Wednesday 3 June 2015

Apps, Apps, Apps, Apps ...

Wednesday 3rd June 2015

Each week I will typically see between three to six companies that are either looking to raise capital or that are on the road to raise their profile and expectantly their share price. No doubt I could see more but six is quite enough for me over a five day stretch. 

Companies will range in stages from early private start-ups, to pre-IPOs, IPOs, or already AIM and fully listed ones. Sizes vary from micro-cap to medium-ish. Venues will be an assortment from a quick chat in a coffee shop, to a decent lunch in the City/West End, or a less decent group lunch (think a tray of curled up cheese and pickle sandwiches, washed down with sickly sweet concentrated orange juice in a broker’s clammy office), or a presentation that may last an eternity … in a broker’s clammy office.

The companies I meet will also be an eclectic mix. In general, the only sectors I won’t meet are anything to do with oil and gas or pharmaceutical, of which I will never understand either.

Lately however, it seems that almost every other company being promoted has something to do with an app or an internet based solution. 

Yesterday for example, I met two. Both were private concerns; company A and B.

Company A was focused on some sort of solution through a mobile device for ordering coffee, food, room service, etc, thus avoiding waiting in line. I'm not convinced this is a problem requiring a solution but was open to persuasion.   

Company B centered on an app with the aim of connecting brands, influencers, artists, and celebrities with the great unwashed. The latter who will no doubt wonder what came over them when ogling some celebrity’s contribution to the webisphere and suddenly being clocked by a canny advertiser. 

Neither A nor B had any revenue. Material revenue for each was unlikely for at least two years if their projections were to be believed. They seemed ambitious. Of course three years in and their projected revenues were off the charts. Each was therefore loss making for the foreseeable future. Company B was significantly so; apparently burning through c. £350,000 per month, which was only likely to increase, I think £500,000 per month was mentioned.

Neither seemingly had a unique business model, high barriers to entry, or first mover advantage. Company A, openly acknowledged that it had at least five competitors (in the UK) vying to take over its market that it was aware of. And that they had much deeper pockets. I felt as though far from a parallel universe there was probably another fellow bald investor being pitched to by a broadly similar company not two doors away, or at least in Paris, Frankfurt and New York.

As for company B, I’d actually met a similar app based company to B’s business over breakfast in February last. It too had the lofty ambition of monetizing a connection between high profile earthlings and hoi polloi. I did not invest. And thankfully so, as having this morning checked on its progress it would appear it’s come to a less than distinguished “pivot”?!?

Mobio INsider - connecting Brands and Influencers with hoi polloi a greater audience

In the case of company B, I was particularly amazed at its cash burn. It was clear that repetitive funding rounds would be required and likely in short order.

A Google search later and it would appear that again, this has also been tried and tested and less than successful endeavour. For example, it seems a US based company came up with an app, WhoSay, founded in 2010. WhoSay raised $12 million in July 2012, funded by such backers as Greylock Partners, Amazon, and various others ... Amazon!

WhoSay - connecting high profile earthlings with hoi polloi fans
In the three years since its $12 million funding round it would seem that WhoSay has managed to muster a somewhat unremarkable 69,000 downloads of its app on an iPhone device. Goodness knows what WhoSay was valued at in July 2012. I reckon I can take a decent guess at its valuation in June 2015.

WhoSay - app downloads to iPad
Company A and B were being promoted with what I reckoned to be preposterous valuations. Whether they will be successful in obtaining the capital sought at their respective valuations is to be seen.

My general conclusions are that:
  • There’s increasingly too many of these types of companies being promoted. Highly speculative, low barriers to entry, high cash burn, considerable competition, crazy valuations.
  • On the flip side, I would like more of these types of companies to come to the public markets thereby offering juicy short opportunities. 
  • If there are investors that are willing to invest in these promotions at such valuations, they will need seriously deep pockets and are most likely crazy. In my experience, crazy people don’t maintain their deep pockets for long.   
  • The rate at which these companies are now being promoted is likely causing some form of crowding out effect on proven prospects that have a far higher chance of success, albeit with a less racy blue sky outturn. Nonetheless the total expected return is most probably far higher along the proven course and being crowded out is a shame for better quality businesses and the economy in general.
  • I may have to add app based businesses to oil & gas, and pharmaceutical ones to avoid.

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