Springboard to Funding #13 - Seconds Out

Added Friday, September 21 2018

Being an angel or a business investor sounds rather good. The image, aided by the TV, is of working with edgy entrepreneurs with the sniff of making a financial killing. And it sounds good around the golf club bar too.

When it’s done right some people make some fantastic gains. However companies often fail or worse, drag on forever. The average time for an angel investor to make their gain, if they ever do, is 6 years. So there are many people with money sitting in long term angel investments waiting for their ship to come in. 

Now this is often fine, that’s sort of what they signed up for, but for many investors circumstances change. As they get older their priorities, or their health or family circumstances move on. Others just lose patience.

And worse, this money ‘trapped’ in an investment can stop them being able to invest in new stuff.

What is needed of course is a means of selling these unlisted shares to release the capital. But there’s a clue in the word unlisted – unless you can find someone willing to buy them, there were few option to buy and sell.

However recently that began to change.

Seedrs, one of the equity crowdfunding platforms, now offers a limited but expanding service to allow this to happen. And others are making noises to join in.

The problem of course is how to set the price. Seedrs have a formula to set what they call a fair market price. It’s complicated but basically works on the last major funding event. So if a company had raised new funds in the last three years, then that sets the price. 

If no further money has been raised in the last 3 years but the company appears to be successfully trading, the price remains where it was at the initial raise.

And where neither of these apply, Seedrs conduct what they call a substantive valuation analysis with a presumption of decline in value. In other words a fairly tough review.

All this appears reasonable and Seedrs have been moving cautiously by trading limited numbers of shares during certain restricted windows. And they initially only allowed existing shareholders, who wanted to increase their holding, to buy. Now it is expanding this to continuous trading with new investors allowed to join in. 

Other too are starting to provide option for secondary trading, notably Asset Match whose auction solution was used by BrewDog.

It’s clearly early days for secondary markets. And of course there is a strong temptation for shareholders in a company which is under performing (or worse) to seek to offload before the worst happens. This means that buyers really need to do more, not less, due diligence. 

There are many genuine reason for wanting to sell shares, but how can a new buyer know if this is the case? The answer is simple, they can’t. So it’s buyer beware squared – if the company’s prospects are good, why are the shares being sold?

One suspects these questions will be reflected in the price, so clearly there will be bargains to be found if you are prepared to swim with the sharks.

Add to this the inherent hassle of the paperwork and the annoyance of Stamp Duty, and secondary market trading doesn’t look that attractive.

However there is a real need for this if the angel and crowdfunding share classes are to reach their full potential. So these early steps are to be applauded.

Secondary trading has a long way to go.

Alan Watts is the Director of Capital Match at Catalyst Inc (formerly the NI Science Park).

For more information about Capital Match or to contact Alan, go to capitalmatch.catalyst-inc.org