Tag: IPOs
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Pros & Cons of a Direct Listing vs. an IPO
The post Pros & Cons of a Direct Listing vs. an IPO appeared first on ClickIPO.
“Institutions have Arrived:” Who, What, and Why
Reading Time: 7 minutes 2019 is the year we can finally say “institutions have arrived,” in the blockchain / crypto industry and in a big way. Despite being a commonly cited catalyst within the crypto space, progress has felt slow. After all, these are large organizations with significant value at risk, so they want to be careful and deliberate […]
Is “Freight-Tech” the future or Has Uber and Lyft Killed the Dream?
While I personally was unable to attend the annual Freightwaves Transparency19 conference this year I did watch a lot of the clips and I was fascinated by the shear volume of "Freight-tech"(I will abbreviate FT) companies coming out of the woodwork to help shippers ship product. We are in the "golden age" of FT launches, venture capital money and potentially IPOs.
Or, as the title stated, has Uber and Lyft killed the dream? More on that later but first, let's remind ourselves "how business works".
An entrepreneur comes up with a great idea and tries to get it to scale with a series of private fundings. Venture capitalists get in early, generally get seats on the board and hope for an eventual big pay day when the company is either sold or goes public. The company is built to scale (meaning it is generating cash - hopefully - or has a path to be cash flow positive. Then, the early owners need to take money out of the company for a variety of reasons by going public or selling. Here are the reasons they may want to extract money:
Or, as the title stated, has Uber and Lyft killed the dream? More on that later but first, let's remind ourselves "how business works".
An entrepreneur comes up with a great idea and tries to get it to scale with a series of private fundings. Venture capitalists get in early, generally get seats on the board and hope for an eventual big pay day when the company is either sold or goes public. The company is built to scale (meaning it is generating cash - hopefully - or has a path to be cash flow positive. Then, the early owners need to take money out of the company for a variety of reasons by going public or selling. Here are the reasons they may want to extract money:
- Family wealth planning - they generally have a lot of their wealth in the company and they need some back.
- Pay Employees - Many early stage company employees are paid with options and they eventually want and need that money. This is a warning to many employees who get in too late in the game. If your options are valued right before the IPO then a lot of the time you are under water when it goes public (as are many Uber and Lyft employees).
- All the juice is squeezed and the VC people want out. - Venture capitalists do not hold companies and eventually they want their money back. Once they believe they have "squeezed all the juice out of they idea they will want to exit.
Now, let's get back to Uber and Lyft and while I did not read the S-1 for the Lyft before it went public I did read the S-1 of Uber (skip the glitz slides and read the words) and it caused me to ask the question: "Who the hell would invest in this company"? Let's look at what the S-1 (The S-1 is a required SEC filing before the company goes public and it generally is the first time you get to see their financials - it is required reading if you are going to invest in IPOs) taught us:
- Uber has lost over $3Bl in the last three years. And that is if you count a gain on divestiture and "other investments". If you look at just operations, in the last three years Uber has lost almost $10bl.
- They continually discuss incentives paid to the drivers and to the customers. They are paying on both sides of the transaction.
- There is very little path to profitability. They "sold" the IPO to the retail investor at exactly the right time (for them.
Now, what are the learnings from e-commerce? What we are starting to see is the "bricks and clicks" (Especially Wal-Mart) is the model to win. Unfortunately, Wal-Mart took far too long to "get in the game" and it may be too late. But, if Wal-Mart had responded back in 2013 as I had suggested when I wrote The Battle for Retail Sales is Really The Battle of Supply Chains, they would have killed it. Once Wal-Mart woke up I welcomed them back in 2017 in the article, "Welcome Back Wal-Mart. We Missed You Over the Last 5 Years".
Which brings me to J.B. Hunt and their work with Box and J.B. HUNT360. That is the winning formula! It is the "Bricks and Clicks" of the freight world. Like retail, eventually everything gets down to assets. Someone needs to build stores and warehouses in retail and in freight someone needs to own the boxes, trucks and have drivers. J.B. Hunt is showing they learned the lesson of Wal-Mart (Don't cede any ground to the tech guys), they jumped in early, they disrupted their own business and they are now the leader in this space for the asset players.
What will come of all this? I believe J.B. Hunt will continue to drive their leadership position further and the asset guys, to catch up, will have to buy a number of these FT companies. Which means the VC population will get what they want but the asset guys will pay a huge premium for not getting in early.
So, let me summarize:
- Too much money chasing too few ideas... the "new" ideas are starting to be "me too's" (How many apps can have a competitive algorithm just to find an available truck)?
- The FT VC population will want to sell.
- The Asset guys will find out they are getting killed by the "trucks and clicks" model of J.B. Hunt and this will drive them to pay exorbitant prices to get the tech quick to catch up.
- JBHunt, by innovating early and fast will win this game big just like they did with intermodal.
Finally, in the UBER S-1 we get our first public glance of UBER Freight and I am amazed at how small it is. Now that UBER is public we will get to see more and more of their financials. They believe the industry is moving to an "On-Demand" industry. I find this hard to believe as big shippers need predictable freight and solutions like the J.B. HUNT 360Box where you get access to trailer pools. I could be wrong, but I do not see a huge future for this.
4 Things to Know Before You Invest in Your First IPO
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Cannabis and Cobalt
In terms of top performers, last year was a pretty great year for Australian IPOs. At time of writing there are five companies that listed in 2017 that are more than 500% up on their listing price. The companies provide a good insight into the current zeitgeist of the Australian micro-cap sector. There are two infant formula companies, one exploratory mining company, one medicinal cannabis company and one 3D printing company.
| Company | Listing price | Current price | Return |
| Wattle Health | $ 0.20 | $ 2.26 | 1030% |
| Cann Group | $ 0.30 | $ 2.75 | 817% |
| Bubs | $ 0.10 | $ 0.72 | 620% |
| Titomic | $ 0.20 | $ 1.22 | 510% |
| Cobalt blue | $ 0.20 | $ 1.40 | 600% |
While initially you might think trying to find common ground between such a diverse set of companies would be difficult, there is one thing that all these companies share; low or nearly non-existent receipts from customers. The five companies listed above have a combined market capitalisation of 960 million, yet their combined receipts for the first six months of FY18 is only 2.8 million. That’s an annualised price to revenue ratio of 172, a ridiculous metric by any stretch of the imagination.
To be clear, each company has their own, potentially legitimate reason why revenue is currently low or non-existent. Cobalt Blue is still in the exploratory stages of assessing mining sites, Titomic is in the process of setting up its operations centre in Melbourne, CannGroup has multiple regulatory and legislative hurdles to pass before it can start selling cannabis and Bubs and Wattle Health are both waiting on their CFDA licenses that will allow them to sell their products in China.
A cynical explanation for this coincidence is that it is much harder to disappoint shareholders when you are pre-revenue. A pre-revenue company is all possibility: When you are pre-revenue there are no pesky questions about profitability, client retention, or growth rates. No pre-revenue company was ever caught giving misleading statements about new customers or cooking up elaborate scheme
s to artificially inflate their quarterly cash flows. A company that is already making money usually needs actual growth to cause an increase in share price, all a pre-revenue company has to do is make vague claims about massive potential market sizes.
While the initial returns may be spectacular, history suggests the ASX can tire pretty quickly of these sorts of companies. You only need to look back at the best performing IPO’s from 2016 to confirm this. Interestingly enough, there are six IPO’s from 2016 that have at some point traded at over 500% return, but as of today only Afterpay Touch is still trading above this benchmark. Get Swift’s problems have been well publicised, but there are others whose drop in value have been nearly as dramatic.
Aurora Labs, a 3D printing company at one point reached a high of $3.93 before additional capital raises and elusive revenue growth pushed the share price down to it’s current $0.55. Creso Pharmaceutical, another cannabis related company (whoever said the ASX is too predictable) has dropped from its high of $1.36 to $0.70
Even without the benefit of history it seems at least some of the 2017 IPO's are pretty overvalued currently. To take Wattle Health as an example, the current market capitalisation is around $210 million vs current sales of $329,000 a month. If Wattle Health was a mature company with normal growth prospects you would expect it to be trading at around 10X gross profit (keep in mind this does not include administrative, marketing or interest costs), which would require sales of $3,017,248 a month at current margins This means they would need to grow their revenue by 817% just to justify their current share price. It seems safe to assume a stock with an 817% revenue growth already priced in is a perilous place to have any capital invested.
In summary, I predict the next 12 to 18 months will see a pretty steep decline in the average share prices of these five companies. But the next time you get offered shares in an IPO selling 3D-manufactured cannabis-infused baby powder you can be sure that for the short term at least you are in for a ride.
Xinja
A couple of weeks ago, the first six AFS licenses for crowdfunding were issued, paving the way for Australian companies to raise money from retail investors without listing on the ASX. While I usually restrict this blog to reviewing initial offerings of publicly listed companies, I thought it might be interesting to review one of the first crowdfunding offers in Australia to mark the occasion. There’s something to be said for reviewing a company that doesn’t have a public market for its shares, as you are less likely to end up looking like an idiot.
While a few of the crowdfunding platforms are still in the process of setting up their first offers, Equitise seem to have got the early jump on the competition. Their crowdfunding campaign for Xinja, a start-up digital or "Neo" bank, is already live and at time of writing $1.3 million into their 3 million dollar raise.
Xinja has ambitious goals. With the recent weakening of laws regarding setting up banks in Australia, they intend to set up a fully functioning Australian bank, complete with deposit accounts and mortgages.
Just in case you forget this is a crowdfunding offer as opposed to your usual boring IPO, they have put together a pitch video, replete with flashy animations and bubbly tech muzak in addition to the standard offer document and financials. Once you look past the executives in torn jeans and distressed-paint walls, you quickly conclude that the pitch seems entirely devoid of anything original. Xinja’s main claim is that they will be the first “100% digital bank,” offering fully online services with no branches, but ME bank has been offering deposit accounts since 2003 in Australia and has never opened a branch. Another big focus of their pitch is that they will develop tools that nudge customers to make better financial decisions, which seems pretty similar to an advertising campaign NAB has been running for years. While the idea of a new digital bank in Australia is in itself is somewhat interesting, it is a shame that this is as far as they have got in terms of originality. Watching Xinja’s pitch video I’m reminded of that old Yes Prime Minister joke, about how boring speeches should be delivered in modern looking rooms with abstract paintings on the walls to disguise the absence of anything new in the actual speech. These days the modern equivalent I guess is a converted warehouse office space and vague references to blockchain.
What makes this paucity of orginality a particular concern is that the challenge faced by Xinja is enormous. There are good reasons why Australia has been dominated by the same big four banks as long as anyone can remember, and it’s not because no one has ever thought of making banking work on your phone. The pitch seems to promote this idea that the big banks are old tired institutions, with needlessly slow and cumbersome processes, just waiting to be pushed aside by some new start-up. As someone who works in the finance industry I know this is far from reality. Banks are obsessed with innovation and change, and are constantly sinking huge amounts of money into technology to stay ahead of the curve. The simple reality is that banking is one of the most heavily regulated industries in Australia. More often than not, what you find frustrating or slow about a bank’s processes is down to legislative restrictions rather than the banks ineptitude or unwillingness to change.
A lot is made in Xinja’s pitch video of the involvement of the founder of Monzo in Xinja. Monzo is another digital/Neo bank that was set up a few years ago in England. In the pitch Monzo is held up as an example of the success of Neo Banking, but this seems like a ridiculously premature thing to say. While Monzo has been through multiple capital raises at increasingly higher valuations, the reality is Monzo’s revenue for 2017 was a paltry $120,000 vs a loss of 6.8 million. It’s true that Monzo has some interesting ideas and managed to pick up an impressive half a million customers thanks to their zero fee pre-paid cards, but it is still far too early to hold them up as some sort of success. If I started handing out free cup cakes at Flinders Street Station I’d probably run out of cup cakes pretty quickly, but it’s hardly proof of a valid business.
The example of Monzo also gives us a good example of just how much capital is needed to start a bank. According to Crunchbase, since June 2015 Monzo has raised a total of 109 million, and given how far they are off profitability more funding rounds are probably on the cards. At each raise the business valuation has increased, but it does demonstrate just how long the road ahead is for Xinja.
Valuation
While it might be considered a bit boring to talk about something as mundane as valuations and financials in the crowdfunding world, it is probably worth noting that Xinja is raising its $3 million dollar campaign at a $43.1 million dollar valuation, higher than the last 5 ASX IPOs I have reviewed on my bl
og.
To be blunt, the $43.1 million market capitalisation is completely ridiculous. Reading the “achievements to date” section of the prospectus it is hard to believe someone was able to write this with a straight face. While bullet points like “we have assembled a committed and exceptional team” and “we have completed 80% of our app” might be acceptable when putting together a slide deck at a hackathon, for a company valuing itself at over $40 million dollars it is downright obscene.
Not only does Xinja have no revenue from customers to date, they don’t even have trial products with customers or a license for any type of banking activities in Australia. They have only raised $7.8 million dollars before this crowdfunding campaign, which means that somehow investors are meant to believe that the other $32.3 million of their valuation has been created by coming up with a company name and hiring a few people.
Even Monzo, which seems to have ridden the hype train of ridiculous valuations pretty well, has been more restrained in their valuations. In October 2016 when Monzo valued itself at $50 million pounds, they had already been granted a restricted banking license and had a prepaid cards with a fully developed app out to 50,000 people. Earlier on, Monzo raised 6 million at only a $30 million valuation in March 2016, but at that time had a working trial pre-paid card out to 1,500 people. In contrast, Xinja has not only not yet released the beta version of their prepaid card, they still don’t even have a banking license.
To provide just one more example of how ridiculous the Xinja valuation is, it is worthwhile to look at the ratio of book to market equity. Banking has always been a capital-intensive business, and post-GFC regulations have only made it more so. This means that profits always require significant amounts of capital. The CBA, for all its market advantages from to being the largest bank in Australia has a book to equity ratio of $0.43. This means for every dollar of CBA shares you purchase, you are getting an entitlement to the earnings of $0.43 cents of equity on the CBA balance sheet. For the Xinja crowdfunding campaign, a bank with no license, revenue or market share, that ratio is only $0.22 cents.
On the Xinja Equitise crowdfunding campaign, the offer is described as a bank job. What they don’t tell you though is you’re the one getting robbed.
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