Easy come, easy go? On crowdfunding and the wisdom of crowds

by Simon Murdoch

Easyproperty has launched on Crowdcube at a crazy price. If successful Crowdcube investors would invest £1m for a tiny 1.5% of the business, resulting in a post money valuation of £66m.

Stelios Haji-Iannou of Easygroup fame is lending his name to the business but it’s not clear what his involvement will be beyond licensing the brand name.

stelios_2012732bPhoto from Daily Telegraph article

 

We have noticed that credible founders can quickly raise surprisingly large amounts on equity crowd funding platforms e.g. Kevin McCloud with Hab Housing  and sometimes these are at surprising valuations but Easyproperty is the most surprising to me.

I had thought that the wisdom of crowds was working as the deal had only received pledges for £50,000 of the £1m by this Wednesday and the forum in Crowdcube was alive with posts asking whether the equity on offer was meant to say 15% rather than 1.5%. (The company replied saying 1.5% and £66m post money valuation are correct)

One investor asked repeatedly what their £2000 investment would be worth if the company sold for £1 billion (the approximate valuation of Zoopla after 7 years and an IPO). Unfortunately the company replied incorrectly saying 20x. But buyer beware! If the company never raised any more money and didn’t issue any more share options to staff than currently expected and didn’t ever issue shares in return for partnership deals and had no equity based mergers, then the return would be 15x, but those caveats are very unlikely to transpire.

For example, I was an angel investor in Zoopla from the first angel round, and there were several rounds of finance and several equity based mergers and partnership deals. The multiple from the first angel round was more than 15x which is great of course, but that’s because the first round valuation was way way less than £66m.

When we as a professional VC investor assess a deal we think about three main things:

  1. is this a great market which is ready for disruption in the way proposed?
  2. is this a great business with a great team with a good shot at becoming the market leader?
  3. is this a great deal i.e. at a great price and with no funny business in the terms so we would share fairly in the eventual success?

For me, Easyproperty fails most obviously in terms of the deal so we wouldn’t touch this with a bargepole. I also think that it fails the other tests. Although the rental market could be disrupted, as some of the forum posts have pointed out, landlords need the management service and not just tenant finding, and that needs local knowledge not just a national website. Also there’s too little information on the management team so we would question whether they can compete with physical estate agents and online estate agents like Purplebricks on one hand and Zoopla/Rightmove on the other.

Right now, the Crowdcube deal is up to £127,000 of the £1m and it looks feasible that the company will raise its £1m over the next 11 days. The jury is out for me on whether the crowd is acting wisely.

 

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  • Rob Murray Brown

    Have you any thoughts on the Justpark deal which funded in 3 days yesterday – £1m for 4.75%. Shares issued are class D and have no anti dilution or premeption rights. Venture Index are converting a loan to shares if (now when) the round completes and class D sharholders have no say in when and how much the next round will raise (£70m plus??), or any option to take part – which is bound to dilute Crowdcube investors ( all of them are held as a Crowdcube nominee SH so cannot take independent action) to the point where increases in value are small. Having pointed this out I was removed from the forum.

    • Simon Murdoch

      Crowdcube is doing a great job bringing early stage investing to a wide audience. I agree with you though that terms for angel investors ought to include pre-emption rights, i.e. if there is another round of investment all existing investors should have the right to buy their pro rata amount in that new round. It doesn’t follow though that you should have anti-dilution rights because that invalidates EIS tax advantages. I would encourage all angel investors to lobby Crowdcube to make pre-emption rights part of their standard terms.

      • Or investors could just go to SyndicateRoom, where pre-emption rights are, and always have been, standard terms.

  • Excellent post as I would expect from Simon. It is important to highlight that there are other options out there for the crowd. SyndicateRoom members invest alongside business angels and VCs, enjoying the expertise from experienced investors. Simon and his comments above show just how important this is. Furthermore, SyndicateRoom members get access to the same class of shares and same price per share as the business angels and VCs. For instance, if Simon were to be the lead investor in the deal on SyndicateRoom, our members would get the same class of shares and the same price per share (same valuation) as Simon.

    • Simon Murdoch

      I agree Goncalo that your model is likely to lead to better value deals for angel investors. Angels should compare the deals on all crowdfunding sites. In my view, celebrity backers like Stelios and TV personalities, tend to drive valuations up to untenable levels. The lead angels on Syndicate Room tend to be full time angels who seek a great deal for themselves which others can then follow.

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