Men by Dan McCrum – £0.99 on Kindle
Economica by Victoria Bateman – £0.99 on Kindle
Or pick up one of the all-time great investing classics – Monevator store
Environmental factors
England’s sewage scandal hinges on a lack of regulation – The Conversation
Renewables to the rescue – Semafor
Koala recovery prompts rethink about genetic diversity – The Conversation
Dense dark forests in Europe are a modern phenomenon – Phys.org
Carbon capture – a contentious climate fix – gathers pace [Paywall] – FT
Robot overlord roundup
OpenAI changes deal with US military after backlash – BBC
The case of the disappearing secretary – Rowland Manthorpe
Meta security researcher’s agent accidentally deleted her emails – PC Mag
Iran war heralds age of the AI-controlled bomber – Guardian
How AGI-is-nigh doomers own-goaled humanity – Gary Marcus
Anthropic and alignment – Stratechery
War prediction markets mini-special
New accounts netted $1m in prediction bets before Iran strike – The Block
The chaos of Khamenei prediction markets – Event Horizon
Not at the dinner table
Greens overtake Labour in YouGov poll – Sky News
The end of Fed independence? – Drezner’s World
Anthropic and the right to say no – The Argument
Stop pandering to the frivolous desires of the ultra-rich, says UN expert – Guardian
Japan can be America’s arsenal – Noahpinion
Off our beat
Apologies to my kids – Oldster
Society-level predictions are often wildly wrong – The Pursuit of Happiness
The yoghurt delivery women combatting loneliness in Japan – BBC
Musk moves against the Russians in Ukraine – The Atlantic [h/t Abnormal Returns]
How shirt makers in Hawaii gave us casual Fridays – Why Is This Interesting
And finally…
“Silicon Valley is awash in wooden Montessori toys and shrouded in total screen bans. Parents at work talk about how they don’t allow their teens to have mobile phones, which only underscores how well these executives understand the real damage their product inflicts on young minds.”
– Sarah Wynn-Williams, Careless People
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I have 3 crowdfunded bets in my shrinking portfolio. So far one gone bust.
I invested small amounts across a number of companies on Seedrs (now Republic Europe) and regret almost all. I knew these were high risk investments but I’ve had a number that went bust only to reappear like a phoenix under new management leaving me with nothing. Some sounded dodgy. I think it’s like the wild west with almost no governance.
Furthermore, I haven’t been able to find performance statistics so can’t tell if I’ve just been unlucky / chosen badly.
I’m steering clear and am assuming that my holdings are effectively worthless. Who knows – there may be a pleasant surprise one day but I’m not holding my breath.
@TI:
Some great links this week – thanks.
Intersting link to Elm!
OOI, how would you compare risk with crowdfunding vs investing in your own employer?
Riffing off your para on brewdog, I propose this alternative for a few years hence
But yeah. Crowdfunding is to be thought of as gift, not investment. I crowdfunded to get some cows shifted, among other oddities. Never expected to see the wedge again, even in the form of milk, and that was just fine!
I put some substantial sums in renewable energy focussed crowdfunder – Abundance. One loan was apparently designed to refinance a short term loan for capital build, but the company instead used to finance more new builds and promptly got the wrong side of a regulator which meant their main source of income dried up and they had overextended themselves. They went bust and seem to have fallen out with everyone in the process. I don’t expect to see any of that back.
I came reasonably ahead overall, but it was a salutary reminder that once people have your money, they can choose to do what they like with it. A good lesson well learned, and worth the entrance price.
On visual capitalist county indebtedness:
1 is corporate debt relevant as it affects the net value of the business? Ie I’d expect businesses to have positive value, it they don’t the debt is worthless
2 it’s never clear whether govt debt includes unfunded pensions liabilities banked eg state pension/teachers/nhs/forces, fire police, civil servents etc (usually not)
Given the debt is owed it seems fraudulent to ignore it. Apparently the size is £1.4t. Is there a good source of comparison between counties on fully reserved basis?
My most foolish investment was into building social housing in Liverpool, through Abundance.
The scheme defaulted but has not entirely been resolved: every year or so I get an email explaining why they have not yet managed to return any money to shareholders. I assume when they have managed to milk the coffers entirely dry we will get a final email. Abundance have been pretty useless and there is no way for shareholders to communicate or act collectively.
Funnily enough Abundance themselves had a crowdfunding round in 2020 (https://europe.republic.com/abundance), but luckily I had learned my lesson by then!
I refer the honourable member to the answer which I (@#22) and FvL (@#15) gave some moments ago (2024 and 2021 respectively) in ‘What are EIS” (bottom left above in this w/e’s “You might also like”). Crowdfunding has no tax relief, and so no point. As Peter Lynch pointed out, the shares just don’t care if you own them or not. Or, as characheture villain Gordon Ghekko put it (and as Carl Icahn apparently actually said to the Chairman of U.S. Steel), “if you need a friend get a dog”. The ‘textbook’ (Grahamite) definition of an ‘investment operation’ is one which upon careful analysis promises sufficient safety of principal and an adequate return (for the risk assumed). Operations not meeting these requirements are speculative. I grant the caveat that the perks might make it worthwhile, but only if you would otherwise buy the benefits at full price. If not, the biggest discount is not to buy.
@TI, thanks for the great links as always.
@Monevator Gurus, some advice please… As it’s approaching the end of the tax year, I’m looking to make use of my CGT allowance. One of my Vanguard index funds (accumulation) is in profit so I plan to sell some of the units to crystallise the gain. I like the fund so would prefer to reinvest the proceeds immediately in the same fund but doing so would cause me to trip up over the bed-and-breakfast rules. So my plan instead is to reinvest immediately in the income class of the same fund which, as it has a different ISIN, to me seems that I avoid the bed-and-breakfast trap. Does anyone disagree? Thanks all.
“Crowdfunding has no tax relief, and so no point.”
Um, crowdfund raises typically come with huge tax breaks. They nearly all raise under either EIS or SEIS schemes, so 30% and 50% income tax relief, with other reliefs beyond that. (E.g. CGT-free).
Brewdog’s last raise was unusual because as with other large crowdfunding companies (and some subsectors, such banking re: Monzo) they didn’t qualify for EIS. But most UK startups raising via Crowdfunding come with huge tax breaks via EIS and SEIS. 🙂
In my opinion the tax breaks are not a reason to do it, but they are certainly a benefit if you do.
“I’m looking to make use of my CGT allowance. One of my Vanguard index funds (accumulation) is in profit so I plan to sell some of the units to crystallise the gain. I like the fund so would prefer to reinvest the proceeds immediately in the same fund”
@Tharho I wouldn’t risk it and would instead just purchase another providers’ equivalent index.
I don’t think an ISIN means that it is a different fund and so HMRC may treat these changes as a fund reorganisation and not a sale
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57709
@Tharho
According to https://techzone.aberdeenadviser.com/public/investment/Guide-Taxation-of-Collectives “switches between different share classes within the same fund, for example switching between income and accumulation shares, are not treated as a disposal for CGT.”
Why not bed and ISA the outcome?
@TI #10: interesting. No idea that crowdfunding qualified (for (S)EIS) or marketed as such. Looks like I’m in good company: “Crowdcube admits that their own research indicates that 68% of Crowdcube investors with smaller portfolios (£5,000 or less) have not yet claimed the tax relief. More than half (56%) didn’t even know they could. Crowdcube surmises that there could be millions of pounds of tax relief, which has yet to be realised.” From here: https://www.crowdfundinsider.com/2023/10/214911-to-simplify-eis-seis-tax-benefits-crowdcube-partners-with-taxscouts
A £10,000 SEIS investment by an ART which goes to zero eventually costs £2,750 net with reliefs; as compared to one outside SEIS/EIS/VCT which costs £10,000. So it makes a collosal difference to how attractive this is, or is not. Sometimes the tax tail does wag the investing dog.
@Tharho
I’m sure if you tell us the name of the Vanguard fund, someone would be able to help by suggesting an equivalent non-Vanguard one.
@Cb @xeny @Jam – thanks. I should have thought about bed and ISA. That’ll do the trick. Thank you.
@Tharho – these posts here agree with you:
https://forums.moneysavingexpert.com/discussion/5860818/accumulation-and-income-funds-cgt
The expert Bowlhead says if you have a contract note for a sale (ISIN 1, Price 1) and a subsequent contract note for a purchase (ISIN 2, Price 2) then this is a genuine disposal which qualifies for CGT. People often get switches and conversions mixed up and use the wrong terms, he says.
@Dales – thank you.
Yes the tax breaks definitely make it less risky in terms of money at stake. But arguably increases the curve of things actually going really wrong, given how it lessens the barrier to investment (/quality bar)
Re Abundance, I can well imagine having been seduced into that one, I remember the very sick marketing campaign well. A bit like brewdog not one I’d have expected total failure from…
Re swapping share classes with a sale, we’ve hammered this out on Monevator before but I think in comments not in a post. I’m on the move at the moment so it’s tricky to search for it!
Thanks for all the thoughts!
@Dales & @Tharo
There was a discussion about this in the comments of this article:
https://monevator.com/the-anatomy-of-a-platform-transfer/
The MSE expert is probably wrong and I wouldn’t totally rely upon it. That said, it does seems to be a murky area and HMRC don’t seem to know fully, since their rules can be interpreted in different ways by different HMRC staff!
Buying an equivalent fund, that tracks the same index solves this for you, as does a bed&ISA.
Generally though holding Acc units outside a SIPP or ISA is a bad idea as it makes the CGT calculations painful, because you need to account for the accumulated dividends in you CGT calculations.
Sorry @TI, my post crossed with yours, but yes we did hammer it out.
Cheers Jam!
@DH. “Sometimes the tax tail does wag the investing dog.”
I remain unconvinced. My hypothesis is that the tax relief inflates the entry valuations very substantially. So it may seem that it’s a no-brainer to invest £10k into buying 1000 crowdfunded shares since the loss of £10k is reduced to £2.75k by the tax relief. If, however, without tax relief, the same number of 1000 shares could have been bought for £2.75k or less, then you are actually worse off.
I contend that, in aggregate, this is the case. In fact, you wouldn’t be able to lose even 1p because the funding simply wouldn’t happen. All that these tax reliefs do is allow any old pile of toxic shite to funded. Without tax relief, virtually no one would touch 99% of EIS, SEIS or VCTs with a proverbial bargepole.
So EIS/SEIS just distorts the capital allocation, resulting in shite businesses and scams getting capital that would otherwise go to good businesses.
As you can tell, I’m not a fan!
These things are definitely for fun. Does anyone remember the MV link to the buffalo herd in Scotland where you got free cheese? Now that’s an investment!
Plausible in theory @ZX, but in practice:
– (S)EIS managers have (substantial) performance fees, and are, therefore, highly incentivised to avoid systematically overpriced crap.
– It’d have to be ~270% overvalued in aggregate (~3.7x across the board for an ART payer, given 1/0.275) to overcome the overall benefits of the available reliefs. Possible, but seems a bit of stretch.
– Quite a few managers have decent track records. The 1 in 100 Pareto investments typically eventually pay for their losers. To take the one (SEIS) manager I’ve some direct experience of, SFC realised a 100x return from the exit of the identity verification company Onfido and a 6.2x partial exit with Ryft Pay. For sure, most of the stuff is Gerald Ratner “total crap”, but that’s always going to be the case when panning for gold dust.
@Jam @TI – thanks. I’d read the Monevator article when it came out but not tracked the comments. Think I’ll bed and ISA some and buy a similar fund with the remainder to be safe.
The preference share point seems a bit overblown to me – given the sale price, how little would investors have received anyway?
@Baloo — Yes, in this instance the preference stack looks a bit of a red herring. (Even the VC will have lost most of its investment, surely). You do get instances when the ‘liquidity stack’ makes a big difference to returns though, at least in the sense of limiting losses.
Only been involved in 4 crowdfunded investments – the profit I made from Freetrade doesn’t cover the losses made from BrewDog or Property Moose but I’ve ended up just being out of pocket there by a few hundred quid, so no harm done. BrewDog bar discount apparently still applies so small bonus there!
Like G, my 4th investment is with Abundance (solar panel developers) and although this still pays me dividends/interest, latest interest payments are overdue so this could yet fail. Capital planned to be returned in 8 years, but again, will only be down by a few hundred quid if it all goes pear-shaped.
If I’m ever going to dip into crowdfunding again (never say never and all that), it’ll just be tiny amounts for fun with no other expectations.
Seems I had some sort of premonition with my ‘this could yet fail’ comment as hours after I had made my above comment, I received an email from Abundance, which began with:
“Dear Investors,
Regretfully, we have come to the conclusion that the Oakapple Two solar portfolio will never be economically viable in its current structure.”
Another one bites the dust!