Tuesday, 7 April 2015

Nexus Notes, Free is Better and Money Place: BBY's Disruptive Lunch series continues.

At Sydney University, the first course in the Faculty of Law that I was  required to complete was entitled "Legal Institutions". It was a bit of misnomer because it was a combination of Constitutional Law, legal philosophy, and Australian court structures. It was an absolute pig of a course.  To get through it, you needed a map, a compass, and a sherpa guide. The few who had a lawyer in the family might have been lucky enough to get some help that shed light onto its sprawling curriculum. If you didn't, it took every ounce of student diligence and cunning you could muster to get through to year two.

At last Wednesday's BBY Disruptive Lunch, one company gave hope to students everywhere.

Nexus Notes allows the confused, the time poor, or (yes) the plain lazy the chance to acquire the course notes of top quartile students for  a mere $US35. For that, you get anything from a complete years worth of notes to a pre-exam outline. If nothing else you get the chance to see what's required to get through what at times might seem impossible. You can browse the available library and get a free 10% sample of each of the available offerings before you buy.

Some of the notes I've looked at are amazing. If I knew a 2015 freshman, I'd give them a set of notes from a successful student to show them just what it takes to get those elusive "A's". For example, if someone had given me "masonzhang1221's" Administrative Law notes I'm pretty sure that the second year of law would not have been such a grind.

The 1000 page case book, the lethargically paced textbook; the memories are still with me. I passed this course, so I know what I'm talking about when looking at these notes.

So what does the author get? 50% of all the fees that they generate. It's that simple. Maybe they get the altruistic sense of helping others? I doubt that's why students and graduates put their notes up for sale. No, it's 99% about the money. Their top author is up about $3000 so far.

Co-Founder's Hugh Minson (CEO) and Richard Hordern-Gibbings (COO) presented as upbeat, energetic and relentlessly logical. Their Advisory Board has plenty of familiar names and reeks with success.

I got a quick five minutes with the guys before the presentations started, and they immediately batted back my questions on plagiarism, etc. They rightly pointed out that students can't plagiarise notes because universities don't mark notes. In fact, universities are supporting Nexus Notes. The team has been smart enough to hire "promoters' or "brand managers" at a number of universities to get the word out.

Nexus Notes are already getting some love internationally. They have a foothold in New Zealand and are starting to roll-out their offerings at The University of Texas (Austin).  It makes sense, as the university experience is almost universal.

It would be easy to get too far ahead of yourself on this one because the model does have some problems, the most glaring of which is scalability. At present, the approval process is 90%+ manual. You sign up and submit your course notes for approval. You can choose to submit your academic record with your notes. They say:

"The file you attach is hidden from the public but your notes will become verified - represented by a visible blue shield. A digital version, scanned copy, or screenshot of your academic transcript will do."

Then the team goes through the approval process manually. I should have asked more about this because I assume Nexus isn't checking the notes for the content, but rather is looking at the format.  It sounds somewhat laborious and will need work.  Imagine if this takes off at the University Texas with its 17 colleges and schools, and more than 50,000 students? The guys hinted at some automation based not only on academic transcripts but also social media type algorithms, but that is still to come. I'm positive this could be a great add-on to a social media site. Remember Facebook started as an attempt to link students at Harvard. It's not hard but will cost money and time.

As I've been a portfolio manager, I'm used to ranking companies. Tech start-ups are no different. It's a numbers game as much as anything else. The more you see, the more you can pick the quality ideas or people from the fakers. Education is a key theme in the "disruptive" world at the moment. Nexus Notes has a solid chance to be a winner in a growing segment. Investors could do worse than spend some time tracking this company's progress.

If $35 seemed like a bargain for quality course notes, then Free is Better has even greater resonance. Take some marketing and advertising energy and stick it onto a basic product like a bottle of water. Give it away for nothing. "Thirsty? Want a free bottle of water? Did you know about the new Mini Cooper S?"

Free is Better is the brainchild of Melbourne based marketing tyro Alex Chen. The idea is that you connect your product to consumers by linking your marketing campaign with free water. They don't just hire a team of kids and drop them off anywhere to hand out the bottles; instead they target districts, and precincts they determine have a high concentration of demographically compatible consumers.

Why water? Chen rightly suggests that the bottled water market is only differentiated by fashion. It could be the colour or shape of the bottle, or it might be the name itself. The Free is Better bottle goes for that clean "google-like" look. The austerity neutralises any social cache down to the statement itself. That makes it firstly inoffensive and secondly a statement that you're smarter than someone paying $2 for something that you can get for free at a public water fountain. There's smugness factor at work here. The price you pay is that on the other side of the label you have some advertising.

The company has gone through a two year gestation period. Now they aim at running limited edition campaigns of one month duration. Each effort sees 20,000 bottle of water handed out and so far they've had mini cars and Levis jeans amongst their product placements. The cost is about $1 per bottle delivered to distribution points, and they essentially charge another dollar for the distribution and marketing know-how to their clients.

Free is Better is only in Melbourne currently. The key is the product placement, and we didn't get a good look at the modelling process behind identifying geographies. I hope it's more scientific then just saying this space looks hot right now. In fact, that's a bit disingenuous because the team hinted at social media analysis as being core to this process. Obviously to roll this out elsewhere and make it worthwhile to investors you'll need to make sure that the underlying processes are robust, quantifiable and somewhat proprietary. If the science isn't right, I can't see the investment case for the product. The wall around the business just won't be high enough.

The team has plans to roll-out vending machines that can be unlocked from a smartphone app. While I'm not sure that this adds to or subtracts from the "fashion factor", it at least shows that Chen and the crew are looking for more data on who is getting the bottles. That is key for them selling the idea to clients.

As an investor, I'm somewhat unsure whether this has legs. The business model seems niche and undefendable without some "secret sauce". At this stage, I think I'd be more an observer than equity buyer. I like the enrgy and thought involved, I just need to see the engine in action.

The last business to cover from the lunch is another peer to peer lender: Money Place. I think Stuart Stoyan (CEO) got unnerved by the presence in the room of some of his competitors. That gave me the feeling he shut up shop in regard to presenting what differentiated his business model from others. Instead, we got the usual arguments as to why peer to peer lending was going to be big in Australia. We didn't get why Money Place was likely to be one of the winners.

I'm fast becoming a peer to peer sceptic. Readers of the blog know that I liked the offering of Society One when it was first presented because of the well thought out smartphone portfolio monitoring tool for lenders. That to me differentiated the business. Others agreed because they've been the market darling, raising capital from the big players in town. Having said that my sources indicate that even with the support that they've garnered the growth of the loan book has been disappointing. That also suggests to me that the marketing campaign needed for the industry to take off may cost more and require a greater gestation period than originally suggested.

How does Money Place compete? Well, the answer is we don't know from this presentation. Given Society One's loan book is still less than $30m, after the support they've had, then Money Place will need to have something special up its collective sleeves.

Stoyan was asked about peer to peer competing with banks in the long run. If you look around the room and make a statement that Australia hasn't seen a downturn for a long time, and "I doubt anyone here has seen one" you want to stop and look at your audience a little more closely. I know I looked around and saw quite a few people who'd had to put up with double digit mortgage rates, bankruptcies and a finance minister who said we (Australia) were in danger of becoming a banana republic. The super liquid monetary conditions we've had recently are not the norm in economic history, so you better have a better set of answers or thoughts when challenged about the industry's sensitivity to interest rates.

When Society One presented at BBY last year, they suggested that average rates of return to lenders was in double figures. Money Place is now saying it's closer to 8%. What happened? Well, the chase for yield in smaller packages is part of the answer. To me, 8% is closer to investing in a second mortgage, not in a fully unsecured personal loan. The problem, of course, is that second mortgages require more funds and longer duration thinking. But this is unsecured and unlike Society One we got no behind the scenes look at recovery processes.

So as an investor what would I do in peer to peer lending in Australia? I want to say that Society One is going to be the big winner, but remain somewhat concerned at their loan book growth. Money Place and others in the field are being given an opportunity to bridge the gap. If it were me, I'd try and get a one on one with Stoyan to see what he and the team have to offer. On the evidence of this presentation, the jury is out and needs to ask the judge for further directions


Thursday, 26 March 2015

Of entrepreneurs and capital raising . . . free advice from the IBCyclist

I don't care what type of entrepreneur you are, whether it's tech, mining, pharmaceutical, mechanical or financial I just need you to answer some very straight forward questions in our first meeting.

1. Opportunity: What market are you attempting to satisfy? 

It's an easy question, but you'd be surprised how many fledgling companies don't state it right up front. I've seen some great presentations, and they usually start with a clear value proposition:

Did you know that the average amount spent on a taxi fare in New York is X? Total income for the industry, last year was X.

Did you know that the average automobile has X meters of copper wire in it? And if every third Chinese or Indian household owned a car we'd require X amount of new copper production . . .

Obesity is the single biggest killer of adults under the age of retirement. Spending on related solutions is likely to grow at X% over the coming decade?

2. Concept: What are you offering that satisfies the opportunity you identified? 

Show me your solution. Don't use words when pictures, maps and numbers will best highlight things.

Our app is a unique solution that enables the user to connect with the nearest taxi directly and offers passengers a rebate for frequent use.

The "Big Deposit" copper mine can be operating within 18 months and produce ore at a rate of . . . 

"Nofatsilose" is currently in stage 2 of clinical trials and we hope to confirm that it reduces cholesterol by X% in the first year of use.

3. Demonstrate: Walk me through the process.

How do we get the solution working. Give me a timeline and state various hurdles, be they regulatory, physical construction or software testing.

Here's a mock-up version of our app. It's taken 12 months to get to the beta phase and $100k. As you can see the user's location is automatically identified, and all they need to do is select a destination either from their address book or by inputting it in the address bar like this . . . 

This map shows the mine location. You'll notice the proximity to transport, both road and rail. The pit depth for stage one needs to be . . . 

If we pass stage 2 the drug goes to final FDA approval which should take 12 - 18 months. In that time, we'll need to conduct some additional studies . . .

4. Funding: How much do you already have? How much do you need? How much cash are you burning per month?

Entrepreneurs need to demonstrate they have a grasp on their business costs. Don't ask me for a million dollars today if you need to come back in 3 months for more because you didn't understand the risks of cost blow-out, etc.

The app needs 300k users to breakeven. We estimate total operational costs (developers, testing, etc.) in the first 18 months to be $850k. In addition using recent data from X, Y or Z, we're estimating those first 300k users to cost us $4.50 each. That will be attributable to marketing and database maintenance. All in we're raising $1.5m, allowing us a contingency . . . 

The basic mine infrastructure is likely to cost $40m, but that excludes a rail track extension for the last 9km. That costs $3m, but the weather means we need to double that contingency if the rains fall early. We have $10m in cash, which will last us nine months . . . 

We have $30m in cash on hand. The final trials will cost $38m, but if the regulator needs extra evidence we don't want to be coming back to the market in the middle of the process. We think it makes sense to raise an additional . . . 

5. What's in it for the investor?

What is the current capital structure (who owns the business)? How long before you breakeven? What is the dilution effect of the capital raising you're conducting? If you have to raise money again do I get first right of refusal on new shares?

Post breakeven we estimate that each new users will generate around $2.50 of income. Of that roughly 30% will be needed for operational costs and 20% for ongoing marketing. In terms of valuation comparables . . . 

Total cost per ton of Ore will be XXX. That means we'll be the lowest cost producer in the market. Stage 1 is likely to be exhausted in 3 years at which time we will have shipped XXX . . . .

Once FDA approval is granted, we estimate marketing costs (via conferences, literature, etc.) to be approximately $26m when implying the same model Fizer used for it's inferior product that launched in 2008. That means that once we're on the approved list we'd expected take-up in the EU and the US of around 50m patients at a cost of . . . 


Obviously the more facts and figures you have, the better it is and the better your credibility. Some entrepreneurs have an advantage in that they come from a very numeric background. If you're more about style, then you need to have a good CFO that you can toss to in case deep divers (like myself) start throwing out detailed questions. It's not the end of the world if you can't answer the questions, but you do need to show that you understand what's being asked.

Finally some words on your presentation.

If you're a hedge fund and I'm an institutional investor I don't want to come to your office and see six traders dressed in shorts playing air hockey because nothing is happening in the market today.

If you're a miner and you've just entered the car park in a $300k Ferrari I'm going to wonder why you need my money.

If you're tech looking for $1.5m it's probably best if you're not wearing a $75k Patek Philippe and $1500 John Lobbs, Christian Louboutin's or Jimmy Choo's. I'm going to ask why you're not funding this yourself.

If you're a pharmaceutical . . . . don't get me started.