A reader brought this Daily Mail excerpt to my attention about Kashflow:
For shortly after his [Duane Jackson,MD] release from prison - he received two-and-a-half years for possession of 6,500 ecstasy tablets - Jackson, 30, started Kashflow, a business supported by The Prince’s Trust. Six years on, the company, which makes accounting software and boasts Lord Young as chairman, is valued at £10 million.
[My emphasis added] The Daily Mail is not known for being too accurate with its facts but even this raises eyebrows. Why?
The last time Kashflow reported any tangible information it was to announce it had 2,500 customers, the implication being most are payers. Even at the most optimistic revenue call of £480,000, I can’t come up with a valuation number larger than £1.7 million. That’s based on Kashflow’s declared figures and pricing. The revenue figure is bound to be inaccurate because it doesn’t account for professional licenses, acceleration rates, churn or reseller discounts. How do I come to this figure?
Simple: check the market cap to revenue multipliers of both NetSuite and SalesForce.com, the best known on-demand vendors. In NetSuite’s case we’re talking 4.75 and in Salesforce’s case 4.17. Take the bare average of the two and use that as a multiplier. That’s a crude but effective measure from publicly traded companies.
But…Kashflow is a growth company and as we know, growth companies can generate extraordinary valuations. Xero for example is sitting on a massive revenue premium but then we have to take its recent NZ$23.2 cash raising exercise into account. If we look at its chart for the last year, we can see that around the time of its interim report, Xero was trading at NZ$0.75 or roughly 54% of the current valuation of NZ$98 million.
The recent Xero price hockey stick has little to do with fundamentals but the expectation the company will continue its upward trajectory. In other words, future growth is already baked into the valuation but based on some extremely good results in the last few months. The same cannot be said for Kashflow which has 40% of the customers Xero counts. Kashflow has taken 6 years to acquire those numbers compared to Xero’s 33 months.
So let’s be generous given that Kashflow’s last announced figures were January, 2009 and that trends and numbers elsewhere I am seeing imply that this last quarter has been very good for the saas/on-demand/cloud players. Let’s assume they’ve added 50% (although most recently, Jackson said the number of payers was c.3,000 or around 20% up on January) then on my measure they’d maybe come in at £3.4 to 4.0 million using the NetSuite/Salesforce.com formula. We could be more generous still and add a premium for the fact both NetSuite and Salesforce.com are established players measured more on fundamentals than the hopes that sell side analysts frequently bake into their targets. That could give us a figure of £6 million. Why not more? Several reasons.
- Last year, Jackson tried to sell the company to his namesake at a reported £3 million. That fell apart. Unless the company is claiming x3 revenue growth in some 9 months – and I have no evidence to prove that figure or otherwise, then £10 million sounds ambitious. Having said that, I’m not convinced the buyers had much clue what they were looking at based on conversations I had after the event.
- Duane Jackson isn’t known for being shy and assiduously following every word that’s said about the company and commenting accordingly. He’s kept quiet about this one.
- In a recent conversation, Jackson said to me that he didn’t want to take on investors. If that’s still the case then there is no market for the company and so any valuation could be valid though it remains hard to see where £10 million comes from.
- Kashflow is not an accounting solution but a bare book-keeping service. You can argue that makes it less competitive with other offerings but then it is priced accordingly and has found a growing market and done some interesting marketing deals upon which it has yet to execute.
- Xero has been able to take advantage of CEO Rod Drury’s past track record. It has delivered on its public forecasts and has attracted high quality industry investors. It has a very aggressive growth plan including an attempt on the US market, hence the need to raise NZ$23.2 million against the original NZ$15 million. That allows sell side analysts to justifiably ramp figures, sending the share price upwards.
Although Xero is a ray of hope on the landscape, it is an outlier. It shows where the market might go, but not its general trajectory. Markets are still very cautious. Kashflow doesn’t have any real management outside Jackson so any investor is going to look longer and harder at the MD’s track record before concluding a valuation. Investors look more to management quality than any other factor when considering investment.
It’s not enough to be in a hot segment because as seasoned investors know, making the first million in revenue is not that hard when you’re in a good segment. Making the next £10 million is much harder and often represents one of those ‘crossing the chasm’ periods. Having a solid management bench together with quality investors in the seed and early rounds makes a huge difference. That’s a lesson I learned a long time ago. Xero is really the only company in the very small accounting space that can demonstrate quality across all those dimensions. Others may disagree but then remember I am parsing this discussion with reference to the market Kashflow is able to realistically address.
Of course I could be completely wrong because investors are not always known for making rational or well-informed decisions. Given that 90%+ of Silicon Valley investments fail, you can see why investing in start up technology companies is always something of a gamble. I doubt that’s the case right now – or at least less so. But what I hope I’ve demonstrated is that while saas/on-demand/cloud is unquestionably a hot area, the vendor community can quickly run away with ideas based on a left field remark that are not necessarily born out by the analysis.
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