KC Underweight Deals: An Invention With No Legs

Key Stats:

Summary

Based on high demand from our customers to provide more coverage that does not only highlight top companies, we have decided to start a series where we highlight companies that are deprioritized in our KingsCrowd due diligence funnel.

As we research companies in our due diligence funnel we consider several aspects including market size, monetization strategy, market position, competition, management experience, prospects for growth, valuation, liquidity opportunities, etc.

Below you will see two companies we have identified that raised red flags along some of the metrics mentioned above. Please let us know how else this series can be helpful.

SST – Technologies LLC: Raising on Wefunder

Overview

SST- Technologies, which is currently raising via Wefunder is building a product called The Anywhere Fridge, which is a solar powered portable fridge. Although the technology is impressive and the need for an alternative energy refrigeration system likely exist there are several notable concerns that prevent us from thinking this is a viable investment for long term growth.

1. Misaligned market positioning: The Anywhere Fridge has yet to identify a compelling core consumer for its offering. The team touts wanting to serve customers in rural areas and in countries that don’t have access to refrigeration. To simplify, the team appears to be serving a generally low-income population. At the same time, the product has been priced at $989, which would make it one of the most expensive portable fridges on the market (most are price between $500 and $700).

   
   The likelihood of this low-income core consumers buying a $1K portable solar fridge to assist in the event of a natural disaster or for general refrigeration in countries without access to electricity seems highly unlikely.

   
   Additionally, the team wants to market this product to more traditional consumers for the purposes of tailgating, camping, etc. The utility of this product over a traditional cooler is hard to discern especially since one full day o f charge only provides one night of cooling power.

   
   One market that could be relevant is RV campers who spend extensive time on the road, and don’t want to deal with coolers for weeks or months on end. However it appears that traditional powered portable refrigerators serve this customer well and the need for a solar powered one that may or may not always be charged seems to have limited utility.

   
   For these reasons we think this is a product that has yet to find its core customer and market positioning. Though there may be a need we don’t think it has been correctly identified. From management’s answer to how big is the market is the answer was, “IT’S ENDLESS!!!.” This is a red flag that the organization has limited grasp on their core consumer.

2. Heavy competition: It appears that the portable fridge market has many viable competitors that offer lower priced products. In the teams own analysis of the market they call out 8 other portable fridge options, all of which offer more storage space.

Though being a solar powered portable fridge is unique, the question is whether or not the value of the solar power warrants a much higher price point and less storage space within the refrigerator. In many ways this reduces the utility of the Anywhere Fridge.

From our research it appears that other major players are in this space as well including Electrolux and Whirlpool. We think competing effectively in this market will prove challenging unless the team finds their niche, which they have not to date.   

3. Management ability to execute: The CEO touts having spent 11 years pursuing the buildout of this business but has little results beyond the basic technology of the product.

   
   A major concern is that it appears a little over a year ago the company launched a traditional crowdfunding round on Indiegogo, which essentially raised money for the business in return for pre-orders. Several individuals have called out on the Wefunder page that they have not received the product. It also appears the team has spent the money raised in that round with only $55 left on hand and will be unable to meet the orders promised during the rewards-based crowdfunding round.

   
   This lack of focus on the customer and ability to execute are major red flags. It also does not appear the team has surrounded themselves with the types of advisors or support they need to help fill out their areas of incapability. For these reasons, we have concern around their ability to continue to execute moving forward.   

Swoon City Music: Netcapital

Swoon City Music, which is currently raising via Netcapital wants to build a record label to support a focused group of indie artist to reach the masses in a world where music streaming has opened the door to smaller artist. We believe there is likely a need for small record labels like Swoon City Music, the challenge is whether or not these types of organizations can drive outsized returns for their investors over the long term. With the current $5M valuation, we do not think this is possible based on the below factors.

1. Monetization strategy: Swoon City Music is focused on creating a record label for a small group of artist. They want to capitalize on the growth of the music streaming business. However, this approach is not necessarily a profitable one. Last year in 2017, the team produced $27K in revenue on 3.5M lifetime streams of music from their 2 artist. The going rate on Spotify streams is around $0.006 cents per stream.

   
   As a recording studio, the team will not even see all of that money as they will only receive a slice of the overall pie. The challenge of being a record label is that you are taking a slice of a slice, and with so many big name record producing labels out there, the only ways to compete are to provide better service or lower prices, both of which limit profitability.  

2. Go-to-market challenge: Becoming a record label is incredibly challenging as it is not only about running a good business, but it is also about identifying great talent that can drive meaningful sales across streaming, concerts, merchandise, etc. for a sustainable amount of time. Few record labels have ever been able to do this at a really high level,. Finding the right talent, right time, and right distributors introduces many variables that increase the risk of this investment.

   
   Our other concern is Swoon City Music is focused on the indie scene. Although that is an altruistic and good business to pursue, it is not necessarily a way to become a large label. We think at the $5M valuation the team will struggle to find a 10X+ return for investors. Record labels are not like tech companies. If an acquisition occurs it would likely not involve a major revenue multiple unless they had identified a major superstar recording artist with broad appeal, which is extremely hard to find in the indie music scene.

    

3. Liquidity opportunities: Though the management team has experience in the industry at other record labels, the challenge is whether or not this can become a scalable large business with an exit. In many ways this appears to be more of a lifestyle business.

   
   The odds of an exit would come if another label wanted to acquire their talent. At a $5M valuation and 2 artist to date that have generated $27K in revenue we have deep concern that they will not be able to grow this into a sizeable business. We think management has the ability to build a lifestyle business that can make money, but we don’t think the upside opportunity is large enough to warrant the risk presented by the opportunity.

Summary

As you can see both of the above organizations are businesses that fell out of our funnel for very different reasons. The first is because the team has not identified the right market positioning and management has not shown an ability to execute.

On the other hand, we do think Swoon City Music can become a viable music record label because it has found a niche market positioning and management has solid experience. The challenge in their case is the opportunity seems too small to bring enough upside to warrant the $5M valuation.

Considering the risk reward curve in startup investing is key. Both of these did not provide enough reward to warrant the risk. Thus these are two deals we would deprioritize as you consider investing.