Crowdfunding (Upcoming 2018/19 Round) - Updates

I was thinking about this last night, here are a few thoughts:

To put it in perspective, most people with a pension or ISA will be paying between 0.5% and 1% a year for the management of that fund, even the passive ones that are self managing! Over ten years you’re losing 5% to 10%. If you have a pension for 40 years then up to 40% will have been taken on some of that money…1.5 % up front seems eminently reasonable for the management of my investment. Some pension research I saw (but now can’t find so feel free to ignore this) suggested that 1% fee could halve the value of your pension because of the effect of compound interest.

The cost for investing £1000 is £15. And for that they’ll manage my investment for potentially the lifetime of a company. Pretty good value.

Their big competitor takes a chunk when you cash out. I think I remember it being around 7%. That would potentially be a lot more than £15 on a £1000 investment. To work that through. I invested £1000 in Monzo shares and would have paid £15 for the privilege. They are currently worth, let’s say, £15K so, if I cashed out, I’d be paying 15 *70= £1050 if I’d invested via the other platform. Choose your poison.

Crowdcube provide a valuable service:

  1. They manage a large amount of administration for small companies. Managing shareholders is costly and time intensive, they will potentially be managing this group of investors for many years, in fact it’s open ended. It is fair they are paid for this.
  2. They put investors in touch with companies. How would you have got a piece of Monzo before crowdfunding came along?
  3. The perform due diligence on companies. I’ve been an active crowd investor for a number of years and consider the companies curated by Crowdcube to be better than the alternative platforms.

Here’s two alternative that Crowdcube could consider:
1: Allow users to choose 1.5% now or 1.5% on any profits.
2: Allow companies to suck up the 1.5% charge in their fees.

Crowdcube need to be sustainable so it was inevitable that a new cost structure would need to come into place. It seems pretty fair to me to be honest. I don’t begrudge a company a profit if I’m getting a good service.

Disclosure: I own a small amount of Crowdcube shares but don’t consider this has influenced this post.

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How is that conjecture? There is a link where Monzo say they will use Crowdcube and a link showing Crowdcube intend to charge 1.5% on all investments from Nov 12th.

It’s the same thing. Taking 1.5% up front results in your profits being 1.5% lower.

The cost of management of your investment is not proportional to the amount you invest. You are an entry in a ledger, it does not cost any more to make that number bigger.

And saying ‘the other guys are worse’ does not justify Crowdcube making a money grab.

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I’m not sure I agree with you on that:
If I invest £1000 and then pay a fee of £15 it’s not that I would have invested £1015. If you want to invest £1015 then go ahead and invest that amount.
If the cost of managing a raise is X and someone took half of the shares in that raise they would expect that half of the fee to be passed to them. I’m not sure that’s particularly controversial.
I have no issue with paying for a good service and it is cheaper with Crowdcube than with their competitor. I have no issue with companies making a fair profit, currently they’re running at a loss. Crowdcube, and Monzo for that matter, are not charities, they have a variety of stakeholders to satisfy including their founders, employees and shareholders alongside the customers. As long as their charging structure is transparent then people can choose to be customers or not.

That is so illogical I’m not sure how to respond. If you add the fee on top, you have invested £1015. You can’t just remove costs from the equation.

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Actually for this, Crowdcube already charge the business an annual fee to “manage investors”. If I remember right, it’s around £1-£3/investor/year.

For this, the company gets:

  • A (hopefully) up to date list of email addresses to send out important documents, vote etc
  • An interface to send out emails to a large group of users.
  • Responsibility for collecting votes, buying and selling legal docs deferred to Crowdcube’s nominee.

I’ll try and find the exact figure - I think I remember a company posting it somewhere. In my view, it’s expensive already to manage shareholders.

Edit: it’s actually £4/year. Although Tom doesn’t confirm whether the entire £4 is Crowdcube fees - I personally can’t think of where else this money would go.

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My point is you don’t know that will apply, thus, conjecture.

Given that both are clearly published intentions, I’d argue the conjecture is that it may not apply.

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It’s no different from the fee you might pay your financial advisor for an investment product. It’s clearly not part of the investment and it’s not a failure of logic to state that it is separate.

It might not, but it might.

Indeed they do, but despite their success (>50% of the market etc) they are still running at a loss. Something needs to give.

I’m not sure that what the companies pay is relevant to this conversation particularly. It boils down to - are you happy as an investor to pay a fee of 1.5% for access to a stock that you’re interested in? As mentioned elsewhere, the fees for even conventional and simple products like ISAs mount up to 40% or more over a lifetime.

It is indeed no different to the fee you pay your financial advisor, but it is part of your overall investment. If you hadn’t paid the fee you could have put that money into the product and made even more return.

Not sure investing in a company through Crowdcube is comparable to an investment advisor or investment platform like Nutmeg. You have to remember that you are not paying an investment advisor for access, you are paying an investment advisor for advice. It’s the advice element that is expensive and Crowdcube are not advising and barely doing proper due diligence on the companies raising money. It’s very much buyer beware.

A better comparison in the retail investment space is a DIY trading account like ii.co.uk who charge a flat fee for custody (just less than £100 per year) plus a flat transaction cost (£10). That provides access. The flat fee isn’t linked to the amount invested.

Charging a proportion of amount invested like CC are implementing is not comparable.

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Do Crowdcube manage your investment? Freetrade for example manage their own shares and have their own share register, I know Monzo use the Crowdcube nominees but to my knowledge that is not the normal (not that I have noticed at least).

I thought Crowdcube just provides the pitch platform and did the transaction but then it was over to the company to manage share holding going forward?

Try this: https://www.investopedia.com/articles/basics/10/guide-to-calculating-roi.asp

Stocks
By not factoring in the transaction costs of investing in stocks, the ROI can become inflated. For example, let’s say you made a $200 gain on a stock investment, but there was a $20 transaction fee charged when you bought the stock, and again when you sold it, your initial ROI of $200 would not be accurate.

No. You’ve invested £1000 and paid a fee to do so of £15. And nobody is arguing that you don’t include that cost when working out your ROI.

Ok, so let’s work out the ROI in your two scenarios, assume we invest for 10 years at a compound growth of 10% to make the figures easy, and in both cases the capital required is £1015:

Pay the fee up front:

Return = 1000 * (1+0.1)^10 = 2593

Pay the fee at the end:

Return = 1015 * (1+0.1)^10 * (1-0.015) = 2593

In both cases you are giving up £39 of growth.

On £10 it is effectively 5%, as there’s a minimum fee of 50p. There’s also a maximum cap of £250. ( source )

In my opinion it seems more aimed at user numbers rather than investment amount, I think they want users to invest more per/pitch which might be driven by the cost per/user per/year.

Crowdcube have increased their fee for entrepreneurs raising on their platform to 7% + VAT, and there’s a a completion fee, which is on average 0.75% -1.25% of all funds raised ( source ).

They need to find a way of making money but this might backfire.

If you’re making the point that 1.5% at the beginning is the same as 1.5% at the end then it doesn’t stand up to scrutiny.

In scenario one Crowdcube get £15
In scenario two Crowdcube get £39
and in a scenario where the investment loses money then they may get nothing

But I don’t care about crowdcube - the effect on me is the same, I lose 39 quid.

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