The appointment at the lawyer’s office in Cologne lasted 11 hours. At 3am, Alexander Djordjevic and Ole Schaumberg finally signed the contract for the first ever exit from a crowdfunded company in Germany. Celebrations? Not really. The two men climbed into their car and drove back to Hamburg. “At around five in the morning I stopped at a motorway service station and we toasted with a can of beer,” says Djordjevic. “It really wasn’t much of a celebration.” In actual fact, what the two founders of Foodist had accomplished was truly pioneering. The path that took them there in the summer of 2016 was rather tougher than the drive home that morning.
Djordjevic and Schaumberg met as students at the Hamburg School of Business Administration. After graduating, Djordjevic signed on as unemployed while Schaumberg lived off his savings, too proud to go to the social services. Both turned down job offers because they had an idea: adopting trends from the USA and Britain, they wanted to sell a gourmet food box online in Germany. In October 2012 they set up Foodist. Their parents just shook their heads.
The business model did not appeal greatly to investors. “They felt that collaborating with a large number of small producers was too complex and not scalable,” says Djordjevic. In addition, the two founders were just 22 and 24 years old, with no professional experience, no network and no vision. Meetings kept ending with the same remark: “Your idea is crap.”
Online food retailing was considered unprofitable in 2012. Venture capitalists (VC) and business angels did not want to get their fingers burnt. However, crowd investment – whereby small investors get a share in the new company, rather than just a gift – was booming, with growth rates of almost 400%. So the two Foodist founders shot a three-minute video, posted it on the crowd-investment platform Companisto and collected about €200,000 (then £160,000) within days. “For young startups not yet in the sights of venture capital companies, this is very tempting, of course,” says Djordjevic. “But you always have the niggling question in the back of your mind: why are no VCs and no business angels investing in you? What is wrong with you?”
Foodist took part in three rounds of funding on Companisto and received about €1.5m. “What we’d bought into was the disadvantages of crowd investing,” says Djordjevic. “The capital is extremely expensive: 10% to 15% of the invested money goes straight to the agency. That all adds up. And after eight years you have to pay back the loan together with 1% interest. This is calculated on the basis of the current market value of the company. So if a company starts off being worth €5m and €1m of this is in crowd shares, in other words 20%, and eight years later an auditor values the company at €20m, then you have to pay back €4m – plus interest. Hardly anyone can afford to do that.”
Foodist underwent some rapid developments and changed its business model several times. Initially, the company only sold the gourmet box, but it sent out questionnaires about the quality of its products, which consumers completed in great detail. Little by little, the founders realised the tremendous value of this data. Products with high ratings in their online shop were offered to supermarkets.
Thanks to the data, Foodist collected on each product, the company was able to establish the precise target group. Foodist began setting up its own displays in supermarkets. Once business was flourishing, the supermarket cleared its shelves for the products. Foodist now claims to be occupying about five kilometres of shelf space in German supermarkets. “The best advertising banner in the world,” as Djordjevic puts it. In 2015, their turnover was €6m.
Expanding called for fresh capital. And suddenly Foodist was interesting classical investors. “Back then, I spent eight months doing nothing but funding. Lots of the talks went really well, up until the point when we mentioned the crowd investment,” says Djordjevic. “We explained that we would have to make the crowd an offer, which would be followed by a two-week voting period, and if the owners of 75% of the invested capital agreed, we would be allowed to sell. But VCs are not interested in that sort of thing. They want swift decisions. Yes or no. The buzzword was ‘deal security’. Can you guarantee the deal? If not, we’re out.”
One investor advised the founders to simply trash their company by steering it into controlled bankruptcy. That would take the crowd out of the equation. Then they could pick up the remains and start again from scratch. To Djordjevic and Schaumberg this was unthinkable. They owed the investors – all 2,399 shareholders – too much. It left them with a dilemma.
Christian Nagel, of the early-stage investor Earlybird, agrees with their misgivings. “The shareholder structure of this type of company is usually not ideal,” he says. “The more fragmented it becomes, the more trouble it is. That can make things extremely complex. The question is, how can I push through my goals? Should I call in a lawyer? How quickly can decisions be made? A startup needs to be good to justify the high administrative overheads.”
Nagel also believes crowdfunding is often used to finance business models that are not viable. “The crowd invests irrationally, because it likes the product or the idea. But that does not mean the business model is sound, or that the founders can carry it out. That sort of thing needs to be checked very carefully. It requires experience. It’s not something you do as a sideline.”
Crowd investment (equity-based crowdfunding) is a form of crowdfunding. Private investors give startups small sums of money and receive a share in the profits in return. Crowdfunding platforms such as Kickstarter, Startnext, Seedmatch and Companisto serve as mediators. The terms of the contracts are as varied as the platforms themselves. There are silent partnerships with a right of repayment, profit-participating subordinated loans, bonus shares with relatively fixed interest rates, or shares. Maturities and repayment plans also vary. In traditional crowdfunding, users receive no shares in a startup but a token return, such as a CD.
Jonathan Becker is with the venture capital company e.ventures. He lists further reasons why he keeps his distance from companies like this. “If they are sold, the crowd always gets its money back first. Other investors, who invested later and when the ratings were higher, can be left empty-handed.” The crowd share has to be paid back after six to eight years. “The market value of the company is usually based on its valuation during the last round of financing,” he adds. “However, that is an estimate for the future and does not represent its true value. Suddenly, the startup finds itself with liabilities that it is unable to meet.”
On top of this, every small investor who has put as little as €5 into a company is legally entitled to see the precise figures. “That is awkward, to put it mildly,” says Becker. He, too, believes decisions made by crowds are often irrational: “Many people think they have invested in the next Facebook. If they cannot walk away with a hundred times what they invested, they will not agree to it, preferring to risk insolvency and total loss.”
That was the case with Protonet, which developed a personal server system with built-in team collaboration software. The Hamburg company crowdfunded via Seedmatch, which was taken up by the US “accelerator” Y Combinator in 2016. The seed accelerator offered $120,000 for 7% of the shares – far less than the crowd investors had paid. There was uproar. Many people feared for their money. Protonet did not have the liquidity to pay off its small investors. Early in 2017, it filed for bankruptcy.
Tarek Müller, chief executive of the online fashion retailer About You, was a Protonet investor and says he lost the equivalent of “a small family house” at the time. He is angry that Protonet lost the opportunity Y Combinator could have offered it in the US. The investor, which had previously backed Airbnb and Dropbox, would have opened the door to Silicon Valley. “I’m no expert on crowdfunding,” he notes cautiously, “but as the contracts are worded at the moment, crowdfunding platforms show too little interest in the success of the company. They are too inflexible. That sometimes scares off professional investors during later rounds of financing.”
Müller also invested in the Eatclever food delivery startup, which last year raised €250,000 via Companisto. It operates in 17 German cities and has just opened its first branch in Vienna. Its chief executive, Mohamed Chahin, did not face widespread rejection in his search for investors. “However,” he says, “investors in this country are often unaware of the nature of the contracts. This issue never arose with Anglo-American investors. The German market is still young and comparatively inexperienced.” He puts a lot of effort into communicating and providing information to dispel concerns. Eatclever has not yet found a major investor. But it is not interested in another round of crowdfunding either.
2011: Startups €449,250 / real estate projects 0
2012: Startups €4,041,919 / real estate projects €981,500
2013: Startups €14,675,465 / real estate projects €2,337,750
2014: Startups €14,400,248 / real estate projects €3,121,000
2015: Startups €17,323,600 / real estate projects €20,937,135
2016: Startups €17,250,932 / real estate projects €40,242,252
2017: Startups €11,180,960 / real estate projects €91,930,798
(Figures for Germany, Source: Crowdinvest.de, as at 8/9/2017)
David Rhotert, one of Companisto’s two founders, agrees more explanation is needed. The contract the crowd-investment platform uses is one of the most complicated in the field. Companisto wants to protect its investors but asked whether the investors or the startups are his clients, Rhotert says: “Both. We have two groups of clients.” However, the interests of both parties are not necessarily the same.
Meanwhile, the hype over crowdfunding is over. Investments in startups have been stagnating since 2015. The young people who used to invest between €5 and €100 in cool companies have been replaced by experienced investors backing lower-risk projects. According to an internal survey carried out by Companisto, its average investor is male, 45 to 49 years old, makes an average of three investments, each worth about €600, and expects a 100% return after five years. If he suffers a loss, he first blames the startup, then himself, but also the platform for not checking the details carefully enough. “We make a preselection to decide which founders fit us,” says Rhotert, “but we cannot check any precise numbers.” The startups draw up their own financial plans. “Every investor can and must form their own opinion.” He stresses that investing is always a risk: “Our platform cannot guarantee the security of a business model.” According to the online German startup magazine Gründerszene, returns on all crowdfunded German startups have been negative: since 2011, €6.1m has gone up in smoke. At Companisto, 14 startups have filed for bankruptcy.
There may be further bankruptcies in the near future. Alexander Djordjevic is concerned that the platforms focus too much on their own earnings and too little on the viability of the business models they offer. In the end, only one solution made sense for Foodist’s founders: selling the company to the online advertising company Ströer. It also paid off for the investors, who received 20% to 90% on top of their initial investment, depending on when they joined.
Peter Möllmann, of the law firm SMP, supervised the sale. “One of the challenges was that we were not dealing with a single, uniform contract but with hundreds of contracts and contracting parties. That increased the complexity of the takeover.” As a listed company Ströer had to comply with capital market regulations, especially when it came to passing on information.
Djordjevic is certainly “incredibly glad to finally be able to turn my back on these rounds of financing and to have a real strategic partner now”. To do so, he had to sell his company and he is now only the chief executive. “In the end we are all happy,” he says, but admits he would not resort to crowd investment again.