Howdy,
Lovely morning in Basel today, sun is shining, 20 Celsius outside (I know, right?) and ready to brew a new edition of Sunday CET. Welcome everybody, here’s what I’ve got this week:
• the trajectory of a series B startup
• Europe can do tech startups too
• the hottest app right now in the market
Enjoy,
Dragos
Observations
Geeking out
A couple of weeks ago Henry announced raising $55 million series B - for people who don’t know, Henry is a British neo-bank for parents providing a savings account and an associated debit card. Instead of a boring press release, their CEO briefed directly the media, to which he mentioned some numbers:
2021 revenue £30.5 million, up from £19.7 in 2020
2022 revenue figures expected to be “far less than that”.
2 million customers across the U.K. and the U.S.
losses shot up 20x to £30.5 million, from £1.5 million in 2020.
So I threw those numbers in a spreadsheet and imagined a P&L statement projection for the next couple of years. Here’s what I came up with:
Some assumptions:
paying customers growth at 40% - this can be definitely different and subject to geographies, general ARR growth benchmarks for B2B SAAS that’s doing $10M+ are in the 40-50% range. Keep in mind though that Henry sells a consumer finance product, not SAAS and that these days people are more inclined to sit on cash and cut unnecessary expenses. Henry sells vitamins, not painkillers - granted, saving for your kid can be one of the best way to save, if you’re so inclined so.
revenue per customer at £20. Conventional wisdom says that neo-banks, typically offering fee-free current accounts and making their money from the interchange fees, are averaging $18 per customer per year (£16 at current rates). Henry’s case is different as its model involves a monthly sub fee, on top of potential money moving arbitrage - it charges £3/month for managing a saving account and a debit card, with the first month free, which would make a yearly £36 revenue per customer number. Same goes for the CAC - the benchmarks say that the average customer acquisition cost (CAC) of neobanks is around $35 (£31). I settled above for £30.
Sales and marketing are at 40% from the total expenses. This is a general benchmark for $10M+ B2B SAAS producers and may as well be higher or lower - marketing is more expensive in a consumer business that requires a lot of education, while running a bank requires an extra back office handling, on top of the engineering and customer support + the European market is really different from country to country.
Pixpay acquisition - again, big assumption here. Pixapay last raised 9M series A in 2020, meaning a valuation at 30-35M at that time. The acquisition rationale for Henry is getting hold of Pixpay’s 200k users - 30 quids a pop means 6 million. I am assuming that the Pixpay deal was likely a stock transaction, well mostly - I considered the user acquisition to be the cash part of the whole transaction. Assuming Pixpay was bought for 40 million, that would be 6 in cash and 34 in stock.
All this would reflect on the cashflow evolution, of course, which as you can see it was pretty strained prior to the series B raising.
Having all those out, this is just a basic scenario analysis that can be modelled in all sorts of way. In the above scenario, in two years Henry will need to raise more in two years max as it burns some 84 million a year and has in the bank only 30 in year 2.
In line with the current environment, a profitable scenario can be worked out of course, I put one below - I changed the revenue per customer at £33 and considered the CAC payback to be a year. Also increased the % marketing spend to 45%, meaning more effort for the same number of employees (the fixed costs are mostly salaries). You can now see that the company all of a sudden becomes profitable and still can sustain a 40% growth rate from what it produces as the cash flow is going up.
This is just situational and a speculation - a real life context requires a more complex model, with many more variables. But this kind of numbers can be indicative and really decisive when figuring how to tackle the market ahead, in adverse macro or not. Also, the whole exercise is a good reminder not to get impressed by media narratives throwing unicorns and all sorts of numbers for getting your attention.
The raw reality is that raising money when you have PMF is just a bargaining exercise based on a great spreadsheet model, which can be used to produce any number works for selling a narrative.
The best case scenario for a startup in growing mode is to know how to align the building of this model, the doing sound market strategy against an articulate vision and the ability of executing the shit out of it. Guys able to do this are the winners - granted, finding a dude mastering the combo of those three traits is not that often, you’re lucky if you’re decent at 2/3. That is why usually investors bring in seasoned CEOs to run startups already reaching later stages - investors set up the directions and the CEOs need to execute what they’re told.
You can go crazy with the numbers by yourself here.
Tech made in Europe
Story of the week in Europe is Stability’s raising a first investment round - Stability is probably one of the more interesting tech pieces produced by Europe in the past couple of years, at par with US-based DALL-E, just valued at nearly $20 billion.
The tech uses machine learning models in order to generate digital images from natural language descriptions. The end result combines concepts, attributes, and styles from real life, generating output that can be used for and/or replace many current ways of doing things for both consumers and business involved in media generation (i.e. art creation, media writing etc). It is the kind of technology defining a paradigm shift, a before and after moment in how things are done - if you want to grasp more, this is a required reading on the larger context. More intriguing in my mind is the unknown use cases, open to exploration and particularly this exploratory avenue is what makes the work extremely valuable.
The dude doing Stability is a British mathematician who’s worked for hedge funds most of his life and got into it a couple of years ago. Business wise, he went the open source avenue, and launched Stable Diffusion this summer - a public and collaborative-made model that can run on most consumer hardware equipped with a modest GPU (as opposed to the cloud-only that DALL-E is running). And in a couple of months, Stable Diffusion has been downloaded by 200k developers and is used by 1M or so users.
Also notable, the investors backing it are Americans - Coatue, Lightspeed and O'Shaughnessy - alas a bit outside of the scope of the European ones more focused on 15 min grocery delivery, in particular, or on how to build continent tech sovereignty, in general. :-)
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Euro startup intel
Interesting deals
🇫🇷 Namla, doing edge computing SAAS, raised $1.2M pre-seed.
🇪🇸 Viterbit, doing an HR SAAS tool used for recruiting, raised $1.6M seed.
🇸🇪 Mason, building an app crunching productivity analytics, raised $1.7M seed.
🇨🇭 Jua, working on an AI-powered meteo platform, raised $2.5M pre-seed.
🇩🇪 cylib, building a biz on top of a battery recycling process, raised $3.5M seed.
🇬🇧 Noala, developing a speech and language therapy platform, raised $4M seed.
🇧🇪 Tapio, developing a synthetic asset protocol, also raised $4M seed.
🇬🇧 Plandek, developing an analytics platform for engineering metrics, raised $5M.
🇬🇧 Paytrix, developing payment and banking infrastructure for other software companies, raised $5.6M.
🇬🇧 Koyo, financial provider that uses machine learning to offer loans to people with poor credit histories, raised $5.7M series A extension.
🇫🇷 Ellona, developing sensors for gathering environmental intelligence for outdoor and indoor spaces, raised $6.9M.
🇩🇪 Quantum-Systems, unmanned aerial systems or drones, raised $17.5M from Peter Thiel et al, eyeing the Ukrainian war market.
🇬🇧 ChAI, building an AI-driven commodity market intelligence, raised growth money.
source N9
More intel bits
💲 Powder: V3 Invest (€100m), Satgana (€30m)
🏦 Exits: Adevinta, All Iron, FJ Labs ($47.6m)
🏃♂️ On the move: Mike Smeed joined InMotion Ventures, Finn Murphy
🗣️ Startup cheat sheets ($): climate-focused, marketplaces, cybersecurity, web3.
Watercooler talk
Good to know basis
👉 Mistakes when raising capital - some basic rules.
💲 B2B SAAS fundraising ranges - in US that is.
🤫 Never trust VCs part 257352
👻 VC value add - biz devel cold pitching on twitter.
🕳️ Brain drain is real: Euro founders moving to Silicon Valley.
Reality checks
🔥 The hottest app right now is Gas - a mobile app asking teens to compliment each other, done by three ex-Facebook guys, only available in a few US states. Reached 1 million MAUs last Friday on their own (ceo + 2 engineers + community manager) - didn’t raise a VC penny for getting there but likely to sell out soon for a nice prize because nobody does startups for glory.
Meanwhile, the hot social app from Europe leaked to the press that it indeed raised $60M series B back in spring - context covered here.
🙈 Tell me you’re desperate without telling me that Uber got into the advertising business as it will display promotions within its apps, on top of cars and on the back of seats. The announcement is fitting as Snap just said the ad market is drying up and doesn’t expect things to improve going forward.
💭 Need it take 7500 people to run Twitter? Nope. Shareholders and employees should be grateful that Musk made his historically ill-timed offer to buy the business for more than double what Zuckerberg paid for WhatsApp. It's a bailout for the ages - Elon is definitely overpaying for Twitter.
🤖 More AI consumer cases How about a human lover being able to compete with an AI trained for love/companionship with YOU and all of your uniqueness. No fights, no frustrations just profound love and understanding on a SAAS model.
🇬🇧 Britain is host to a new digital pub, Semafor, done by one ex-Bloomberg and an ex-NYTimes senior guy, which raised 25 million, and targets the higher end of the market by covering what everybody else in their segment is covering but in yellow. In the same media vertical, US-based Puck, a newsletter-powered media company that has nearly 20,000 paid subscribers, held talks for raising $15 million at a valuation of at least $75 million.
📈 Market reality check Best performing industries, on the public markets, as of last week:
1. Aluminium +17.9%
2. Oil&gas equipment +11.4%
3. Nuclear +10.6%
4. Department stores +10.4%
4. Oil&gas refining +10.4%
5. Semiconductor +10%
🇬🇧 The Brits are in disarray and Boris J coming back is not part of the solution, but part of the problem. Regular trashy mess is Brand Britain today and Russians can be proud of a job well done as Brexit spiralled nicely into a devastating chaos and put the economy on tubes. It’s telling that it took them 6 years to figure out what hit them, if that, and yet still too damn proud to admit it - alas not having an idea how to get out of it is more pressing than finger pointing blame.
Closing notes
🇬🇧 Amazon launches the Amazon Insurance Store in the UK, a comparison service for buying and reviewing third-party providers' home and contents insurance.
🇪🇺 Energy crisis - EU may shut down Bitcoin mines to ease energy crisis.
💰 Paywalled restaurants - paying for reserving in order to eat at private “clubstaurants”. FOMO mechanic that works great, in NYC that is: it’s like winning the lottery to eat at these places.
🥕 The land of the free - weed is coming to U.S. gas stations.
🏄 The gem that is Portugal An unassuming seaside town in Portugal is in the midst of a major glow-up, as it’s become a luxe getaway for wealthy surfers.
💡 Jobs I’ll never have James Gandolfini got paid $3 million to not do The Office by HBO
⚽ Everybody is a VC today, including Messi.
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Created every Sunday by @drnovac of Nordic 9 with weekly notes and observations from the European startup ecosystem.
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