Leading equity crowdfunder Seedrs sees former fundraiser list on AIM at a lower valuation than when it crowdfunded.
FreeAgent, a cloud based accounting software firm for freelancers and small business owners, has listed on AIM – becoming the first IPO to have been delivered by an equity crowdfunder in the UK. But unfortunately for Seedrs investors, the listing took place at a lower valuation than had been calculated at the time of FreeAgent’s fundraising campaign on Seedrs in July 2015.
FreeAgent raised £1,015,350 from 695 investors on Seedrs last year, in a round that was EIS eligible. The company floated on the AIM earlier this week, achieving a market capitalisation of around £34.1m, raising £10.7m. Its pre-money valuation equated to a down round for Seedrs investors, who invested at a valuation of approximately £31.5m when they acquired 3.26 per cent of the company last year.
Those who invested through the EIS scheme appear to be sitting on positive returns, but they will need to hold their shares for at least three years in order to be eligible for the tax break, and it's difficult to say where the share price of FreeAgent will be by then.
FreeAgent raised £8m in new share sales and £2.7m for its selling shareholders through the IPO. Seedrs shareholders were not offered the opportunity to sell their shares in the company as part of the listing, but they may now seek to exit their investment via the AIM secondary market, subject to demand.
It is worth noting that there is a £30 administration charge plus commission of 0.75 per cent on consideration for Seedrs investors who wish to sell shares on the AIM. It’s a small amount of money, but for an industry that prides itself on allowing investors to back companies from as little as £10, a £30 fee is significant. All the more so given that Seedrs investors already stand to make a loss on their investment, should they choose to sell out now.
In addition to the IPO, Seedrs’ CEO Jeff Lynn also announced the latest iteration of the platform’s landmark portfolio analysis, in an email to investors. The portfolio update was first published in early September, calculating a 14.44 per cent internalised rate of return (IRR) across the Seedrs platform (prior to the application of SEIS/EIS relief).
The latest portfolio update encapsulates a larger data set, running right up to 30 September 2016, and covering 375 deals (up from the 253 that were covered by the first report). The platform-wide IRR for the latest version was calculated as 14.4 per cent on a non-tax-adjusted basis, rising to an impressive 49.1 per cent with the benefit of SEIS and EIS reliefs.
The consistency of Seedrs IRR figure is somewhat surprising given that Seedrs recently suffered a significant failure in the form of Pronto. The company raised £830,720 of convertible equity on 5 June this year, and was declared a failure just months later.
AltFi Data, which recently published its own overview of performance across the equity crowdfunding sector, suspects that the impact of this failure has been somewhat softened by an adjustment in Seedrs’ IRR calculation methodology. Where previously the platform’s IRR took account of the relative size of each fundraise, the latest calculation appears to assume that all fundraises are the same size, meaning that a £1m failure would have exactly as significant an impact on investor returns as a £50k failure. And the same, of course, is true of the effect of up-rounds and exits.
Rupert Taylor, CEO of AltFi Data, offered his thoughts: “Seedrs’ disclosure of portfolio performance is a huge step forward for transparency in the sector and a move that should be applauded. Development of this disclosure to a common standard would further improve credibility by allowing independent verification, consistency of output and benchmarking of performance. Ultimately this would be in the interests of all parties – investors, issuers and the platforms themselves.”
Seedrs boss Lynn noted in his email that investors with portfolios of ten or more investments have, on average, outperformed investors with fewer investments on the Seedrs platform. So while the FreeAgent listing will drag down returns for 695 investors, the hope will be that they are well diversified, and are nonetheless sitting on what will blossom into positive net returns in the long run.
Seedrs declined to comment on the FreeAgent listing.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.