WEBVTT - This Blogger Is Exposing the Risky World of Startup Investing 0:00:07.600 --> 0:00:11.600 The steering wheels on the wrong side. Here all right, 0:00:12.760 --> 0:00:17.920 first time driving on the right side. See how this goes. 0:00:19.520 --> 0:00:22.880 The voice you're hearing, that's Adam Satriano. He's one of 0:00:22.920 --> 0:00:25.279 the reporters on our team in London and he moved 0:00:25.320 --> 0:00:27.400 there from San Francisco just a few months ago to 0:00:27.480 --> 0:00:30.640 cover the European tech scene. And that tape we're listening 0:00:30.680 --> 0:00:32.840 to I recorded that just as I was getting into 0:00:32.880 --> 0:00:35.600 a rental car to drive to the eastern coast of Scotland. 0:00:36.200 --> 0:00:38.440 I was about midway through the ninety minute drive from 0:00:38.520 --> 0:00:41.640 Edinburgh Airport on a narrow two lane road in the 0:00:41.640 --> 0:00:45.519 Scottish countryside, headed to the town as St Andrew's, and 0:00:45.560 --> 0:00:47.519 I was thinking, how great is this job that I 0:00:47.560 --> 0:00:50.600 get to travel here for a story like this? When 0:00:50.640 --> 0:00:56.760 there was a bit of a snap foo, Well, I 0:00:56.800 --> 0:01:00.960 got a flat tire. So I am in the middle 0:01:01.120 --> 0:01:06.440 of the scott this countryside, have a few cows off 0:01:06.440 --> 0:01:08.760 to my right here on the two lane roads some 0:01:10.120 --> 0:01:13.200 and in this rental car there is no spare, so 0:01:13.280 --> 0:01:18.679 I am waiting for a tow truck. Um, we'll be there, 0:01:18.720 --> 0:01:27.000 we'll make it. We're gonna do this. Hi, I'm Brad 0:01:27.040 --> 0:01:30.720 Stone and I'm Adam Sacian, and today we're traveling across 0:01:30.760 --> 0:01:33.560 the Atlantic to explore a new way that startups are 0:01:33.640 --> 0:01:36.840 raising money in the UK, not from venture capital firms, 0:01:36.959 --> 0:01:40.120 not from banks, but from regular people like you and me. 0:01:40.800 --> 0:01:43.600 And I was making this somewhat fraught journey to St 0:01:43.640 --> 0:01:46.640 Andrew's to meet the guy who, through a blog, has 0:01:46.680 --> 0:01:49.000 become one of the most vocal critics of this brave 0:01:49.040 --> 0:01:52.720 new world of investing. These services that are making equity 0:01:52.800 --> 0:01:56.120 crowdfunding possible. Are they matching the brightest minds of the 0:01:56.200 --> 0:01:59.080 UK with much needed capital or are they making it 0:01:59.160 --> 0:02:02.840 too easy for investors without enough experience and with incomplete 0:02:02.840 --> 0:02:06.040 information to dump money into these startups that might never 0:02:06.080 --> 0:02:08.600 have a chance of succeeding in the first place. Stay 0:02:08.680 --> 0:02:14.239 with us as we hear from both sides. So back 0:02:14.280 --> 0:02:16.680 in May I moved to London and soon after I 0:02:16.800 --> 0:02:20.040 arrived I started noticing this peculiar ads in the underground 0:02:20.080 --> 0:02:23.720 and online. Uh. These were ads encouraging ordinary people to 0:02:23.720 --> 0:02:28.040 put their own money into funding startups. So what started 0:02:28.160 --> 0:02:30.760 as a quick, easy way of paying for coffee is 0:02:30.800 --> 0:02:34.760 beginning to reboot the world of payments. Now everybody has 0:02:34.800 --> 0:02:38.560 the option of creating their very own secure economy free 0:02:38.600 --> 0:02:42.480 of banks and fees. At Crowdcube fund raise target is 0:02:42.560 --> 0:02:45.960 five hundred thousand pounds. This will enable us to invest 0:02:46.040 --> 0:02:50.480 in marketing, PR and promotion, to continue to develop a 0:02:50.600 --> 0:02:54.639 strategic partnerships for user acquisition, and to further develop the app. 0:02:55.400 --> 0:02:58.320 Did you know that over half of pet dogs are overweight? 0:02:59.080 --> 0:03:01.520 That's where we rease a re launched our first product, 0:03:01.880 --> 0:03:07.400 just like a fitbit, but for dogs. The model is 0:03:07.400 --> 0:03:10.639 similar to Kickstarter, which many of our American listeners will 0:03:10.639 --> 0:03:13.000 know as the website that lets you donate money to 0:03:13.040 --> 0:03:16.280 an artist or a young company and in return, if 0:03:16.320 --> 0:03:18.680 the project raises the money at needs, you get some 0:03:18.720 --> 0:03:21.400 sort of product at the end. The difference is that 0:03:21.480 --> 0:03:24.440 with these funding sites in the UK, you're not investing 0:03:24.480 --> 0:03:28.600 in a new fangled coffeemaker or a new health monitoring bracelet. 0:03:28.960 --> 0:03:32.280 You're buying a piece of somebody's company. The biggest platform 0:03:32.360 --> 0:03:35.560 is called crowd Cube, but there are others too, one 0:03:35.600 --> 0:03:38.960 called Cedars and others called syndicate Room. And the idea 0:03:39.000 --> 0:03:41.000 is that if you decide to back a startup and 0:03:41.040 --> 0:03:44.040 then it turns into a successful business, and then it 0:03:44.080 --> 0:03:47.040 decides to sell to another company or even files for 0:03:47.080 --> 0:03:49.880 an I p O. You, brad Stone will get a 0:03:49.920 --> 0:03:54.240 piece of the action. I can't wait. Ordinary people investing 0:03:54.280 --> 0:03:56.840 in startups. That's something that only just became legal in 0:03:56.880 --> 0:04:01.000 the US earlier this year. President obamallingly called it the 0:04:01.120 --> 0:04:04.440 Jobs Act. Previously, you could only invest in startups if 0:04:04.440 --> 0:04:07.560 you are really rich. But even with these d regulations, 0:04:07.680 --> 0:04:10.040 there's still a lot of restrictions here in the US 0:04:10.120 --> 0:04:13.280 that just don't exist in the UK, and crowdfunding just 0:04:13.360 --> 0:04:17.000 hasn't taken off at this very early stage. In the UK. 0:04:17.200 --> 0:04:19.640 On the other hand, policy makers have been eager to 0:04:19.720 --> 0:04:23.200 embrace it and it's become a pretty big industry. And 0:04:23.240 --> 0:04:26.200 the back drop here is that after the global financial crisis, 0:04:26.240 --> 0:04:30.320 banks became reluctant to lend to small businesses. So the ideas, 0:04:30.520 --> 0:04:34.839 let's allow small business to go directly to consumers for financing. 0:04:35.480 --> 0:04:38.920 Some companies use crowdfunding along with traditional investors, and it's 0:04:38.960 --> 0:04:41.520 kind of a marketing technique. You get your customers more 0:04:41.520 --> 0:04:43.680 engaged with the company if they own a piece of 0:04:43.680 --> 0:04:47.120 what they're buying. You can see how investors would be 0:04:47.200 --> 0:04:49.799 drawn to this. You could park your money and government 0:04:49.839 --> 0:04:53.760 bonds and basically earn zero interest, or you could take 0:04:53.800 --> 0:04:56.719 this leap of faith and maybe just maybe make a 0:04:56.839 --> 0:05:00.880 crazy return at Darren Westlake because the CEO of Crowdcube 0:05:00.880 --> 0:05:04.359 described it to me as the democratization of investing. The 0:05:04.360 --> 0:05:07.920 Internet has brought prominence to this kind of investing, and 0:05:08.240 --> 0:05:11.160 VC investing has become kind of sexy, I guess, and 0:05:11.560 --> 0:05:13.800 people see that stuff and they want to see if 0:05:13.839 --> 0:05:16.640 they can get that little part of them. And here's 0:05:16.640 --> 0:05:18.799 what one investor told me who I met at a 0:05:18.800 --> 0:05:22.719 crowdfunding event. I'm Adam or Squake, and I've invested in 0:05:22.880 --> 0:05:26.520 over a hundred ext charac funding campaigns, and in particular 0:05:26.560 --> 0:05:30.320 I'm excited by extra crowdfunding because there are a lot 0:05:30.320 --> 0:05:32.480 of problems and things to six in the world, and 0:05:33.200 --> 0:05:36.200 starts to take components are one way to address it. 0:05:39.600 --> 0:05:42.120 So listening to guys like Darren and Adam, it all 0:05:42.200 --> 0:05:46.080 sounds really promising and it is. But like every good experiment, 0:05:46.160 --> 0:05:48.120 you need to keep a close eye on the results, 0:05:48.440 --> 0:05:51.000 and very few people are tracking what's actually happening to 0:05:51.040 --> 0:05:54.520 these startups after they raised money on these websites like crowdcube, 0:05:55.360 --> 0:05:57.400 except for the guy you tracked down on your ill 0:05:57.480 --> 0:06:01.080 fated road trip to Scotland. Yeah, guy named Rob Murray Brown. 0:06:01.560 --> 0:06:05.200 So we sent you there to meet him. I how 0:06:05.279 --> 0:06:11.279 you doing right? Kind of day? Well, kind of sound 0:06:11.360 --> 0:06:14.599 they didn't have the time. What do you what? I 0:06:14.640 --> 0:06:16.719 met Robin a bench at the top of the cliffs 0:06:16.720 --> 0:06:19.680 overlooking the north Sea in St Andrew's. It's a beautiful 0:06:19.760 --> 0:06:22.720 point town with one of the world's most famous golf courses, 0:06:23.160 --> 0:06:28.160 lots of stones, seventeenth century buildings, student cafes, golf shops, pubs. 0:06:28.800 --> 0:06:30.640 And this guy Rob, you were telling me, he looks 0:06:30.680 --> 0:06:34.080 a little bit like the British actor Bill Knight. Yeah, 0:06:34.120 --> 0:06:36.400 you know, the guy from Love. Actually he also played 0:06:36.480 --> 0:06:40.159 Rufus and Harry Potter. Anyway, it was a windy day 0:06:40.200 --> 0:06:42.279 and he was bundled up in a thick tan coat. 0:06:42.600 --> 0:06:45.919 And even before you got into your minor car crash, 0:06:46.120 --> 0:06:49.719 getting to this interview was a little bit of a challenge, right. Yeah. 0:06:49.760 --> 0:06:53.040 When I first reached out, Rob was understandably wary of 0:06:53.080 --> 0:06:55.680 a journalist coming in using all his research that he 0:06:55.839 --> 0:06:58.520 compiled on his blog and not giving him any credit. 0:06:59.120 --> 0:07:01.479 I offered to fly to St Andrew's in Scotland to 0:07:01.520 --> 0:07:04.320 meet with him. At his home, and I understand he 0:07:04.360 --> 0:07:07.400 didn't want you to. He didn't, but after a couple 0:07:07.400 --> 0:07:09.640 of days of back and forth, he agreed to meet 0:07:09.680 --> 0:07:12.200 me for a beer and dinner in town. It's here 0:07:12.200 --> 0:07:14.480 that Rob told me about how he stumbled into this 0:07:14.520 --> 0:07:20.400 world of equity crowdfunding. Well. I got interested back in 0:07:20.480 --> 0:07:24.280 two thousand and eleven when the equity crowd funding market 0:07:24.320 --> 0:07:29.440 in the UK started and crowd Cube, who are now 0:07:29.960 --> 0:07:33.440 the world's largest equity crowdfunding site, launched in the in 0:07:33.480 --> 0:07:35.640 the middle of two thousand and eleven, and I started 0:07:35.680 --> 0:07:39.320 following them U then I invested in a small company 0:07:40.800 --> 0:07:44.400 which is still going um and I've got a bit 0:07:44.440 --> 0:07:48.080 concerned about the way companies were being promoted on the 0:07:48.200 --> 0:07:51.880 site and the amount of due diligence, and so I 0:07:51.880 --> 0:07:53.800 asked him to look get into a little bit more 0:07:53.800 --> 0:07:57.120 of the specifics. You just look at a company and 0:07:57.160 --> 0:08:00.880 you read what they said about themselves as the founders, 0:08:00.960 --> 0:08:04.320 and you check back through the records on the Internet 0:08:05.120 --> 0:08:07.760 and find that what they were saying about themselves wasn't 0:08:08.160 --> 0:08:13.920 entirely true. It was generally exaggerated quite often actually wasn't 0:08:13.960 --> 0:08:16.560 true at all, And they never told you any of 0:08:16.600 --> 0:08:19.440 the bad stuff, only the good stuff if there wasn't it. 0:08:20.400 --> 0:08:23.720 And Rob, he's been running small businesses basically his whole life. 0:08:23.880 --> 0:08:25.800 He knew how hard it was to borrow money from 0:08:25.840 --> 0:08:29.440 the banks. He wanted crowdfunding to work, so he reached 0:08:29.440 --> 0:08:33.760 out to Crowdcube. I sent them a very nice email, 0:08:33.800 --> 0:08:35.599 I thought, saying, you know, I would. I said I 0:08:35.600 --> 0:08:39.360 would offer them a free of charge service for six 0:08:39.440 --> 0:08:43.000 months to do their due diligence. I would basically do 0:08:43.040 --> 0:08:45.200 the job that I felt they weren't doing. I knew 0:08:45.240 --> 0:08:47.880 they weren't doing it because I and according to Rob, 0:08:47.960 --> 0:08:51.000 Crowdcube basically told him thanks, but no thanks, and then 0:08:51.040 --> 0:08:55.000 ignored them. But Rob kept at it, so he was 0:08:55.040 --> 0:08:57.160 told to go away, and of course that got him 0:08:57.160 --> 0:08:59.920 more interested. So clearly this is a guy who really cares. 0:09:00.920 --> 0:09:04.200 He really does. And I asked him why I have 0:09:04.240 --> 0:09:08.640 spent my life running sms, and to be honest with you, 0:09:08.720 --> 0:09:12.800 I really hate both. And I got really annoyed about it, 0:09:13.600 --> 0:09:15.600 in fact that it annoyed him so much that he 0:09:15.679 --> 0:09:18.559 kept looking into the company's raising money on these sites, 0:09:18.960 --> 0:09:21.079 and his kids got tired of listening to him talk 0:09:21.120 --> 0:09:23.640 about it, so they suggested that he set up a 0:09:23.640 --> 0:09:27.520 blog that was in and this is the blog ominously 0:09:27.600 --> 0:09:30.400 called The Truth about Equity Crowdfunding. That's made him a 0:09:30.400 --> 0:09:33.760 tiny bit famous in the industry. Yeah, maybe a little 0:09:33.760 --> 0:09:37.440 more infamous than famous. When I brought up Rob's website 0:09:37.440 --> 0:09:39.920 to people in the crowdfunding industry, I got a lot 0:09:39.960 --> 0:09:43.760 of tight smiles and grimaces. The website doesn't have a 0:09:43.800 --> 0:09:46.760 big audience, maybe a thousand people per week, but it's 0:09:46.800 --> 0:09:50.040 having an impact. Some London papers have picked up things 0:09:50.080 --> 0:09:52.600 he's written, and it's even led to some new business 0:09:52.679 --> 0:09:57.079 opportunities for Rob. Yeah. He's been getting the intention of 0:09:57.080 --> 0:09:59.240 of startups who are trying to raise money this way, 0:09:59.280 --> 0:10:01.480 and they've been reached out to him for advice. He 0:10:01.600 --> 0:10:04.280 set up a little consulting business on the side. Yeah. 0:10:04.320 --> 0:10:06.280 I could see how we'd get attention for the blog. 0:10:06.320 --> 0:10:09.000 There's so much interesting stuff there and so much interest 0:10:09.000 --> 0:10:11.479 in the industry. But how do you think the investors 0:10:11.520 --> 0:10:14.840 feel about this? Are they worried like Rob about being 0:10:14.880 --> 0:10:17.800 misled by these sites? That's what I asked the investor 0:10:17.840 --> 0:10:22.040 we spoke to earlier. Some of them are going to fail. Um, 0:10:22.080 --> 0:10:25.040 you know, if you treat early stage investment as part 0:10:25.080 --> 0:10:28.640 of a balance and broad approach, then you know you 0:10:28.760 --> 0:10:30.640 do risk yourself and it is at the high end 0:10:30.920 --> 0:10:34.520 of of a risk profile. Um. And I'd certainly not 0:10:34.559 --> 0:10:38.679 advocate putting everything having to startups. You know as an individual, 0:10:38.800 --> 0:10:43.520 these investments you know of them could fail. Um. You know, 0:10:44.280 --> 0:10:47.840 so that's the game. I don't have put anything in. 0:10:48.080 --> 0:10:51.840 I would be to lose Adam as war Kick is 0:10:51.920 --> 0:10:56.320 making the conventional wisdom point there about maintaining a balanced portfolio, 0:10:56.440 --> 0:11:01.120 But the question is will investors heed that advice. Let's 0:11:01.120 --> 0:11:02.920 take a quick break and when we come back, we'll 0:11:02.960 --> 0:11:05.199 go through the juicy details of some of the startups 0:11:05.240 --> 0:11:07.680 have never made it. We'll also tell you exactly how 0:11:07.679 --> 0:11:10.680 many of these startups have actually made money for their investors. 0:11:13.880 --> 0:11:16.559 Hey guys, it's Ocky. You heard from me an episode 0:11:16.559 --> 0:11:18.960 three about the d n C hack and I helped 0:11:18.960 --> 0:11:21.920 produce the show. I just wanted to say thank you 0:11:21.960 --> 0:11:24.720 to everyone who's left us a rating and a review 0:11:24.840 --> 0:11:28.360 on iTunes. It goes so far in helping us climb 0:11:28.480 --> 0:11:30.920 up the rankings, which in turn helps put our show 0:11:30.920 --> 0:11:33.400 in front of more people. If you'd like to leave 0:11:33.440 --> 0:11:36.840 us a review to open your podcast sap on your iPhone, 0:11:36.920 --> 0:11:40.280 tap the search button on the bottom right, type DECRYPTID, 0:11:40.480 --> 0:11:42.520 tap on the show and then tap on the tab 0:11:42.600 --> 0:11:45.720 in the middle of the screen that says reviews. Then 0:11:45.760 --> 0:11:48.000 you can tap on the purple link a little lower 0:11:48.080 --> 0:11:50.800 down that says write a review. And I promise it's 0:11:50.880 --> 0:11:54.160 less complicated than it sounds. Now back to the show. 0:12:00.280 --> 0:12:02.600 We've been talking about how startups in the UK are 0:12:02.679 --> 0:12:06.800 using crowdfunding platforms to raise money from ordinary people. It's 0:12:06.800 --> 0:12:09.400 something that's really starting to take off there, but at 0:12:09.440 --> 0:12:12.960 least one person, Rob Murray Brown, who we heard from earlier, 0:12:13.160 --> 0:12:16.400 has been watching the space closely and has some serious 0:12:16.440 --> 0:12:20.400 worries about whether companies are disclosing enough information to us, 0:12:20.720 --> 0:12:23.719 the people they are raising money from. So Adam, let's 0:12:23.760 --> 0:12:25.680 dig into that some more. Let's take a look at 0:12:25.720 --> 0:12:29.880 a few of these startups. Every few days, Rob publishes 0:12:29.920 --> 0:12:32.439 fresh examples of a small company that he thinks is 0:12:32.480 --> 0:12:35.360 headed for trouble. One of the more high profile flame 0:12:35.360 --> 0:12:38.079 outs was a company called Pronto, which was a food 0:12:38.080 --> 0:12:41.320 delivery startup. That's a great name for a food delivery company. 0:12:41.360 --> 0:12:43.679 It actually makes me kind of hungry. It raised more 0:12:43.720 --> 0:12:46.360 than a hundred thousand pounds from the crowd along with 0:12:46.440 --> 0:12:49.479 another seven hundred thousand pounds or so from outside investors. 0:12:49.840 --> 0:12:52.920 The company valued itself at five million pounds on Cedars, 0:12:53.000 --> 0:12:55.880 which is one of crowd cues rivals. Here's what they 0:12:55.880 --> 0:12:59.320 told potential investors in their pitch video. We're growing up 0:12:59.320 --> 0:13:02.040 at the six and week on week over the last 0:13:02.040 --> 0:13:04.600 twenty four weeks, but we've missed a majority of our 0:13:04.679 --> 0:13:08.400 growth every single day because of our delivery area. And 0:13:08.480 --> 0:13:12.120 this raises first and foremost all about growth, about rolling 0:13:12.120 --> 0:13:15.200 out and expanding our fort here. It sounds exciting, right, 0:13:15.520 --> 0:13:18.520 We're lucky to have some alone's top investors to went 0:13:18.559 --> 0:13:20.920 out of business about three months later. I asked rather 0:13:20.960 --> 0:13:23.319 about this. I mean, if you if you read the pitch, 0:13:23.960 --> 0:13:27.840 which I have done it, you know it sounds good. 0:13:27.920 --> 0:13:30.520 They talk a good game. It's all seems to be 0:13:31.640 --> 0:13:33.560 take deboot. I think. I think one of the problems 0:13:33.559 --> 0:13:38.000 with these companies is that they they come for money 0:13:38.040 --> 0:13:44.600 before they've stress test tested their model, and and so 0:13:44.800 --> 0:13:46.520 when when when they get the money and then they 0:13:47.640 --> 0:13:53.080 hit the starting button, it all the wheels start to grind, 0:13:53.080 --> 0:13:55.520 and the and the cogs come off, and they don't 0:13:55.520 --> 0:13:57.800 know what to do. You know, I mean clearly, to 0:13:58.200 --> 0:14:00.880 lose eight hundred thousand pounds and three moms is gone 0:14:00.880 --> 0:14:06.720 an achievement. The frownder Pronto, the guy in the video, 0:14:06.880 --> 0:14:09.560 declined to comment to us for the story. He did 0:14:09.559 --> 0:14:12.240 write an apology letter to investors that said the company 0:14:12.280 --> 0:14:15.720 didn't have the resources to scale and compete against larger rivals. 0:14:16.240 --> 0:14:19.840 Or what other horror stories have you heard? Another company, 0:14:19.880 --> 0:14:23.440 a clothing manufacturer went bus just the past few weeks, 0:14:23.760 --> 0:14:28.240 as did a subscription snack business uh Rob's blog as 0:14:28.280 --> 0:14:31.440 several mentions of companies financial results didn't live up to 0:14:31.480 --> 0:14:34.800 what they were projecting. The report last year by Alt 0:14:34.880 --> 0:14:37.320 five Uh, this is kind of a research firm that's 0:14:37.360 --> 0:14:39.480 been looking into this. They said that one in five 0:14:39.520 --> 0:14:42.480 of the companies that use crowdfunding from two thousand eleven 0:14:42.520 --> 0:14:45.760 to two thousand thirteen have since gone bust. So, Adam, 0:14:45.800 --> 0:14:48.400 none of this is unusual. There's a lot of risk 0:14:48.480 --> 0:14:51.280 and start up investing. It's very typical for startups never 0:14:51.360 --> 0:14:53.680 to make it. Even the big ones funded by tons 0:14:53.720 --> 0:14:56.800 of venture capital can can eventually fold, like fab dot com, 0:14:56.800 --> 0:15:00.200 which we profiled in our very first episode. Yeah, that's 0:15:00.200 --> 0:15:03.320 something that Darren Westlake the CEO crowd Cube pointed out, 0:15:03.400 --> 0:15:08.560 the most successful companies won't materialize until later. Failure comes first. Still, 0:15:08.680 --> 0:15:10.880 the bigger question here is are there a couple of 0:15:10.920 --> 0:15:14.640 breakout successes to balance out all the failures? Okay, then, 0:15:14.680 --> 0:15:17.840 so stepping back, what is the tally of the more 0:15:17.840 --> 0:15:20.880 than thousand companies that have used crowdfunding to raise money? 0:15:20.920 --> 0:15:24.480 There's been three exits. One was a craft beer maker 0:15:24.560 --> 0:15:28.720 called Camden Brewery that got sold. Investors there nearly doubled 0:15:28.720 --> 0:15:32.479 their money. And I've had the beer. It's pretty tasty. Okay, 0:15:32.520 --> 0:15:35.560 So not a gangbuster return if you're a venture capitalist, 0:15:35.640 --> 0:15:40.440 but certainly respectable. Yeah. Another company was E Car Club, 0:15:40.560 --> 0:15:44.200 which sold up for about three times what their initial 0:15:44.240 --> 0:15:47.560 investment was, so also respectable. And the third was wool 0:15:47.600 --> 0:15:50.440 in the Gang, a garment company. It's sold for a 0:15:50.520 --> 0:15:53.680 touch more than what it raised. This one was cute. 0:15:53.680 --> 0:15:56.440 They offered gift certificates instead of the small game it 0:15:56.560 --> 0:16:02.000 generated for investors. So beer are sharing and garments and 0:16:02.000 --> 0:16:05.640 and that's it. That's it. Three exits out of more 0:16:05.640 --> 0:16:09.400 than one thousand startups. That's a little depressing. Here is 0:16:09.480 --> 0:16:14.400 rab again, the model that the platforms put out is 0:16:14.440 --> 0:16:18.040 that that you should spread your investment very sensible. So 0:16:18.360 --> 0:16:20.520 what the model they give you is you need to 0:16:20.560 --> 0:16:24.680 invest in ten companies, of which one will give you 0:16:24.720 --> 0:16:27.520 a good return, too might give you a small return, 0:16:27.600 --> 0:16:31.080 and seven will go bust, which as we're looking at 0:16:31.160 --> 0:16:35.560 it now, I'd say it's quite optimistic. The problem is 0:16:35.560 --> 0:16:38.320 that the one giving you the good return, if you 0:16:38.400 --> 0:16:42.800 imagine it, has to give you almost ten times the 0:16:42.880 --> 0:16:46.880 return to make up for the losses. And we're not 0:16:47.040 --> 0:16:51.160 even there's no hint of that happening at all. And 0:16:51.280 --> 0:16:53.800 yet there's more and more money coming into this industry. 0:16:54.080 --> 0:16:56.600 I have some numbers here and when Adams showed them 0:16:56.600 --> 0:17:01.000 to me, they were surprising. Two only and pounds were 0:17:01.040 --> 0:17:04.879 invested in crowdfunding services last year, which was three times 0:17:04.920 --> 0:17:07.960 the previous year, and one study said that about fifteen 0:17:08.040 --> 0:17:11.640 percent of all early stage investments and UK startups came 0:17:11.720 --> 0:17:15.159 from crowdfunding. I called professor of Saul Estron at the 0:17:15.160 --> 0:17:18.320 London School of Economics. He spent some time studying the sector. 0:17:19.880 --> 0:17:21.960 They're bound to be favored in this sort of area's 0:17:22.040 --> 0:17:26.240 very early stage, so that you keep you know about 0:17:26.280 --> 0:17:29.640 that you're investing, know that these whisky so there shouldn't 0:17:29.680 --> 0:17:33.959 be surprises in failures in the fact that their failures, 0:17:34.040 --> 0:17:37.159 I think more serious is that as yet they've been 0:17:37.280 --> 0:17:41.040 very limited numbers of great successes. On the other hand, 0:17:41.160 --> 0:17:46.400 it also relates to the early stage feature. I mean, um, um, 0:17:46.440 --> 0:17:49.560 you know that the this really got going to any scale. 0:17:50.320 --> 0:17:54.000 I suppose in early twenty fifteen it will be very 0:17:54.000 --> 0:17:56.600 you'd be very lucky to get big successes in that 0:17:56.680 --> 0:18:00.960 sort of time scale. So we don't start seeing first 0:18:01.000 --> 0:18:05.159 of all, uh not that many of these figures, and 0:18:05.240 --> 0:18:09.040 second of all, some really visible successes. I think the 0:18:09.160 --> 0:18:13.280 last you know, the shine may go from this new idea, 0:18:13.640 --> 0:18:15.600 but I don't think that has I don't think we're 0:18:15.640 --> 0:18:17.679 exactly at the point where that is going to happen 0:18:18.080 --> 0:18:20.600 now or in the next few months. I think, you know, 0:18:20.640 --> 0:18:24.960 the window is in the next few years. It's a 0:18:25.000 --> 0:18:28.040 tough call because the companies aren't doing anything illegal here, 0:18:28.440 --> 0:18:31.320 but the material that potential investors see online might be 0:18:31.359 --> 0:18:35.199 misleading or at least not representing the full picture. Like 0:18:35.320 --> 0:18:37.679 last week's episode where you and Ellen talked to the 0:18:37.800 --> 0:18:42.000 entrepreneur Antonio Garcia Martinez, Antonio said he lied to his 0:18:42.080 --> 0:18:45.520 investors that he jacked up his growth projections and lowered 0:18:45.560 --> 0:18:48.480 his company's legal costs in order to raise enough money, 0:18:49.160 --> 0:18:52.520 and sure that was definitely unethical. In Antonio now admits it. 0:18:52.880 --> 0:18:55.520 But in that episode, one of his investors, a guy 0:18:55.600 --> 0:18:58.640 named Russell Siegelman, formerly at one of the big Silicon 0:18:58.760 --> 0:19:02.120 Valley venture capital for Kleiner Perkins, told us he doesn't 0:19:02.160 --> 0:19:05.199 even look at projections for an early stage startup. And 0:19:05.240 --> 0:19:09.159 that's coming from Russ, a professional investor, incredibly experienced and 0:19:09.280 --> 0:19:12.680 very savvy. These investors on sites like crowdcube and cedar 0:19:12.760 --> 0:19:15.399 trying to hit the jackpot, though that might be a 0:19:15.400 --> 0:19:18.320 different matter, and that's what's bothering Rob. He thinks these 0:19:18.359 --> 0:19:21.679 platforms need to do more to weed out the bad companies, 0:19:22.200 --> 0:19:24.840 to be more of an honest referee and make sure 0:19:24.880 --> 0:19:28.960 the entrepreneurs, however well intentioned, aren't spinning fairy tales to 0:19:29.040 --> 0:19:32.600 gullible investors. And he blinks it partly on the business model, 0:19:32.800 --> 0:19:35.320 because the companies like crowdcube take a percentage of all 0:19:35.359 --> 0:19:37.800 the money that gets raised on their site. And what 0:19:37.840 --> 0:19:41.240 does crowdcube say about this? As you can imagine, the CEO, 0:19:41.359 --> 0:19:46.520 Darren Westlake definitely disagrees well First of all, people investor 0:19:46.520 --> 0:19:50.160 relatively small amossive money. Yeah, so people are best investing 0:19:50.320 --> 0:19:53.480 betting that life savings on this stuff. The average investments 0:19:53.520 --> 0:20:01.280 to two thou pounds and the other The other mile 0:20:01.400 --> 0:20:04.000 point to that kind of argument is I think it's 0:20:04.080 --> 0:20:07.760 quite patronizing to think that people don't understand the risk 0:20:07.920 --> 0:20:10.960 and don't have the ability to pick and choose what 0:20:11.040 --> 0:20:16.840 they want to invest in. And even vcs and professional 0:20:16.840 --> 0:20:27.800 investors aren't that great to added them, and I'm taught 0:20:27.840 --> 0:20:30.200 to this. It is worth noting that crowd cube makes 0:20:30.240 --> 0:20:32.760 you take this test before you're allowed to be an investor, 0:20:33.000 --> 0:20:35.320 so they make sure you're getting into this with some 0:20:35.440 --> 0:20:38.480 level of knowledge about the risks. Adam, did you take 0:20:38.520 --> 0:20:43.119 the test? I did? Tell us your score. It's a 0:20:43.160 --> 0:20:46.840 series of multiple choice questions like what happens to most startups? 0:20:46.880 --> 0:20:49.240 Do they fail? Or do they become big successes and 0:20:49.320 --> 0:20:52.560 make investors lots of money? Or what happens if a 0:20:52.600 --> 0:20:55.440 company fails? Will you lose your money? Or will crowd 0:20:55.480 --> 0:20:58.600 cube Brian burst you for your losses? So I clicked 0:20:58.600 --> 0:21:01.000 through all the wrong answers just to see what would happen, 0:21:01.680 --> 0:21:04.960 and it said I didn't pass what they call the 0:21:05.000 --> 0:21:09.239 sufficient knowledge test needed to become an investor. But then 0:21:09.280 --> 0:21:11.399 they let me take it again. Did you take it again? 0:21:12.480 --> 0:21:18.040 I did? I passed. So what does crowd cube think 0:21:18.080 --> 0:21:21.240 about your friend Rob up in Scotland. When I first 0:21:21.240 --> 0:21:24.000 talked to Darren, I wasn't planning on centering our story 0:21:24.040 --> 0:21:26.480 around Rob, so I didn't ask him. But when I 0:21:26.480 --> 0:21:28.960 went back to Darren recently, he declined to go back 0:21:29.000 --> 0:21:30.879 on tape to talk to me for the story, but 0:21:30.920 --> 0:21:33.520 he sent over a statement. Whenever you get the statement 0:21:33.560 --> 0:21:36.040 from a company, you know that you're on sensitive territory. 0:21:36.119 --> 0:21:38.240 So do you want to read it out loud? Yeah, 0:21:38.359 --> 0:21:41.639 I'll read it, he said. Crowd Cube welcomes quote constructive 0:21:41.640 --> 0:21:45.840 commentary on the industry. We're constantly improving our processes to 0:21:45.960 --> 0:21:50.399 ensure investment opportunities are presented fairly and our investors are 0:21:50.440 --> 0:21:52.800 aware of the risk. And so he goes on to 0:21:52.880 --> 0:21:55.800 say that investors know about the risk involved here and 0:21:55.840 --> 0:21:59.040 that the that the problems are are made clear. Reading 0:21:59.080 --> 0:22:04.600 between the lines see suggesting that Rob's criticism is not constructive. Well. 0:22:05.000 --> 0:22:08.640 Crowdcube has been a particular target for Rob Cedars, which 0:22:08.760 --> 0:22:11.119 was started by a former corporate m and a attorney 0:22:11.359 --> 0:22:13.639 has a bit of a tougher due diligence process and 0:22:13.720 --> 0:22:17.000 serves as a representative for the investors with the funded companies. 0:22:17.680 --> 0:22:20.000 And when I reached out to Cedars, it's CEO Jeff 0:22:20.080 --> 0:22:24.000 Lynn said, failure is inevitable. He expects sent to fail. 0:22:24.600 --> 0:22:27.000 He said, anybody who doesn't know that shouldn't be investing. 0:22:27.280 --> 0:22:29.639 And there was one other company you mentioned earlier in 0:22:29.640 --> 0:22:33.720 the program, Syndicate Room. Yeah, that's one requires people to 0:22:33.760 --> 0:22:35.760 put more money in. Is a way to ensure that 0:22:35.800 --> 0:22:39.359 there are more sophisticated investor and only list companies that 0:22:39.440 --> 0:22:43.719 have money from a an angel investor or another accredited backer. 0:22:44.119 --> 0:22:48.520 Can you can you crowdfund investments into the crowdfunding companies themselves? 0:22:49.520 --> 0:22:51.200 You know, I think that's a good idea. I did 0:22:51.280 --> 0:22:54.320 see a company that has that. It is now scoring 0:22:54.440 --> 0:22:57.119 crowdfunding companies. So there are a lot of different variations 0:22:57.160 --> 0:23:04.000 popping up. So I guess what rob is pushing for 0:23:04.160 --> 0:23:06.640 is a combination of more vetting from the websites as 0:23:06.640 --> 0:23:10.480 well as better regulation. The UK government is taking recommendations 0:23:10.520 --> 0:23:13.080