04 September 2015
London to Berlin on an Eve Mattress?
London residents like to think they are in the centre of the
world, or at least in Europe’s top capital. Boris Johnson calls London, “The
greatest city on earth”. In addition to being a leader in financial services,
international trading markets such as commodities and insurance, there are
thriving marketing, creative and business services industries. London has even
managed in 35 years to move from bottom of the world league of restaurants to
top.
And then there’s the tech start-up scene. London claims European
leadership in start-up creation, finance and growth, helped by being the regional
capital of venture capital and tech-focused advisory boutiques. With incubators,
shared office spaces, support networks and even its own area of London in
Shoreditch, London has the most successful start-up ecosystem in Europe,
producing the most start-up companies in the European Union and the most success
stories.
But London shouldn’t ignore Berlin. The central European
city is buzzing with new companies, many with international reputations such as
SoundCloud, Delivery Hero, Babbel, Mister Spex, Outfittery and 6Wunderkinder. The
city is large, diverse and much cheaper than London. Finance is available, as
is government support. It’s London’s major tech competitor.
Let’s take the example of Eve Mattresses. Eve is a typical
London start-up, aiming to disrupt the market for mattresses. They noticed most
mattresses are not very comfortable and that the money is made not by the
manufacturers but by the resellers or spent on logistics – these are large
items to store and to move around. Their simple idea was to build a comfortable
mattress and deliver it directly to the consumer in a box, with the mattress
expanding to its full size once unpacked. Brilliant, you may think. In fact,
it’s a disaster.
The morning after my first night on an Eve Mattress I
overslept by 90 minutes. The second day, I couldn’t get out of bed because the
rest of the day seemed to offer nothing that I couldn’t get by staying under
the covers. Eve has over-achieved, which is just not on.
Once, the United Kingdom was a great power – it’s in the
name Great Britain, after all. We were the world power, with our fleet, trade,
language and culture. Then along comes the Eve mattress. We have no chance of
being world leaders if we sleep that well. Battles are fought at dawn and world
markets won by being the early bird. We were successful because our mattresses had
lumps, were made of horse hair and full of bugs, all actively encouraging us to
get up and get going. The morning cup of tea was invented to compensate for a
bad night’s sleep. If we all get Eve mattresses, we’ll turn up late for work, unshaven
but smiling. That’s a disaster for our international competitiveness.
The government is concerned: UK productivity is worryingly
low compared with our peers, and nothing seems to work to improve the balance
of payments. The French can apparently overcome strikes and 35 hour weeks to be
more productive. That’s frankly not surprising as they are not sleeping on Eve
mattresses.
So I have a plan. Eve should focus on the German market,
offering their great products to the over-energetic Berlin entrepreneur
community. A website www.evemattresses.de
in German, encouraging sales by reducing the price to €600 from the UK price of
£600 should do the trick. In parallel, introduce a British mattress which is
suitably uncomfortable, guaranteeing backache if you sleep in. That way Eve can
save London from losing out to Berlin, and improve the UK balance of payments by exporting their British-made mattresses.
I’m so excited I need to lie down for a bit. See you (much)
later.
03 August 2015
Why is it so hard to sell my business?
The founder CEO of a company who came to see us recently is
rightly proud of his company and what it’s achieved. The technology is good,
the products win awards and the customer list is impressive. But as he
approaches retirement, why can’t he find a buyer for the business? What’s he
done wrong?
The company earns about €2 million of revenue and makes a
reasonable profit. It sells globally in a niche market. The founder is the sole
shareholder and his expectations are sensible: he’s more looking for a good
home for the business than a high price.
A closer look shows the industry dominated by large players,
none of which is interested in acquiring his business. He knows them all, and
has spoken to them all. They like his business but there’s just no compelling
reason for a strategic trade buyer to buy his business: it wouldn’t move the
market share needle for them and the niche he operates in is quite specialized.
The company is too small for Private Equity, unless as a bolt-on to an existing
portfolio company.
It’s easy to forget that, in addition to profit and revenue
multiples, the company needs to be of the right size to appeal to buyers: big
enough to make a difference to their business and small enough to be digestible
and affordable.
He may be best offering the firm to his colleagues in a
management buyout, in which he is the provider of the finance. It sounds a
little like selling your house to someone and providing the mortgage but,
structured properly, an equity-to-debt swap can work really well for everyone.
A discounted Rights Issue can force the hand of reluctant shareholders.
This case is not unusual: we’ve been talking to a dynamic
young CEO with reluctant investors. The company in question raised some money
from angels and a VC and is facing resistance from the existing investors to
invest more, even though the company may well fail without an urgent injection
of €500k. The business is sound, but it developed more slowly than expected;
some investors are impatient and others are now outside their investment
window. Cash is so tight that the poor founder CEO has not been paid for a few
months.
Only one shareholder has expressed interest in investing
more; the others are either unwilling or unable. The shareholders have agreed
that the company is worth €5 million but, surprise surprise, no-one is actually
prepared to invest at that valuation (which of course means it’s not worth €5
million).
One option the CEO should consider is a heavily discounted
Rights Issue. Here all shareholders may invest in proportion to their holding.
Here’s what a Rights Issue would look like, to raise €500k with a valuation of
€5 million:
Here is what it looks like if, for example, if only the CEO and
Shareholder 4 take up their rights and Shareholder 4 also taking up everyone else’s:
No wonder no-one wants to reinvest at this point of crisis:
there is minimal dilution for quite a large risk.
But what about saying the company is worth just €50k? It
sounds farfetched, but if the company’s future is at risk, the company is
flirting with a zero valuation. The effect on the cap table is dramatic, with
the CEO and the investing shareholder becoming the dominant owners:
Won’t the shareholders just resist it? They may not like it,
but such a Rights Issue is hard to resist: the company demonstrably needs the
funds and all the shareholders are being treated equally.
How does the CEO find her share of the money? By converting
the debt in the form of unpaid salary into shares (tax and social security
costs will need to be found, of course).
So this would certainly get the shareholders’ attention, and
may be a route to a solution. Just be careful: a discounted Rights Issue does
not of course work if any of the shareholders have liquidation preferences.
22 May 2015
What time is it, Eccles?
I’m old and daft enough to enjoy the Goon Show. In one
famous sketch (https://youtu.be/-tjHlFPTwVk),
Bluebottle admires Eccles’ ability to tell the time, because he’s got it
written down on a piece of paper. If someone asks the time, he shows them the
piece of paper. The paper says 8 o’clock, so if it isn’t 8 o’clock, Eccles
doesn’t show them the piece of paper. There’s some suggestion the clock is a
forgery as the plot unfurls. It’s just a piece of Spike Milligan script magic.
There is a business equivalent to this that I see all too regularly,
which you might dub the Clock Graph. To explain it, I need you to imagine a
graph where the ‘X’ axis is time and the ‘Y’ axis is some kind of financial
performance, perhaps sales or profits (or cashflow, or orders, or downloads –
you get the picture). There’s a single line showing the historical and future
performance.
Often, the historical data is at a different slope to the
future, perhaps even like this:
It’s not just that the graph looks like the hands of a
clock, but you also know what time it is, don’t you? It’s Q4 in year 1, of
course (to copy Eccles, if it’s not that time, I don’t show them the graph).
The past is a disaster but we’re about the turn the corner. The orders are
about to come in, adoption is about to take off and sales are about to explode.
At stake is the credibility of the CEO, because more often
than not, a quarter later things will have slipped and the graph may look like
this. The CEO may be maintaining his or her optimism but the graph tells
another story:
It’s still a clock: we know that it’s now Q1 in year two.
This forecasting can be career limiting for the CEO. Any
change in the slope between historical and projected performance needs to be justified
– it may well be correct, it just needs an explanation. This company is doing
nicely, for example, but it’s clear the clock is showing the time as Q4. What
is happening to the business to increase the future growth rate? Is a new
product about to be launched, or is a new sales channel coming on line? Or is
it just over-optimism?
So if your graph is telling you the time, you’d better have a
believable explanation ready.
