Focus this week : The Elemental Motor Company
Platform: Syndicate Room
Looking to raise: £600,000
Pre money valuation: £1.7m
Already raised: £342,380
Product: the Rp1 road legal, track day sports car
The Elemental Motor Company’s campaign on Syndicate Room is something of a wild card. Obviously the idea of funding a next generation manufacturer of road legal, track day super cars should set the pulse of any petrolhead racing but this campaign breaks some of our favoured rules for investing in crowdfunding equity offers.
Our first, most important rule is that there are only two things that really, really matter in an early stage business: management and…well, management. Equity investing is always a risky business and investing in start ups and early stage investing is even more risky but one way of controlling the possibility/probability of a complete failure is to back business leaders who proudly wear a badge that says “been there, done that”. That means they’ve got bitter experience of managing teams, running a profit and loss account, and being accountable to shareholders. In our experience this makes a huge difference and unfortunately although the Elemental team have huge experience in Motorsport engineering we are less than convinced that there are some obvious business leaders or inspirational, experienced CEOs lurking around although there is a financial director and project manager called Jeremy Curnow.
The next fail for us is what we call the Billboard Test. Put simply we are cynical about sexy campaigns and fund raisings i.e stuff that could easily appear on a billboard. In our experience everyone gets very excited about the so called gold miners of the world but in fact the businesses we prefer are the guys and gals who supply the bricks and shovels. In sum we have a preference for slightly boring businesses that might not the set heart fluttering but can produce high margins.
Lastly with many crowdfunding businesses we prefer one last means for controlling risk – world domination via the quick scale up. As investing in early stage businesses is so risky we like the idea that once a product is established and creating revenue it can scale up quickly and build a global brand within say 5 to 10 years. There are some wonderful hairdressers for instance in the world but even if they scale up like crazy hardly any will become global brands and thus make a huge profit. But if you come up with a wonderful hair product built on clever technology or chemistry which every hairdresser in the world can use, that business could scale within a matter of years. Elemental Motor Company has quite modest ambitions and is quite honest that it simply wants to sell a whole bunch of road legal, track day sports cars. If it did well it might sell hundreds of these lovely looking vehicles and thus be quietly profitable but it is not looking to become tomorrow's BMW.
OK so having being thoroughly cynical about Elemental breaking our rules, let's say why we think this wildcard could be a surprise. We do think this could be one for adventurous types, especially those who think that engineering and design IP is crucial to generating future wealth here in the UK.
Petrol heads may already realise this, but the UK is an absolute world leader in motor sport, including the manufacture of race cars and F1 motors, much of which bleeds through into our growing mass market premium cars market. There’s a huge amount of money being made (and lost) by businesses grounded in deep engineering expertise. One only has to look at how McLaren has moved from designing F1 cars into everything from building road friendly super cars to management consulting. Billions of pounds are being punted on businesses such as JLG ( the Tata owned Jag and Land Rover business), Bentley and Aston Martin.
And looking at the engineers behind Elemental including founders John Begley and Mark Fowler you get a real sense of what anthropologist Clifford Geertz once called ‘thick’ knowledge I.e deep, intuitive understanding of a business sector rounded by decades of hands on experience. Again, put simply, if anyone can make a go of building a great engineering-led road legal, sports car business these guys can.
This leads us to our next big plus. The engineering and design IP. This has already involved spending over £500,000 in hard cash and countless years of man hours. Whatever happens to the business, our sense is that this IP must have some residual value.
And that existing spend speaks to another factor. Too many crowdfunding businesses involved in what we call lite-lifting.. What we mean by this is that someone has done the easy bit of drawing up a whizzy PowerPoint and business plan, then got a bunch of funky people together and then constructed some new kind of very basic minimum product which actually isn’t very much at all – and will almost certainly not produce any revenues for many years.
With Elemental the real heavy lifting is done and we are now in the last bit of the race (for survival) where the PR and marketing people get to work and the first cars (called Rp1s) are delivered early next year at somewhere between £60k and £85k a pop. This is a business that COULD – if we believe it's business plan – be generating a profit next year based on meaningful sales of more than £2.2m. Ambitious yes, but not inconceivable.
The RP1 in full flow
All of which acts as a long preamble to our last observation which is that the numbers on this project look realistic. We encounter too many businesses where the founders have frankly started at a minimum pre money valuation of £2m and then headed north. We think that the valuations being punted out on many investment memorandums are frankly either a) absurd, b) preposterous or c) delusional….or a combination of all three.
The pre money valuation of Elemental Motor at £1.7m, with a target raise of £600,000 for a 26% stake isn’t a bargain but it is quite possibly realistic. We also think that the suggestion of an exit five years hence at 6 times ‘projected 5th year earnings’ of £1m - £6m – are doable, especially if lead angel investor Alex Graham really works closely with the business. Slightly counter intuitively we also think that the sales target of selling 36 cars in 2016 isn’t pie in the sky especially when you consider that equivalent businesses such as Ariel, Radical and KTM are selling hundreds of these sexy beasts every year.
So if even a non petrol head like this observer can see the business case for Elemental – our favourite cars are cost effective South Korean motors with nice long warranties…..yes, boring is the right word to describe the writer – then fans of British engineering and Motorsport might well consider this a risky but potentially rewarding punt.
The RP1 undercover