For this edition of Crowdview I have headed over to Syndicate Room.
Syndicate Room does not perhaps have the profile of Crowdcube but as an investor seeking sound investment opportunities, with good disclosure, at attractive valuations it is to my mind the best place to go. Syndicate Room uses a very interesting model which offers a solution to the most fundamental problem faced by an equity crowd-funding investor – price discovery.
Price-discovery is the process of a market arriving at a fair price for an asset. In a functioning secondary market it is a live process with prices continually updating as new information becomes available. Effective price-discovery is always more challenging when it comes to the issue of new equity and harder again when it comes to small companies with a limited history and few comparable companies with which to establish context. The risk with many crowd-funded investments is that the crowd has a limited ability to recognize if the price is at a level which offers the realistic prospect of a return. The crowd may have only a limited amount of industry experience and limited trading history or management projections on which to make a reasonable estimate of future cash flows and hence dividends.
“We only list companies that are already backed by professional ‘business angels’, who are investing their own money and thus have taken an active role in evaluating the strength of the deal. We then offer our members the ‘same share class and same price per share’ if they decide to invest alongside these professionals”.
This gives investors the reassurance that someone who should have a good understanding of the risks involved, and hence what a sensible valuation should be, is committing their own money. Regular readers of this column with also note that a further pet concern of mine is also mitigated by this structure – share class. All to often equity crowd-funded deals offer the crowd a different class of shares to management. This is never the case on Syndicate Room. To quote directly from the investment terms:
“All investors will receive shares carrying equal rights to vote and participate in dividends and any return of capital, being the same class of shares as the lead investors.”
Emboldened by this impressive track-record we have discovered Balluga beds. Beds appear to be an increasingly exciting product area with the market in the process of being shaken up. The internet has allowed a number of new entrants to do away with the traditional bricks and mortar retail route to market and sell direct from a website. Traditionalists might argue that a bed needs to be tested in a showroom. However it appears that savvy modern shoppers would prefer the saving created by removing the middle-man than an un-satisfactory, fully clothed, and all too brief, test in a showroom. On top of that new era web based retailers are finding that trade shows and pop-up shops can serve as an equally good way of demonstrating their product. The market is also growing consistently as the existing stock of beds have a replacement cycle with the additional following wind of ageing populations in the target developed markets.
Against this positive back-drop, Balluga has a unique approach to manufacturing beds that claims to radically improve the users experience. Essentially any conventional method of support – mainly springs – has two problems: they wear out; and the springs support but by definition have to press into the sleeper. Balluga’s beds use a system of air filled balls that improve longevity and remove the pressure points from the sleeping body.
On top of this Balluga are exploring interesting ways to demonstrate their beds to well-heeled potential customers by partnering with a number of hotel chains. It seems likely that a full night sleep, in a hotel room, should serve as at least as good a demonstration as the method favoured by conventional department store bed retailers the world over.
Management have a proven entrepreneurial track record and have shown good creativity as well as excellent cost control in getting the project this far.
So to the valuation. The company is issuing 11.11% of the equity in Balluga for £250,000 which equates to a pre-money valuation of £2,000,000.
Balluga anticipate that they will make a profit of £5.5m on sales of £28.5m in the year to December 2017. Ultimately this is a start up so the outcome is likely binary. It will either take off and look incredibly cheap or fail to take off in which case any valuation is expensive. The way I look at is therefore to discern what is the implied probability of success. This new design of bed may not take off and there is no getting away from that. But what could my payoff be if it does work?
£28.5m of forecast sales in 2017 represents 4.4% of the UK beds market or just fractions of a % of the £15bn global beds market. If the product is genuinely different – which the angel sponsor clearly believes it is – then that seems a reasonable estimate of market-share penetration. In which case the company is on less than ½ 2017 profits. If in 2017 it is indeed making that sort of progress then the company would likely command a multiple of around 10x profits suggesting a 20 fold return for investors. This existing round of fund-raising will provide CAPEX sufficient to build capacity to produce £50m of sales per annum – so the risk of dilution remains low. So what are the chances of this positive scenario coming to pass? Totally inexpertly I would give that a 33% chance. But a 33% chance of making 20x my money is appealing.
In an attempt to ensure that I am not getting carried away I asked AlgoValue to objectively assess the valuation today. AlgoValue provides an online valuation tool for small companies. Using their access to a huge range of comparable companies they derive a valuation, after subtracting a lack of marketability discount, of £4.8-£5.7m. This provides considerable reassurance to sit alongside my more blue-sky based analysis. You can read more about AlgoValue and how the valuation methodology works here.
Parameters for future data
Calculation period (years)
|Enterprise Value (£M)||6.068||7.083|
|Equity Value (Pre-Money Value) (£M)||6.068||7.083|
|Lack of marketability discount (%)||20%||20%|
|Equity Value (Pre-Money Value) after discount (£m)||4.855||5.666|
I would be the first to highlight that equity crowd-funding is not an activity for those who wish to ensure that their investments will guarantee them a sound night sleep. However the risk/reward on offer at Balluga beds looks very attractive.
This is not investment advice. For more information please follow through to our 'Important Information' page.