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As a child I went to Sunday school and remember to this day being told this cautionary tale from the Bible about the foolish man who built his house on sand.
The other half of the story says that a wise man will build his house on a rock. Later in life I actually had a house built on sand and found that reality is not so black and white and the strength of the foundation depends on the structure of the sand. Investing in a business may be akin to this, and several recent events have highlighted this.
I don’t want to turn it into a Cazoo column even though it might do a few hundred words each week about the latest twists and turns in the story.
For those of you outside of the UK reading this blog you may think that this is a UK only story and not something that impacts business in your country, but my interest this week is not so much in the specs of Cazoo, but in the risks of launching a business or investing in a business where the foundation is not just sand but the worst kind of sand, and no one seems to be surveying it.
As a brief history Cazoo was launched by highly successful internet entrepreneur Alex Chesterman, who builds and sells businesses in the entertainment and real estate sectors.
Looking for the next opportunity, he identifies used car retail as one that “hasn’t benefited from any digital transformation yet.” The business launched in December 2019 and had a very successful flotation on the New York Stock Exchange less than two years ago when the business was valued at US$7 billion.
Despite the history of subsequent missed targets, the IPO documents are still available on the Cazoo website. I can pick out a lot of holes in that document and the press interview that was held with Chesterman at the time. Perhaps most significant is that there is such a thing as a European used car market, customers are eager to buy their used cars online, and incumbents are asleep at the wheel, failing to invest in digital.
Less than two years later, money not spent on creating brand visibility through all forms of advertising and sponsorship has been written off as a result of acquiring businesses in the UK and continental Europe most of which have now closed or sold at heavy losses.
In last week’s latest restructuring announcement, volume ambitions for 2023 had been set at 40,000-50,000 units in the UK (the only active market remaining) compared to the ambition in the IPO documents of 234,000 units of which 176,000 will be in the UK.
The revised targets would bring them the same size as Motorpoint, the UK’s largest independent used car retailer following a normal omnichannel model, and having a market capitalization of £130 million. Last year’s gross profit per unit was £600, while an increase from the previous year still less than half of the £1373 achieved by Motorpoint in their last half year results. Cazoo claims to have enough cash to last another 18 to 24 months, but then needs to raise new capital. Given the under-promised deliveries to date, that may prove to be the final crunch point for the business.
I could go on dismantling Cazoo’s concept and execution, but that’s not the point. All the facts were available while the business was planning and launching to show founders and investors that the concept was flawed.
It’s pretty clear that they’re building on shifting sand, not rock, but sadly it’s pretty easy to find other examples of hope that close reality. The money being poured into self-driving car projects, not just by investors in startups but also by tech companies and manufacturers themselves, is also based on the naïve hope that technical, legal, regulatory and behavioral challenges can all be overcome in a matter of a few years.
We have been told time and time again that car ownership is dead and urged to invest in mobility businesses that ignore the importance of fleet utilization and the overwhelming desire for individuals to have the keys to a car that they can call their own and which is full of their own things.
If a business can only be launched when the foundation is solid then that will stifle innovation and we will only see slow, linear progress. We do need entrepreneurs and investors who are ready to take risks, because that’s how we achieve breakthroughs, but that risk capital would be better focused on areas where we need breakthroughs and the risks need to be properly highlighted.
Identifying, evaluating, and mitigating risk takes effort, but it should provide more consistent and sustainable results. Unfortunately, there seems to be no shortage of investors who value a good story more than a good business case, so I’m sure we’ll continue to see money put into start-ups that launch on sand, but I hope that we’ll see a swing back to wisdom for stupidity as the economic climate becomes more challenging.
Steve Young is managing director of ICDP
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