Sunday 14 August 2016

Crowdfunding Chickens Come Home to Roost






Investing in early stage companies and startups is exciting and can deliver handsome returns.  No debate about that.
But, there is a right way and a wrong way.  The right way is to do what smart, professional angel investors do.  They do good due diligence.  They actively work to add value to the company to help it succeed.  They monitor the activities of the company and they make sure good corporate governance is in place.

The wrong way, in my view, is to invest passively and select the companies from a crowd funding website.
Case in point. Recently the UK's booming crowd funding industry hit a rock.  A number of companies funded on platforms such as Seedrs and CrowdCube, the two leading platforms, went belly up.  Hundreds of investors collectively lost more than GBP 2 mn.

Anyone who knows me can tell you I have never been a fan of equity crowdfunding platforms. My view is that the risks far outweigh the reward and investors will be disappointed in the end.  The platforms, on the other hand, will profit handsomely.

I wrote about this nearly two years ago to the day on my Angel Blog.  Here's a snippet from my post on March 18 2014.

"There will be disasters in the crowd funding space sooner or later. There will be cases of fraud.  There will be lawsuits brought by angry investors who feel they are not treated fairly in a corporate action.  Inevitably there will be cries for tougher regulation."

I won't bore you with the detail here. One article  in the Telegraph I found suggested there have been 70 crowdfunded companies, about 20% of the number funded so far, have gone bust while only 1 has delivered handsome returns of about 3 times investment.

I'll concede the glass maybe half full.  The jury is out on the other 80% of the companies.
Still, the news flow is alarmingly predictable. I did a search on google recently and found a chorus of articles in the popular press talking about potential disasters waiting to happen.  Seems I was not alone in my concerns.

My esteemed colleague  Gonçalo de Vasconcelos,  CEO of Syndicate Room, sent me an e-mail this week.  He pointed to the failure of Rebus as evidence that the industry is prone to problems that go beyond simply the normal business risks of crowdfunding.

Goncalo runs an equity financing platform that takes crowdfunding to a higher level and helps remove some of the risks.  At Syndicate Room, each deal posted has a lead investor who is putting money at risk and who and has a track record of success and who supports the transaction.  Investors in the deal go in on the same terms as the lead investor.

Syndicate Room is not the perfect solution, but in my view it is a far better alternative and will yield far better results than CrowdCube and Seedr's will.  Incidently, I don't have any money invested with Syndicate Room and I have not done any research into Syndicate Room's due diligence process or the due diligence process and integrity of the lead investors on their site.

The conclusion I still can't dismiss is that the keys to successful investing in startup and early stage companies are in the hands of the investors themselves.

Investors should invest in companies where they know the entrepreneurs, they understand the industry and the business and can draw conclusions as to the company's genuine prospects for success.

Investors can increase their chances of success by actually adding value to the company they invest in - introducing the company to clients, opening the doors to financing, structuring company governance, serving on the board of directors.

It is of course impractical for each investor in the crowd to do these things.  However, it is practical for investors to join syndicates, invest in portfolios run by dedicated Angel investors, ask critical questions of companies, do some of their own homework to assess the real propensity for the crowd funded company to succeed.

Call me biased.  I'm an angel investor. I run an angel investment fund. I'm an investment manager.  So naturally I have to stand on this soap box. Or call me practical, wise, full of good old fashioned common sense.  You're the crowd.  Judge for yourselves.

Oscar Brings Seniors & Juniors Closer Together

One of the best things about being an angel investor is that I get to see really interesting projects led by talented, dedicated people who put their heart into their work.

Entrepreneurs must be more than passionate about their ideas, however.  They must be practical.  They must understand when to raise capital and when not to raise capital, when to develop and when to launch, where when and how to advertise, when to grow and when to consolidate the gains. It's very rare indeed to meet one of those exceptional people.

Recently I met Tomas Posker.  Born in the former Czechoslovakia, Tomas is an entrepreneur who established his first business at the age of 16. Starting from scratch, Tomas built his first business Poski.com into to a company with 20 employees and such customers as Henkel, Whirlpool.



Tomas went on to co-found Ki-Wi Digital, a company developing its own digital signage software and designing its displays and interactive kiosks for retailers, advertisers, real estate agencies, municipalities and government.

When you meet Tomas one of the first things you realise is that he is remarkably humble.  He is soft spoken and exudes a quiet, but firm confidence.  He is a person you can immediately feel comfortable being around.
Tomas worked in California, America's technology state.  Like a good and caring grandson, he wanted to keep in touch with his grandmother living in the Czech Republic.  Like many of his peers, he didn't want the internet and computer technology to be a barrier to communication between he and his grandparent.

As Tomas explained to me, grandma frequently needed help understanding with computer and tablet functionalities. Very often Tomas provided help via telephone.  Then one day Tomas looked at his telephone bill and decided there must be a better way.  And thus, project Oscar was hatched.

Put simply, Oscar provides a simple yet permanent interface for seniors that enable them to maintain even continuous contact with their younger family members. 



The system works with all the commonly used communication capabilities: text, video, voice, pictures, reminders. This allows seniors continuous contact with their family members. The younger generation can help to remotely control a senior’s app, thus avoiding a senior’s frustration with technology.
The senior's end is installed on a pc, laptop, mobile phone or tablet and contains a user friendly interface that drives the functionalities.  In most cases a tablet is the preferred device.

The junior's end is installed on a table, pc or mobile phone.  In contrast to the senior end, the junior's end is full or tools that enable the junior to access the senior's device and use a series of tools to provide whatever technical assistance the senior might need.

The Oscar application thus provides the mechanism for trouble-free, internet driven communication between generations.  Functionalities include:
  • Communication tools via e-mail, text, voice and video
  • Live-view screen sharing to provide help in case the senior gets stuck or needs a problem solved
  • Classical internet browsing and embedded access to content such as  weather, news, sports and games
  • Reminders so senior and junior can track medications, doctor visits and other scheduled events


Over the past two years Tomas developed and enhanced the application and the user experience.  He built a user base of about 1,500 around the world, mainly by word of mouth.

I asked Tomas why he hasn't done more advertising to move the business faster.  He explained to me that he felt the system improvements in functionality and user experience before he could feel comfortable marketing the service on any scale.  Tomas prefers to have fewer customers who are satisfied than more customers who potentially would be unhappy.

As any right thinking angel investor would do I asked Tomas about his monetisation model.  He told me that he's not so concerned at the moment with pricing.  His first aim is to deliver a good user experience and to learn just what his customers want.  Over time he'll develop value added features that users can pay for, most likley with a monthly subscription.

I asked him about advertising and marketing.  I found his answer remarkable.  He said he wants to experiment gradually to learn which forms of communication are effective.  Tomas believes ultimately the best form of advertising will be word of mouth, personal recommendation and the development of marketing partnerships that can give Oscarsenior visibility to the key audiences - seniors and their adult children.
Tomas pretty much got me hooked on his concept and his product, so naturally, I opened the discussion about early stage investment and here's where the conversation got even more interesting.

Tomas told me that right now he is focused on finishing the iOS version of the product and releasing a new version of Oscarsenior with enhanced features and user experience.  Then, he wants to invest a relatively small amount of money in advertising and marketing to grow the user base and understand their technical needs better.

Tomas believes that while what he as done in thus far is a good start, more needs to be done to develop the business with his own resources before he brings in outside capital.  He thinks the time for outside capital is getting closer, but he is comfortable for now to wait, work and develop.

I think many entrepreneurs can take a lesson from Tomas.  Too often I see startups eager to raise capital before they have really a  developed product with some proven demand.  The result is usually not good.  They struggle to raise capital.  What capital they get they inevitably spend unproductively. The generate sup-par returns for their investors and themselves.

Tomas earns much of my respect for his patience and his focus on product development.  He sees the benefits that this will bring in the long run.  When he raises outside capital he will have a much easier time than most early stage companies, because he'll have proven demand and a marketing strategy grounded with practical experience.

Tomas will presented Oscarsenior at the European Angel & P2P Summit. It's a presentation I think all the investors found refreshing.