Mous

Unlike many early-stage companies that raise funds on crowdfunding platforms, Mous has both a long trading history and has raised funds from private investors on several occasions in the past.  It has also raised funds from institutional investors, a very important factor to consider in the case of this investment opportunity, something we elaborate on below. 

Trading History / Demand for Products

The company had Sales of £24m for the full year to the end of March 2023 and has shipped more than 4 million accessories (such as cases, backpacks and wireless chargers) to 1.8 million customers.

These are impressive numbers and there would appear to be plenty of room for growth, as the company is operating in a global market estimated to be worth £180bn ($228bn).

Profitability

While full-year Revenue figures of £24m are impressive, an EBITDA loss of £550,000 is concerning, given how long the company has been in business. A Gross Margin of 70% is all very well, but it’s clear that it’s Operating Costs are too high and / or the company is required to spend so much on content creation and promotion to achieve these sales as to make the business model questionable.

Side Note: EBITDA can be a very misleading indicator of the true profitability of a business.  Depreciation and Amortisation may be ‘non-cash’ items, but they are still a cost to the business!!  If you’re going to give EBITDA, your next sentence should state what Net Profit is, if you want to be fully transparent.    

Valuation

Mous has a pre-money valuation of £65m. This compares to a pre-money valuation of £52m that the company had when it did a fundraising exercise back in 2019. A smart investor would have to question if the company has done enough in the intervening period to justify such an uplift in valuation, particularly as the macro environment has definitely deteriorated over the last 4 years.

But, worryingly, the current valuation of £65m also needs to be compared against a valuation of £82m at which the company raised funds from private investors in 2022.  For a company that would expect to be considered as ‘high growth’, that is a serious erosion of shareholder value over an 18-month period. 

Previous Fundraising Exercises

The mere fact that we can compare the valuation of the company over numerous fundraising exercises is a major cause for concern, and for more than one reason.  As any entrepreneur will tell you, raising funds is a massive ‘time-suck’, between preparing the investment documents, engaging with investors and completing the legal agreements.  That is time that would be far better spent by the Founders on growing the business.     

It is also extremely expensive – legal fees and platform commissions will typically swallow between 7% and 9% of the total amount raised.  That is dead money – none of it goes into the growth of the company.  All of these fundraising exercises also raise concerns about the ability of management to forecast their cash flows.       

Caveat Investor

Regardless of whether you think a valuation of £65m is appropriate for a business like this, the casual investor could be forgiven for thinking that the shares they are buying have equal rights to previous investors in the company. NOT so!!

Have a read of the following, which is tucked away on the last page of the Mous slide deck for this fundraising exercise:

“As is customary with an institutional investment round (Piper PE, August 2019), Mous and its shareholders entered into a shareholders’ agreement and adopted articles of association which set out, amongst other matters, certain investor protection rights afforded to Piper as the lead institutional investor.

As a result, it is noted that all subscribers will be required to enter into a deed of adherence to accept the terms of the shareholders’ agreement as a condition of their investment.

For your information, we have outlined below a summary of the key investor terms.

• Piper’s investment in the company consists of Series A Shares. The Series A Shares and the Ordinary Shares rank equally in all respects, save that the Series A Shares have certain preferential rights, including a preferential right of return in the event of an exit or capital event. The terms of the preferential return on capital are set out in the articles of association and consist of an 2 x alternating preference structure, meaning that in the event of an exit or capital event, Piper’s shares shall be entitled to receive up to 2 x initial subscription amount and, prior to such return, the proceeds available for the ordinary shareholders shall be capped at the pro rata value of £52m, which is a fixed amount comprising Mous’ initial pre-money valuation in August 2019. All shareholders will participate pro rata to their shareholding in the event that the liquidation preference hurdles are exceeded.”

In layman’s terms, what this means is that, at a minimum, Piper will receive 100% of their investment back if the company is sold for any amount greater than the amount of their investment. And, Piper can force a sale!!

In other words, if Piper has invested (say) £1m, as long as the company is sold for a minimum of £1m then Piper will receive all of its investment back, and it still participates on a pro rata basis with anything in excess of this.

One must assume that Mous was in a desperate need for cash back in 2019 to agree to these terms. While it’s great to have an institutional investor on the Cap Table, the excessively penal terms in this case would argue against their participation. It’s not like Piper are adding any strategic value, as this sentence in the slide deck would suggest:

In any event it is the Founder’s intention, with the express approval of Piper, to seek a straight replacement investor for their stake in the business during 2024 ….

When appraising an investment opportunity in a campaign on an equity crowdfunding platform, the Discussion section of the campaign is well worth studying, for the following reasons:

1. Other investors ask questions you may not have thought of asking.
2. You can learn a lot about a promoter by the way in which the questions are answered.
3. The length of time it takes to answer a question can be indicative of a reluctance to discuss a particular topic.

Having followed the Discussion on the campaign I wasn’t impressed with a number of the answers, nor the time it took to respond to the questions.  In response to a question about whether the company was just going to continue raising funds indefinitely, one of the reasons given was:

“Mous becomes a more resilient business with more cash on the balance sheet.”

While that can be said of any business, it’s only true if the use to which the new funds are put outweighs the dilution effect of issuing more shares.  To date, we haven’t seen enough evidence of this at Mous.