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.