Weekend reading: Trouble brewing in the crowdfunding space

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

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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

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Car finance mis-selling compensation: what you need to know – Which

US non-farm payrolls unexpectedly fell by 92,000 in February – CNBC

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War, oil, and the world economy – Paul Krugman

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Are life insurance ‘perks’ worth it? – Which

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Comment and opinion

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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

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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

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Renewables to the rescue – Semafor

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Carbon capture – a contentious climate fix – gathers pace [Paywall] – FT

Robot overlord roundup

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The case of the disappearing secretary – Rowland Manthorpe

Meta security researcher’s agent accidentally deleted her emails – PC Mag

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How AGI-is-nigh doomers own-goaled humanity – Gary Marcus

Anthropic and alignment – Stratechery

War prediction markets mini-special

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The chaos of Khamenei prediction markets – Event Horizon

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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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