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By Cynical Bear | Saturday 25 November 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I should start this piece by making clear that I am a fan of Paul Scott. I think his coverage of the small-cap space is excellent, data-driven and based on years of experience. But his investment in Sosandar (SOS) is a punt too far. I’ve been tempted to comment on Sosandar for a while now but Paul’s Bulletin Board moron-esque attempt at justification yesterday has tipped me over the edge.
Let’s look at Paul’s “investment thesis” in the article yesterday. I have cut and paste it below in bold with my relevant comments under each part.
I've researched the company & spoken to management, and I really like the concept (innovative product, addressing an under-served part of the clothing market). Also, the marketing approach (featured every week on Loose Women, and with many other celebrity brand ambassadors - women who genuinely love the product.
Regurgitating management-speak isn’t a compelling argument. This doesn’t feel like an under-served market to me; my wife has no shortage of offline and online options to buy her clothes. More on the “innovative” marketing approach below.
I also like Sosandar's website, in that it's taking an innovative approach of being a hybrid of an eCommerce site, and a fashion magazine. This can help them push individual products, through editorial content.
What are you talking about, Paul? It may be an innovative approach but why does that mean it is going be successful? In my experience, the reverse is quite often the case. The e-commerce space is highly competitive and success will depend on developing a sufficiently low cost per acquisition (CPA) of new customers based on using all the online and offline marketing tools available, not by having a bit of content on its website and getting a favour or two from a couple of Loose Women.
Maybe the company floated too early?
Agreed – it has come to market far too soon and shouldn't be valued anywhere near £20 million. This ties in to my concerns about management below but there is rarely a good reason for a start-up like this to join AIM, incurring all the extra cost and scrutiny as a result.
As you correctly state, sales are currently tiny. However, I think the early stage growth percentages could be massive, and if that happens it could drive a big share price increase.
That’s just stating the bleeding obvious, Paul. Unfortunately, there is no evidence to suggest that the growth percentages are going to be massive. At the moment, this is an e-commerce business with no effective online presence. If I type in “buy dress” or “woman dress” into Google, Sosandar doesn’t come up anywhere and I’ve been down to page 10 on Google. How is it going to grow without an effective online presence?
Using favours to get a few celebrity ambassadors is not a long-term effective marketing strategy. One needs to be razor-focussed on its marketing ROI using a combination of SEO, PPC, Facebook and offline channels too. Using brand ambassadors and TV favours looks rather ad-hoc and expensive to me and doesn’t feel like it’s going to generate the sufficiently low CPA needed.
If you check out the latest Alexa stats, it's showing strong growth. That augurs well.
Really?? I cannot find it online and neither my wife nor any of her friends have ever heard of Sosandar and they are bang in the target market.
I hope the company uses the funds raised wisely. Anyway, time will tell, it's highly speculative at the moment. I hold about 1% of the company, so if this works, it would be a very nice outcome for me! But if growth disappoints, then we'd be looking at a big plunge in share price - so it's high risk.
I agree with you that it is highly speculative but why have you invested such a large sum when it goes against all your investing principles? How many bottles of wine were involved in the decision-making process here?
I'm essentially backing management here. They're the real deal, in my view - Ali Hall and Julie Lavington. They've also got some big hitters in the wider team, including a former Matalan Director, who handles sourcing. The outsourced business model means it should be able to scale up rapidly.
Other than the lack of an online presence, this is my biggest issue with the business.
I’m willing to give the founders the benefit of doubt that their lack of direct retailing experience won’t hold them back (although I suspect it will); however, if Ali Hall and Julie Lavington really were the “real deal”, there is no way they would have done this RTO.
Have a look at how much the Kamani family still own of Boohoo (and Pretty Little Thing); look also at the Ramzan family at Quiz and Nitin Passi at Missguided, even the founders at Mint Velvet. Unsurprisingly, all of these successful fashion e-commerce entrepreneurs have protected their equity with all their worth, knowing that it’s going to be worth millions, or even billions, in due course.
The advice I give to all early stage entrepreneurs is to treasure and protect the founders’ equity with all you’ve got as once it’s gone, it’s gone.
The fact that Ali and Julie have been prepared to be diluted down to 5% each at such an early stage of the business reeks of either lack of ambition or lack of nous. It feels to me that they have been sufficiently enthused by a comfortable six-figure salary and have almost ignored the equity altogether. That’s not what I want to see in a founder.
This business will need tens of millions more funding to be a success in this highly competitive space. Accordingly, within a couple of years, there is a high chance that the founders’ stake will become even more pitiful.
I’m afraid that all I can see when I look at Sosandar is a lifestyle business led a couple of founders happy to earn a few quid that have been seduced by the Reynolds’ charm and his promise of oodles of dumb money.
This brings me to my final issue – the Reynolds’ factor.
As a starting point, I’m not a believer in the cult of the personality. I believe in businesses led by a strong and experienced management team with an effective business model that competes hard and executes well, not merely in the magical powers of a non-exec Chairman.
I accept that Adam is no doubt extremely helpful in raising a few quid but that can turn pretty quickly. One minute, you’re the “shellmeister” with a string of ten-baggers in tow (well, one anyway) with people willing to throw money at you and the next you’re the guy who just keeps pestering you for money like the homeless guy that sits outside my local Waterstones with passers-by doing precisely that, passing by looking the other way.
It’s not beyond the realms of possibilities that by the time Sosandar next comes to market for funds in, say, late 2018, Reynolds has had his cap out before then for each of Big Sofa, React, Premaitha, even Optiobiotix (I await the smiting!). Should that all happen, will it be quite as easy to raise another few million quid for an online fashion business with no obvious online presence?
Anyway, let's see what happens. Fingers crossed.
Good luck Paul, I hope it spikes at some point and you derisk sufficiently before the inevitable happens here. One word of advice though, don’t take your cheque book out the next time you go drinking with Tom, Wray and Reynolds.
TW Note I agreed to let Cynical write exactly what he wants as unlike some folks who claim to support free speech I actually do.. But that he thinks, for instance, Optibiotix will place suggests very inadequate research - a lot of this is just mud throwing. His ignorance of options that will see the founders at 18% if certain targets are met is another telling ommission. I'd far rather founders were driven by greed rather than just getting loads of shares on day one of an RTO, wouldn't you? Adam Reynold's track record, overall, is good. He's taken a couple of blows of late but let's see how things look in a few months. I am not in the least worried. Cynical's cheap pot shots ignore long term data.
For the avoidance of doubt neither myself or Mr Wray ( who owns 4.9%) pushed Scott into investing in an IPO that was fives times oversubscribed - we did not even talk to him about it. Nor did Reynolds push him hard - this RTO was hugely oversubscribed, folks were gagging for stock. I gather that there will be a trading statement soon and I think that will show that Cynical is talking cock. Over time the record of Wray, Scott et al is damn good, b et against them at your peril.
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