I must admit to being gobsmacked at the chutzpah of ClearBooks. I'm not the only one:
@dahowlett Ballsy move. Good to them.
— Asam Shah (@asamshah) September 26, 2013
ClearBooks is a UK based online accounting vendor I have pilloried in the past for being clueless about security and about basic database backup. Be that as it may, the company has soldiered on to the point where it is ready to raise a funding round.
According to a publicly available document (PDF), it plans to raise £839,913 via a 'cloudfunding' effort that purports to value the company at a whopping £18 million or 38x its historic revenue.
The number of shares on offer is 93,950 and subscribers can invest as little as £8.94, the strike price for each share. Existing shareholders have committed to investing £86,000. As of the time of writing, the total raised so far since 23rd September is £128,324 which means that £42,324 of external funding has been committed so far. Not shabby in a matter of three days.
The offer is slated to close 31st October although that date might move, depending on uptake. Assuming the offer is fully subscribed then the new shares will represent 4.5% of the whole issued share capital.
Let's be clear, the notion of cloudfunding is not new. Kickstarter has developed a popular model that provides a market for startups to obtain funding. Some are very successful. Pebble raised more than $10 million when its stated objective was $100,000. The vast majority struggle. The point is that for very minimal risk and at zero brokerage fees, anyone can invest in things they like. The difference is that in the Kickstarter model, you're not investing in the strict sense of the word but making a promise to 'invest' in exchange for tangible goodds to be delivered at some point in the future.
ClearBooks is taking this one step further by using UK regulations as a way of reaching investors.
Creative pricing, creative accounting
As a former equity analyst, CEO Tim Fouracre is in a good position to develop an offer document. Whether he is in as good a position to set a price for the shares remains to be seen. According to the audited accounts for the three months to 31st July 2013, 16,000 shares were issued for £63,800. That is a share price of £3.9875 each. How that suddenly becomes £8.94/share when there is no recorded change in revenue escapes me. You only see such price pops when demand outstrips supply in public offerings that are mediated by a stock exchange.
I give Fouracre full credit for getting ClearBooks up to the point where revenue is at a monthly run rate of £60,000 from 5,000 subscribers AND funding it almost entirely from director/shareholder loans. That takes a great deal of faith.
But I also worry that according to the audited accounts and as noted in the offer document, the shareholders' loans have been all but extinguished and are in effect being partially substituted in part by this fund raising exercise. That is because in the three months to 31st July, 2013, all but £35,000 of existing shareholder loans was repaid. At the same time, there was a nifty piece of accounting that reduced the share premium account from £299,990 to £50,000 miraculously turning an accumulated loss of £262,676 into a profit of £61,150. I haven't seen creative accounting of this kind for years. I would have been far happier seeing the share premium account stay as it was. That would have been a far better reflection of what's been going on in the business and provided prospective investors a clearer line of sight into share value. As it is, part of the premium raised in the previous three months has effectively been written off already. How does that work?
Is this the right way to fund?
I have my reservations about fundraising in this way. While it is unquestionably a brave move, successful investing in any company requires the mind of a sophisticated person. Fouracre tries hard to make clear the many risks that an investor will have to assess but that doesn't substitute for professional advice.
I also get why ClearBooks would prefer to raise what is in fact a modest amount in this day and age and so limit the extent to which current shareholders are diluted. I also get the need to keep funding costs to an absolute minimum. Lawyers fees alone can rack up very quickly. But if the value proposition was so good, then why not raise via the usual VC channels?
I suspect much has to do with the valuation the company is choosing to put on itself. I take nothing away from ClearBooks wish to capitalize on a hot market. But they are stretching credulity if they expect the wider world to believe the company has a pre-money valuation of £18 million. Why do I say this? Because I have insights into the recent past valuations of similar stocks.
We have no way to test value because there is no independent assessment of the declared value, neither is there a competitive market for the shares. If £18 million is correct then I would expect to see a much larger round.
ClearBooks will argue that the direct comparison with Xero is valid. That's plain wrong on many levels. For starters, Xero has achieved its current position by aggressively investing in marketing and sales. This seems absent from ClearBooks predictions.
Recent history is teaching us that a large war chest is essential for upstarts to take on the big boys with any real prospect of success. ClearBooks has a stated aim to be the one stop shop for professional accountants but as Adrian Pearson notes:
— Adrian Pearson (@adrianpear5on) September 26, 2013
It also has very bold plans for functional expansion that I believe will prove far harder to execute against than ClearBooks is indicating. Developing a functional payroll for example is a mammoth task that should never be taken on unless you can make it a differentiator. I've never seen that happen yet other than in large cloud implementations that are directly connected to HR. Speaking of HR, again, this is a huge development job. Given the size of funding and even expanding the team to a projected 42 is not going to be enough to get them where they're aiming.
I applaud ClearBooks for this bold move. It's ballsy in approach and stated aims. I worry that the accounts have been massaged in the recent past but then I am pleased to see detail around how they are performing and progress made to date. I am also pleased to see they have provided interesting insights into customer groupings. This level of transparency is welcome.
But...and it is a big one. In my view, the valuation is way outside the ballpark for a company of this size. But if they end up fully subscribed then it will cause some serious head scratching elsewhere.
And despite my reservations, I wish them good fortune if only because the transparency they have adopted is welcome in a market where claim and counter claim are too easily glossed.