KC Underweight Deals: A Not So Refreshing Investment

Summary

This week we are delving into Divinia Water as we try and highlight the various aspects of the business (e.g., market position, competition, valuation) that give us pause as we consider investment.

 

Below you will see our detailed explanation as to the red flags that have hindered this deal from being one we would suggest.

 

Divinia Water: Raising on StartEngine

Overview

Divinia Water is a new age eco and health conscious packaged water bottle brand raising via StartEngine. The founders and the mission of the organization all seem aligned and we do think that for the right investor this could be a company worth putting a small investment into.

 

Their desire to research the health benefits of their natural water solution is reputable and they have worked with notable research institutions to determine the value of their product for people and nature.

 

However, although we love their mission and focus on creating a better water product, we have meaningful concern around the long term prospects of the company.

 

Between a high valuation, many large competitors and a lack of focus on how to truly differentiate and sell on the store shelves leave us concerned as to the type of return this investment could offer investors.

 

  1. High valuation: The Divinia Water team is raising at a $16.1M valuation. This is despite only showing $183K in 2017 revenue after $179K in 2017 revenues according to its Edgar Filing with the SEC. In fairness, in recent months they have shown growth and could hit upwards of $400-$500K in revenue this year, however this will soon max out the capacity of the current location.There are occasions where high revenue multiples can be justified either by the amount of assets on hand or extremely high revenue growth rate in a large untapped market. In this case, the team has not showed a rapid revenue growth pace as you can tell from the $4K bump in YoY sales between 16 and 17. Additionally, if you apply a revenue multiple at the $16M valuation, you would get an 87X multiple, which is well beyond reasonable for a CPG water company.

    Additionally the amount of assets on hand at year end 2017 was $848K so it is not as though the $16M valuation is well supported by the plant, property and equipment owned by the company either. Without enough PP&E or revenue, we can’t find sound reasoning for the valuation. Getting a 5 or 10X return for investors is going to be challenging.

  2. Differentiation, but not enough: The team is focused on providing a water product that utilizes energy efficient production (hydroelectric power), and offers potential health benefits from drinking its Deuterium Depleted Water. Although these are fantastic things and the company truly seems eco and health conscious, the reality is they are entering a market where winners come from strong brand / packaging, fortunate distribution (e.g., LIFEWTR, Starbucks), or positioning along flavor.Divinia, is focused on doing good things but will struggle to win with such a complex message around the product. That is not something that will pop off the shelf and we do not thing they have shown enough ability to create a lifestyle brand like Fiji or SmartWater.
  3. Lack of distribution: Without a clear brand message, the team has not secured any distribution channels with major players that can play a significant role in shaping the brand. As we mentioned above finding a distribution channel such as Starbucks where they carry LIFEWTR can be transformational for an organization. Without these channels opened up, we have concern that the team will not be able to win at mass scale.

Conclusion

Overall, Divinia Water is a mission driven business that cares deeply about what it is doing. If you care about the cause of bringing eco-friendly packaged water to market and promoting a new set of standards for water through research we would say it is okay to invest as long as you recognize that the upside opportunity appears limited.

 

It’s too challenging a market and one built on smoke and mirrors (e.g., great packaging and marketing schemes) rather than true water quality differentiators, and as we mentioned the valuation is tough to swallow based on the lack of assets or revenue to back it up.

 

For these reasons we recommend deprioritizing this asset as one to invest in.

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About: Chris lustrino

A Boston College Eagle for life, on a mission to democratize startup investing for all people at KingsCrowd, with a passion for Fintech, investing, social impact, doing well and doing good, and an avid runner, cyclist and writer.

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