The Big Blind
Anyone looking to go big who hasn’t been on a crowd equity funding campaign page before might find some of the pre-money cap valuations a little fruity. Mature company value indicators like P/E ratios don’t make much sense at the early stage, which would be anywhere from back of an envelope on the kitchen table, to revenue generating prototype on the high street. The first thing the £100k big blind at a table like Seedrs needs to know is where the game is at, before they settle into their seat, and order the same punchy cocktail as the £50k small blind.
Start-ups come in all shapes and sizes, and each case has a past, present and future that must be judged on merits, but generally speaking platforms like Seedrs are there to help start-up entrepreneurs raise much needed growth capital without giving away all their shares at the beginning. While Dragon’s Den makes for good viewing, and netting a Dragon has it’s own intrinsic value (and dangers), in the real world at seed investment stage, no one expects entrepreneurs who’ve put heart, soul, £50k savings and their house on the line to give away much more than 20% to get to where they’re aiming for, unless they’re a Silicon Valley start-up with a billion dollar Unicorn in their pocket.
So where does the entrepreneur start, once the business has a growth aim that requires outside investment, and crowd equity funding is a suitable option? They can work out how much investment their plan needs, and go forward from there, then decide how much equity to give away, and work backwards from there. Somewhere in the middle, a sum of money gets attached to a % of shares that can be justified by other measures, like past and projected turnover, gross margins, intangibles like brand concept, customer data, business strategy, the team, and other points of difference highlighted in the campaign pitch deck, a pdf power point style presentation that must meet the approval of the crowd equity funding platform experts from the outset, long before the campaign goes live.
The Pitch Deck
The pitch deck will help determine where the start-up is in it’s early development cycle, and with one scaleable branch prototype trading, and another in the pipeline, Ebru Evrim has good traction and proven revenue streams that put the brand firmly in the revenue column valuation stage, which would, with supporting metrics and measures, cover valuations up to £2m, broadly speaking.
Those building blocks are summarised in the Ebru Evrim pitch deck presentation, which can be requested off the Seedrs campaign page menu under documents, once the campaign has gone live. That’s the full picture in a user friendly format that supports a £1.8m cap valuation, when taken in the context of the extended investor offer on the campaign page, which is 10% of the brand for £200k minimum target to fit-out Harrogate branch, up to a stretch target of £550k for 27.5% to take the brand to a three branch membership triangle of small-town Skipton, big-town Harrogate, small-city Leeds, in one raise.
One £550k visit to the Seedrs platform is the preferred option, not so much because preparing for and working on a raise is tough and time-consuming, and so better all done at once, but more to make sure the brand is ready to move on a Leeds premises in mid-2022, after Harrogate is open, when the best options should be available, to open mid-2023, when Leeds city footfall is recovering in a new environment with new brands able to afford rent at new, reduced levels.
The Ebru Evrim campaign page and the pitch deck presentation are not the only measures available to investors. Those who want to dig deeper can engage with Ebru Evrim Ltd company directors, to acquire accounts for 2019 / 2020 and 2020 / 2021 prepared by Matthew Hindle at established accountants Wheawill and Sudworth, and detailed three year cashflow sheets, profit and loss projections and balance sheet prepared by brand development agency Polymath Creations’ Jonathan Roberts (also Ebru Evrim Director). They can also access Tom Kenyon Slaney, Founder and Chairman of the largest speaker agency in Europe and Asia the London Speaker Bureau, and an experienced Angel investor, for his extended take on the brand, and its prospects.
Taking a successful Seedrs campaign that overshoots the £200k minimum target by 50% to raise £300k for 15% equity that covers Harrogate branch, bespoke software, and the option of new Yoga studio in Skipton, prepared accounts from Jan 2019 to Jan 2021 and management accounts tracking performance from Jan 2021 to end Dec 2021 were the baseline for three year cashflow sheet and P&L projections with income stream assumptions including membership data from covid-affected Skipton, while excluding Harrogate communal area cafe figures for which there is no previous data to work off. Those figures and the membership numbers behind the extrapolations are part of the pitch deck.
Spend Per Head
The marketing forecast table suggests membership spend per head of under £1,000, if an allowance is made for revenue from ‘users’ who are customers, but not members. But looking at future spend per head growth potential off an existing covid-affected spending pattern baseline, those projections look quite conservative.
If we take an average spend per head across all membership categories of £500 a year (Gold £59.99 p/m, Silver £39.99) that would be the direct debit revenue base for the other Ebru Evrim cross-selling income streams. Those would include an average £300 per member for activewear and equipment priced between £12.99 for toe socks to £74.99 for the latest leggings, and another £500 for workshops, retreats and wellness holidays that range in price from £35 to £2,000, which all together should even out to a £1,300 spend per member head off currently proven income streams with two branches up and running. As yet unproven figures from plans to use the extra ground floor space in Harrogate and future branches to add a healthy living cafe to the communal area and income from teacher training would be likely to lift that to above £1,500.
Detailed notes that accompany the cashflow sheets cover membership number projections built off the Skipton branch in more detail, but anticipated membership spend per head averages are a quick way to cross-reference and double check the veracity of those forecasts.
It’s also a good metric to support the £1.8m pre-money cap valuation. With projected spend per head growth potential from where the brand is now taken into account, a £1.8m cap valuation that might look at first glance on the high side, especially to investors not accustomed to seed investment stage valuations, is on closer inspection a destination driven valuation from a stable departure point that reflects proven value in the combination of Yoga and Pilates studios under one roof, a membership-based business model suitable for branch expansion, and existing and planned mixed income streams that contribute to a high spend per member. Growing on-line sales to the wider world, particularly activewear through an Ebru Evrim store, is the internet icing on the high street studio cake.
So while a £200k minimum campaign raise for 10% of the brand off a £1.8m cap valuation is to a certain extent a means towards an end, and that end is a new branch that once up and running represents significant barriers to entry that help remove a large % of start-up failure risk, a £100k big blind pour encourager les autres unlocks another level of possibility – momentum towards a £550k stretch raise that Polymath Creations project management can turn into the Skipton Harrogate Leeds branch triangle that generates revenue for an organic one a year branch expansion plan, or alternatively a sound base for a decent exit.
What might that Skipton Harrogate Leeds golden triangle look like, based on gross margin average income streams, including membership, at 50%, a combined membership of 1,500, and an average spend per head of £1,500? A £2.25m turnover at a gross margin of 50% is EBITDA of £1.125m, after 20% VAT and 25% corporation tax and £30k annual loan / lease interest payment, not far off £600k. That is £300k for another branch and a £300k shareholders dividend, but £600k divided amongst 250,000 shares (which includes 35,000 convertible loan shares converted and 55,000 stretch raise shares for £550k that equity funds the golden triangle) is £2.40 earnings per share, and a P/E ratio of 4.2, at the current £10 share price. That platform would allow for a raise of £1.5m for 50,000 shares at £30 per share, off a £9m cap valuation at a 12.5 P/E ratio, to fund York and Manchester triangles, if equity driven growth was preferred to organic growth, into prime properties with Harrogate premises specifications, with projected turnover of £6.75m, and net profit of £1.8m.
Is that all? Not quite, especially if you’re an investor who pays higher rate income tax, and the start-up is qualified to sell Enterprise Investment Scheme (EIS) shares, like Ebru Evrim Ltd. Then, a £100k big blind investment into EIS shares would represent £37k at risk capital, and on the upside if things go to plan, a capital gains tax free exit after three years, and inheritance tax free transfer option after two years. A Polymath Post blog goes into more detail here.
And that’s that, apart from runways. Venture capitalists like to talk about runways, and that’s the capital and time required to get trading, and after covid they might talk about the extra power needed to climb up to the safe altitudes of break even, from take-off. The four month Skipton branch development and brand prototype creation runway with a Nov 2019 post-opening take-off climb saw membership grow to 130 in three months, with a lockdown affected aftermath described in more detail here, for anyone that’s interested.
Where would the brand be now, if there hadn’t been post covid lockdowns, which, like quantitative easing post sub-prime, were questionable policy responses to not unexpected cyclical events that had never been seen, or tried before?
That’s impossible to say. Artful low level piloting across a new landscape that household names like Laura Ashley couldn’t navigate, offered up a gilt edged opportunity to get in amongst big brands in a prime high street location at reduced rent. A six month Harrogate branch development plan, from signing the lease, through fit-out, to May 2022 opening, with a shopfront showroom and a Skipton branch growing steadily in the background as things get back to normal, and trading on or near break even most months, means little, if any, Seedrs investment will be burnt up on the Harrogate runway.
And with the 2020’s force majeure out of the way early doors, small adjustments to living standards from higher taxes and energy bills that won’t directly affect the Ebru Evrim customer and member demographic shouldn’t much affect flight paths for the rest of the decade.
But leaving preferred venture capital analogies and returning to this Polymath Post poker one, what the Polymath Creations croupier won’t have is the big blind, or the little blind, or anyone else at the Ebru Evrim cap table, including the Seedrs nominee, investing blind. Everyone gets dealt the same cards – from campaign page, to pitch deck, to prepared accounts and projected figures – as and when they request them. With a little delay sometimes, if it’s all hands on deck that week.
Bricks And Mortar
For those with extra curiosity, there is a Skipton branch class to attend, a new activewear range for sale in the Harrogate shopfront showroom to try, and, while the fit-out is ongoing, hard hat guided tours for those who like building sites and a bit of builder banter. But the virtual tour starts below.