Rudolph the Red-Faced Investor
6 tough investment lessons from 2018
Experienced angels know that there’s always a risk when investing. 2018 threw up some particular challenges and the downfalls of some big and promising brands were highly publicised. These surprise collapses show that even the savviest and most experienced angels need to be utterly scrupulous in conducting due diligence and to spread their risk by having a diverse portfolio.
Here are some businesses and sectors that went bust in 2018, undoubtedly resulting in a large crowd of irate (and red-faced) investors:
Augmented reality company Blippar – which once claimed to be worth $1bn - entered administration on December 17, following an investor dispute over funding. The Sunday Times reported that Blippar had warned shareholders that Malaysian sovereign wealth fund Khazanah – one of the company’s biggest two investors – had blocked a last ditch, emergency fundraising round. Despite having raised $150m and being one of the UK’s biggest start-ups, the firm struggled with its business model and low user engagement and posted a loss of £34.4m for the year to March 2017. Further proof that even the flashiest investment opportunities need to have realistic strategies to commercialise and as with any new technology the uptake will be unpredictable, so wise investors will factor that into any investment decision.
Cat Rock Capital, which holds a 2% stake in Just Eat, slammed the company’s management team, describing them as ‘the worst-performing public equity in online food delivery. These unambitious targets and flawed incentive schemes have significantly damaged the value of the business and shareholder returns’. Shares in Just Eat have fallen over 25% since January and the business dropped out of the FTSE 100 in early December. Just Eat retaliated, claiming to have a long-term sustainable value for their shareholders. This story showcases the importance of chemistry between investors and management teams. Savvy investors invest in people understanding that a strong team is more important than a strong business idea.
Few mourned the demise of Wonga, with its reputation as a pay day loan shark and questionable ‘short-term, high-cost credit’ business model. However, there was very little festive cheer for the shareholders in 2018. Despite efforts to restructure the business - which included an injection of funding by their investors - the business was unable to be restored to profitability due to the level of redress claims. Coupled with an unpaid tax bill of £36m, the flailing management team had no alternative but to place the business into administration, with losses of over £66m. A perfect example: no matter how attractive the opportunity, if you’re not proud of the business’ ethos and have full trust in the efficiency of its management team, it’s probably best to spend your cash elsewhere.
High Street Retailers – Maplin & Poundworld to name but a few
As with fundraising and investing, all trends in 2018 have pointed towards an increasingly digitalised world. The retail sector is transforming itself also: more and more of us are now buying through multiple channels and expect immediate results – the ‘Amazon culture’. Shops and chains stores who fail to appreciate these new behaviours are running a very high risk of going bust; the list of retail casualties in 2018 is the perfect example. Neil Wilson, senior market analyst at ETX Capital, said: ‘Ultimately this is a necessary shakeout of some pretty out-dated retailers, which though terrible for those affected by job losses, is likely to mean a leaner, fitter retail market and a more productive use of capital. The question is whether there are more out there that could fall by the wayside.’ The biggest high street names to fall were Toys R Us, Maplin and Poundworld, resulting in a combined total of over 15,000 lost jobs and some very unhappy shareholders. In 2019, investors should ask themselves whether the retail business they want to fund responds to the needs of today’s consumers. If the answer isn’t obvious, think again.
There is undoubtedly massive value in data and, with 21st century technology able to harvest all our digital footprints, the expression ‘data is the new oil’ is becomingly increasingly credible. However, GDPR is a legal regulation that mandates data protection and privacy for all individuals within the European Union. Cambridge Analytica - the firm that worked with Donald Trump’s election team and the winning Brexit campaign - harvested millions of Facebook profiles in one of the tech giant’s biggest ever data breaches and used them to build a powerful software program to predict and influence choices at the ballot box. A whistle blower from within the company told the UK press that ‘we exploited Facebook to harvest millions of people’s profiles. We built models to exploit what we knew about them and target their inner demons. That was the basis the entire company was built on’. Be wary of businesses in emerging spaces that might be operating in a regulatory grey area. Cambridge Analytica churned out huge profits before being caught in breach of the privacy laws; in the words of a spokesman, ‘the siege of media coverage has driven away virtually all of the company’s customers and suppliers’. Needless to say, they immediately filed for insolvency. Investors need to ensure that a business is sustainable and, as with Wonga, if you’re not proud of what they do, you might want to invest your money elsewhere.
Even the most experienced investor – or indeed founder – couldn’t predict what happened to Patisserie Valerie in 2018. Seasoned entrepreneur and journalist Luke Johnson described the cake chain’s near-collapse as a nightmare after he discovered his Finance Director had defrauded the company and run up nearly £10m in secret overdrafts. ‘There were 2,800 jobs at stake, there was 12 years of effort that I and colleagues had put into the business and the board were determined not to allow the business to go into administration’, he told the Sunday Times. The FD was arrested and Johnson and his board put together an expensive rescue package that thankfully saved the chain. Sometimes, even the most diligent investor is caught up in a scam that nobody could have predicted.
2018 has taught us that while the best advice will help you much of the time, there is no advice that will help you all of the time – save this: make sure you have a diverse portfolio. This is particularly important when funding unquoted companies. For all these stories are woe, there are plenty of start-ups getting it right and leaving their investors feeling distinctly more festive.
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This post was created on December 20 2018 by Victoria Maby