Summary of Crowdcube Review: There are not many platforms which specialise in equity crowdfunding. This is not without good reason as the returns are much more volatile than investing in debt. Crowdcube along with Seedrs are the most established platforms in the industry. As far as returns go, it is difficult to state. Most new businesses end up going bust, while some will produce stellar returns. This gives a large degree of variability to portfolio returns, and there also is a large element of luck involved. As with other platforms investments into seed business can confer some tax benefits such as the Seed Enterprise Investment Scheme (SEIS).
Currently, Crowdcube and Seedrs are in talks regarding a merger. It may be the case that if it goes ahead, both sides may combine.
Here are other platforms in the sector. Please note the returns figures are not directly comparable.[table “” not found /]
What is Crowdcube?
Crowdcube was conceived in 2011 in the aftermath of the latest financial crisis. At the time, this pioneered a new model of business funding. It provided a platform for individual investors to pool investments. This pot of money could be accessed by small businesses in return for a cut of the equity. This model provides benefits for both businesses and investors. For businesses, using equity to raise money instead of debt means that no repayments of the debt are due, and this at a time where cash is likely to be tight.
For investors, it now became possible to invest into small, unquoted businesses. At a minimum of £10 per investment, this was available to everyone. Whilst most businesses that raise money would eventually fail, the ones that do succeed could return money several times over for investors.
Whilst there are no overall statistics about performance, Crowdcube have some impressive successes behind them. Firms such as Camden Town Brewery and E-Car Club were acquired outright, meaning that initial shareholders were bought out by the acquiring company. Alternatively, companies can buy back their shares. The well-known Revolut had a secondary offering which if taken up, would have seen an initial investor realise 19 times their original investment.
Here is a list of Crowdcube features:
|Minimum Investment||1 share (price varies)|
|Fees||7.5% on profits|
|Available in ISA?||No|
|Active on forum?||No|
Crowdcube Signup Offer
Currently Crowdcube do not offer a promotional sign-up offer.
Is Crowdcube profitable?
Crowdcube is a trading name of Crowdcube Capital Ltd. This company has been incorporated since 2014. The parent company is Crowdcube Limited. The last accounts were published on 12 June 2020 and cover the period up to 30 September 2019.
Crowdcube made an operating loss of £2.6m in the past year, which was an improvement on the year before (£3.0m). Revenue jumped sharply and was £7.7m in the past year. For now the cash position looks OK. There was an equity raise in 2018 which meant the cash balance at the end of September 2019 was £7.9m. In theory this is enough to cover operating losses for another couple of years. Given the momentum, it may be likely that there may be a path to break even.
In October 2020 it was announced that Crowdcube and Seedrs were exploring a merger. Both these platforms are loss-making at present, but a tie-up would possibly increase the leverage they have both on businesses and investors.
Crowdcube Operating Model
Crowdcube do not have ownership or influence any of the businesses on their platform. Instead, they facilitate the raising of capital for businesses. The information is presented in a standard format, with plenty of detail given for users to do their own research. Not every business is priced at the same level, and will give away different amounts of equity for a different price. There is no negotiation about the price – either it is accepted or it is not.
Typically, much more information is given out than on other business-oriented platforms such as Funding Circle. This is because funding needs to reach a target before it can be drawn down, and nothing is received if the target is not met. You can expect any questions you have to be answered quickly.
Once your investment is accepted, you are the owner of shares in that company. Crowdcube administer your shares on a nominee basis (although for large enough investments, you can hold direct). Updates are collated and published on the Crowdcube platform, and progress can be tracked. Until recently, a secondary market to sell out your shares did not exist. Now one does, which gives the opportunity for later-stage companies to participate in raises as well as give initial investors a chance to sell out.
Exits are what crowdfunding platforms are all about. Companies can either be bought out by others, or alternatively list themselves on the stock market. This may take some time and more than a bit of luck, as the underlying business has to improve significantly with its newly sourced cash.
Crowdcube makes its money by charging both sides of the transaction. Businesses pay a percentage of raised cash, and investors pay a percentage of pledged cash. Currently this stands at 1.5%, with a cap at £2.50.
How are funds protected?
In some ways, funds invested in seed capital platforms are the most risky of all. Once raised, funds are passed directly to the businesses. As they are equity, there is no obligation at all for the business to make repayments. Neither is there a provision fund on the Crowdcube platform to compensate for losses. In the event of failure of the funded business, the most likely outcome is a total loss for investors, as debt ranks in front of equity. Should the Crowdcube platform fail itself, in theory your shares are still safe as they are held in a nominee account – in practice this may take some time to reconcile. FSCS applies here in the event of business failure, but only applies to uninvested funds.
Crowdcube Review: Pros
Higher Upside – The upsides of a successful crowdfunded investment greatly exceed that of a crowdfunded loan – although this is balanced with the greater risk of loss. In theory, the upside is unlimited.
Tax Benefits – SEIS-eligible businesses can prove to be an efficient use of capital. Tax rebates can be obtained if the investment is held for a minimum period of time. Seek further advice if this point is of interest.
Greater market coverage – Simply holding a Crowdcube account in addition to a Seedrs one gives you great coverage in the industry. Businesses tend to use one or the other for their needs; a raise will not appear on both.
Support small businesses – The appeal of helping small business may attract some, and some businesses give out incentives if your shareholding is of a certain size.
Crowdcube Review: Cons
No guaranteed returns – No returns are guaranteed at all. Given that most of the small businesses will end up failing, if you are unlucky or undiversified enough, you could end up losing all your money.
High Valuations – Many businesses pitch funds at a relatively high level of valuation relative to quoted companies. There is no way of altering this price and it is possible that many businesses are overvalued to start with. Subsequent funding raises may dilute your investment.
Fees – Unlike Seedrs, Crowdcube levies a fee on investors at the point of investment, as opposed to the point of cashing out.
Illiquidity – Only recently did Crowdcube obtain a secondary market, but liquidity is still limited for shares. Given that it requires another person to buy, you may be holding your shares for a long time if there is no demand.
Crowdcube Review: Summary
In the UK at least, Crowdcube and Seedrs dominate the market when it comes to crowdfunding developing businesses. Both platforms have approximately the same advantages and disadvantages, although smaller investors may prefer Seedrs no up-front fee schedule. Investments into small businesses here involves a much greater risk to your capital, but you can expect a greater degree of updates. Returns are extremely volatile and you will need a thick skin to endure the bad news that is inevitable with start-ups.
Crowdcube and Seedrs are in the process of merging; it remains to be seen if the brands remain separate.
Disclaimer: This Crowdcube review represents my own opinions and should not be substituted for investment advice. Please research before you invest with any firm. Typically P2P investments are not covered by the Financial Services Compensation Scheme (FSCS) in the way bank deposits are, and there are no guarantees that you will receive the returns advertised (or even a return at all).