Thursday, 25 June 2015

A close shave (but a swift one)






The subscription model is all the rage - Lovefilm and Graze being two successful proponents.

Crowdcube's newest pitch is also one - a shaving club called for some reason Cornerstone. Shaveclub tried this only a few months ago but failed to raise only £65k on Crowdcube. They both deal with the same German supplier, who supplies Harry's in the US.

Traction and subscriber numbers are the key to success in this model - it will take the company 3 years to get the required subscription levels to make any profit - so lets look and see if that is reasonable on a current valuation of £3.5m.

The company has a small user base - under 5000 and needs to get to 60,000 to make things work. It is investing a total of £800k to reach this stage. Compare that to say Graze, which started the company with a £6m loan. The sort of technology required to reach the Graze status and attract £50m from Carlyle, is considerably more than Cornerstone seem to realise. They will need to raise more money - they are just not telling punters that now.

Another query we would have in comparison to say both Graze and Lovefilm, is the lack of variety in a shaving service. You wouldnt expect to see the subscription model used for say loo rolls - would you?  Both films and food have a continual offer turnover with new, exciting things to retain members. Shaving can be done in a variety of ways but it is not limitless.

Look at their team. Will Hobhouse has been there and done most things consumer. He has run companies like Tie Rack and Whittards - Whittard went into adminstration only to be bought back in a pre packed deal - leaving creditors scratching their heads. Its a record of very rapid growth that is often built on sand. Caveat emptor here.

Cornerstone may well be successful - but be sure that they will have to raise more cash to get there which will dilute this round's investors and that its main backer is a sharp operator who generally comes out on top. Check the small print. It all depends if you think this team has what it takes and if the act of shaving is likely to create customer retention.

One final point. Valuations are always difficult but it would be good if people on ECF platforms would understand that this explanation is just complete nonsense. Many times when asked about dilution and future raises, pitches state that people will not be diluted because they have a right to preemption and the new value of the company at the second, third or fourth raise, will be greater thereby creating more wealth for the original shareholders' smaller percentage. The so called 'higher value' is pure fantasy. A company is worth what someone will pay for it not what its founders say it is worth for the purpose of raising finance. As to preemption, why would you want to buy more shares in a company that has already gone off track? For preemption read  -'invest or stand to lose your original stake'.

Postscript - fully funded in under 48 hours. Most investors putting in around £5k to £10k so not the average Crowdcube punter. Well Heal'd contacts no doubt. Now of course we will see if the over funding attracts the crowd  - it certainly helps to explain the need for only '£500,000' in the pitch. This seems to be commonplace now - ask for far less than you need and then overfund.

Postscipt - We thought we'd test this product. So you can sign up for just £4 for a razor and several sets of blades - no committment. This works out as avery cheap way to buy good razors - normal price would be £14 for this option. It arrived promptly but the handle is very light - not what we were expecting and we cancelled the service. Now how many of the 5000 'members' they claim to have will take be retained? Buying members by offering almost free product is surely a very haphazrd way to build a solid customer base. We also really didnt like the promotional materials for other businesses we have to wade through - maybe they are paying for the postage.   

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