Surprise shutdown of Cityshare

Travel information platform Cityshare has been declared bankrupt by the Amsterdam court on June 30 2015. The company was known as a crowdfunding success on Symbid. Although a few warnings about a conflict between the founders were given, many investors were completely surprised by the bankruptcy.

CityShare launched its iPhone application in the Netherlands in May 2014 and has been one of the Dutch participants at the Websummit conference 2013. The startup’s plan was to make the platform for sharing travel tips, such as things to do and places to stay. The company received € 80.000 in funding via Symbid, the equity crowdfunding platform. The company used the funds to further develop the app and launch a web version, for which they didn’t succeed in. Apparently there was a disagreement between the founders about failing to launch the web version as plannend. The founders could not agree on a buyout for one of the founders and this forced the CEO to go to court months later and request bankruptcy. DLA Piper has been assigned as curator to handle the bankruptcy and will post further information at the DLP Piper insolvency website.

At StartupJuncture we prefer to bring good news, but failure is a part of startup life and nothing to be ashamed of. It is however not good if a startup goes into the wasteful process of a bankruptcy since this usually means that some suppliers will not be paid off. For Cityshare, it seems that the largest creditor is one of the founders, who will not not receive part of the management fee. It would probably have been better to close earlier, negotiate deals with creditors and avoid a court-ordered bankruptcy. Luckily bankruptcies are scarce, we have only published a few bankruptcies so far (Tenpages, Ideedock, SellAnApp, Arete Caerus).

What makes this bankruptcy interesting is the fact that Cityshare is crowdfunded and that the crowdfunders were not informed about the appeal for bankruptcy beforehand. Cityshare has also made use of a common loophole in Dutch law that allows companies to not post financial results in the first year. It has to be noted that CEO Maarten Graven is is now responding swiftly to questions and more information has become available, for example by publishing the financial results of its holding company and answering all questions.

The lack of information raises a lot of questions about the governance of crowdfunded companies. The crowdfunding platform Symbid itself does not monitor what happens with the money they collect for businesses. Most crowdfunding platforms do not do this. Symbid however does determine how the board (technically the management of a UA cooperative) is formed that should guard the crowdfunders interests. It seems that in the case of Cityshare, this board did not communicate enough with all the other crowdfunders. We are hoping the crowdfunding platforms take some steps to improve their governance.

Based on the examples we see, Leapfunder-funded companies are on average better at reporting than Symbid-funded companies, with many Leapfunder-funded companies sending out monthly updates and some Symbid-funded companies not reporting any financial metrics at all. It would be good if Symbid and other crowdfunding platforms changed the rules so that quarterly reporting on financial and business metrics would becomes mandatory (there is a thing called Symbid monitoring but is seems to be an additional feature).

Full disclosure: Sieuwert van Otterloo is an crowdfunder / investor in several startups and  had a minimal investment in cityshare (worth 40 euros at time of investment, currently worth 0 euros)