Citymapper Crowdfunding Round 2021 Due Diligence

All of the information given was obtained through public channels, no confidential information has been given here. Please consult the campaign materials for any information not within public domain.


I must confess, this is a little bit rushed, but I hope you enjoy it nonetheless 😬🙏🏻



TL;DR

Sector: Mapping/Mobility

Stage: Generating revenue/Scaling (distressed)


Citymapper is an urban transport app (think Google maps but with a public transport focus). The app is available across over 60 cities across the globe, boasting 50m users.


Pros


✔️ EIS relief Eis relief is a tax relief scheme for UK residents. Put simply, Investors receive 30% of their investment back in the form of income tax relief.

✔️ VC involvement Index Ventures, Balderton Capital and Benchmark have invested in this company previously as recently as last year. These VCs have backed the likes of Depop, Revolut, Roblox and Discord. Their involvement is arguably a strong validation.


Cons:


❌Transparency Several must-have KPIs were not disclosed (See KPI section)

❌Financials/Unit economics A spokesperson for Transport for London (TfL) stated that Citymapper effectively resell £37 oyster cards for £33 for their flagship "pass" product (a travel card) - this would likely never lead to profitability. I invited Citymapper to elaborate, but no answer was given. Information on customer lifetime value and/or acquisition costs would have helped too, but this wasn't given either.

❌ Negative growth Due to the coronavirus'/lockdown's crippling impact on urban mobility , Citymapper has experienced negative growth in recent years (-20%), with 90% of subscribers pausing their subscription.

❌Valuation At 200m post money, the valuation represents a ~40x revenue multiple. In the context of negative growth and/or COVID headwinds, this is extremely expensive.

❌Exit strategy Citymapper allegedly made attempts to sell the business in 2020, none of which materialised - suggesting the business might be unattractive to buyers.


Not sure


⚖️Team The founder is ex-Google and ex-Seedcamp (i.e. tech and VC experience), but only has 2 years combined experience at these firms. Furthermore, he has no experience in the mapping industry. Due to the campaign's opacity, it's difficult to determine who is in the wider executive team.



Team 👪🧠💪

I mostly have good things to say about the team:

  • Founder Azmat Yusuf has ~2 years startup/tech/VC experience (ex Google, SeedCamp, etc). The founder does not seem to have experience in the mapping industry, however.

  • Inside ownership- founder owns ~30% of company. I.e. He has ‘skin in the game’.

  • Citymapper has a decent work culture. 3.1 rating on glassdoor and a modest staff turnover according to linkedin (average tenure 2.1 years). Good work culture is important in hiring/retaining talent - talent is crucial for growing any business.


I would’ve liked to have known:

  • The founder’s ambition/grit/passion. I always like to see some indication of the founding team’s grit/determination - e.g. bootstrapping.

  • The founder’s compensation. Founders who choose/take lower salaries typically do so to reduce cash burn, and therefore increase growth/shareholder value. More importantly, it reflects on the founder’s determination.

  • The wider executive team. The campaign is quite opaque, I have very little insight into who is in the wider team. This is quite a big red flag for me. For instance, i’ve struggled to find out whether mapping industry talent is in the team, and who their CFO is.



Product 📱💻🛍️

Citymapper is an urban transport app; its key purpose is to help users with intra city travel. It’s USP is that it integrates several modern modes of transport (not just train/underground, bus, taxi, but also rideshare, Escooters, etc).


My main reservation was whether Citymapper could possibly be a better product than google, and on reflection I can say it seems to do so (for public transport). Aside from comparing the cost and speed of several transport modalities, there are nuanced features like telling you which entrance to the underground is best for your route, and which carriage is busiest. Having said all this, I could not justify ever subscribing to their premium offering (£20-£100 annually), as i’m so used to -and content with- free mapping products, e.g. Google maps


Above: screenshot of the Citymapper app in use on the London Underground (left), and the app's premium tier features (right)


Ratings

Trustpilot 2.8/5

Mostly negative reviews; A recurring theme is that users are charged despite having cancelled. This may have distorted their revenue and churn.


Play store: 4.8/5; App store: 4.8/5

Overwhelmingly positive reviews; users consistently reference the apps value add for intra city travel, and occasionally reference its superiority to Google maps for this use case. However, some users state the free tier is ample, I.e. they feel premium tier is not worth the cost - much like myself.


I would like to know:

Net promoter score (NPS): The net promoter score is an indication of how likely users are to recommend the product. It reflects on how loved the product is, and also drives word-of-mouth growth (often the cheapest form of user acquisition). It’s a shame that Citymapper did not disclose this very useful metric.


Technology risk: The app has seemed to scale well over the years, without any outages or growth pains to speak of.


Competition 🏎️🏁🏆

This is not a comprehensive assessment; there are many competitors in this space not mentioned, e.g. Transit. I have only included companies with a reasonable level of information available in the public domain which, sadly, isn't many.



Above: A snapshot of Citymapper's competitive landscape


💡 In many ways, Transport for London (TfL) is one of Citymapper’s main competitors; Citymapper’s ‘pass’ is effectively an alternative to TfL’s oyster card. Being a govt body means TfL aren’t as incentivised to maximise profits/compete aggressively (e.g. they publish valuable company data publicly - this would be big nono for a purely for-profit enterprise). In other words, TfL is quite a nice competitor to have!


Business and/or Financials 📊 📐🗄️

Market size: The global digital mapping market is worth around £20bn , and forecast to reach ~£41.6bn by 2026.


💡 A large and/or fast growing market is essential for a high return. If you had £1m invested £1m in a startup operating in a £2m market, you’d only ever make a 2x return in the best possible scenario (which isn’t a high enough reward for the risks taken) - and that’s assuming you had a 100% stake in the startup!


Risks: I won't list all the risks associated with the company I can think of, however, here are some business/operational risks that I feel are worth highlighting:


  • Funding risk - given the business is loss making, capital is needed to keep it afloat in the near-medium term. There is a material risk Citymapper won't secure this capital. I should note that the business purpotedly failed to raise a series C in 2018, but went on to raise capital in 2020 from existing investors.

  • Monetisation - the business is still undergoing teething problems with how they make money. For example, they allegedly sell their services for less than the amount they cost (See "business model" below). In fairness, Citymapper have showed promise with their B2B revenues: “we have multiple signed contracts with 6-figure annual recurring revenue per customer. Revenues for these contracts are tied to metrics such as use or hits, so are likely to improve over time with the customer's own growth.”"


Defensibility: As with most software businesses, Citymapper has network effects at play - a dual sided network effect, to be exact; the more users it has, the more businesses (e.g. ridesharing companies, Scooter companies, etc) will want to use their platform and vice versa. This puts any competitors/entrants at a disadvantage, as they are immediately less attractive to business due to their inevitably low user base. This is known as "the chicken and egg" problem.


Business model (how do they make money?) Although Citymapper has several revenue streams, their money maker seems to be the Citymapper pass - their Oyster card competitor (think of it as a passport but for intra city travel). What I find especially worrying is that Citymapper refer to their pass product as “profitable” - a statement in dire need of qualifying; TfL disclosed that Citymapper effectively sell their weekly passes for £33 whilst they cost £37 to create. Their less signifcant revenue streams appear to be their premium subscription offering ("Citymapper club") and affiliate revenue (E.g. a "finder's fee" everytime you use a transport provider, e.g. Uber, on their app).


Financials: Here is a brief snapshot of their financials:



Above: A snapshot of Citymapper's financials


💡The company “does not currently hold any loans or long term debt.” Any debt on the balance sheet as per their latest company filings must have therefore been converted into equity, which is common practice with venture debt.

KPIs 📊 📐🗄️

Key performance indicators (KPIs) are essentially performance metrics; they gauge how well a business is doing. They vary depending on the industry and stage of the company in question, but let's take a look at what I looked for in Citymapper:

Above: Citymapper's KPIs

As above, Citymapper disclosed 6 out of 18 KPIs that I typically look for. I would consider this extremely poor transparency.


Valuation 🏷️🛒📊

Valuation is one of, if not *the* most important aspect of an investment; Returns are a function of the initial valuation - the higher the valuation, the less money you will make. If the initial valuation is too high, you might not make any money at all.


Revenue multiple


Given Citymapper’s 2020 revenues were ~£5m, their £190m pre-money valuation represents a punchy ~38x revenue multiple. This is fairly high but not unheard of, but when considering Citymapper’s negative growth in recent years and COVID headwinds, this valuation becomes extremely unattractive. See below for comparables in the industry for context.


  • JustPark - mobility/parking software business, 60% YOY revenue growth, £80m valuation (11x revenue multiple).


  • MapAnything - 70% revenue growth, £200m valuation (13x revenue multiple)


  • What3Words 50% revenue growth, £150m valuation (~375x revenue multiple - yikes!)


💡 What3Words was still mostly pre-revenue, having yet to monetise the business fully. Being a B2B startup, monetisation can be a bit trickier.


💡 Waze, an Israeli Mapping technology company, was acquired by Google in 2013 for £750m, despite making only ~£700k in annual revenue. This was done largely because the data Waze had collated was extremely synergistic to Google’s maps and ads (‘hyperlocal’ ads) businesses. I should note, however, that Citymapper was reported to have courted acquisition offers from Google, Apple and Uber, yet ultimately none of these offers materialised - arguably an indication that Citymapper’s valuation is unjustified. Furthermore, Citymapper doesn’t crowdsource/gather their own data as Waze does, they instead primarily use 3rd party data.



Expected return


Another way to value a startup is to just look at the size of the market and/or incumbents, and ask yourself “if Citymapper became as large as X, or capture Y% of the market, would the implied return justify the risks?”


30x is often touted as commensurate reward for Series A venture risk (this is because a 30x return would 'return the fund' for a classic VC fund portfolio size of 30). In name, Citymapper is at series C stage, but it's risk profile fits somewhere between A and B in my opinion, so personally I feel a 25x return would justify their valuation.


Let's look at some comparables and make a judgement:


Above: Potential return multiples if Citymapper exited at certain valuations


In accordance with the above chart, this valuation method works out as follows:

  • If you believe Citymapper is the next Trainline, their valuation is not fair. A £50m valuation would be more appropriate.

  • -If you believe Citymapper is the next Garmin, their valuation is more than fair. In fact, anything up to ~£800m would be fair.


💡 It is easy to get carried away with optimism using this valuation method. Whilst I included "100% share of global mapping industry" as a comparable, It is unheard of to capture 100% of any market. However, the market size is useful for an indication of the potential ‘ceiling’ of returns. I should also note that the digital map market is fast-growing; although it’s worth ~£20bn today, it is forecasted to reach ~£41.6bn by ~2026.


💡 Please be mindful that this chart doesn't account for the (often heavy) negative effect of dilution! If in doubt, just halve the return multiple (i.e. assume a 50x multiple where i've given a 100x multiple, for example).


💡 Garmin is nearly as large as the entire digital mapping market not because it owns a large % of the market, but because they operate in several large, adjacent markets (e.g. navigation hardware).



Terms 📝🏛️🤝🏼

EIS relief - Put simply, Investors receive 30% of their investment back in the form of income tax relief. This applies to eligible UK investors only.


Ordinary shares - the crowd will be offered ordinary shares. Generally speaking, ordinary shares are less attractive than preference shares (the shares VCs have), but ordinary shares are eligible for EIS relief wheres preference shares are not. Pre-emption rights (the right to participate in follow on rounds) will not be offered to the crowd, it seems.



Coinvestors world-renowned VCs Index Ventures, Balderton Capital and Benchmark have invested in this company previously (but NOT in this round) -their involvement is typically seen as validation. More importantly, they will have board seats, enabling them to add value, and steer the company in the direction that optimises shareholder value/return. On the other hand, they have more senior share classes (non participating preference shares - they get 'first dibs' on exit money) - meaning they may encourage an exit outcome that short-changes investors holding ordinary shares.



Transparency & Shareholder Communication ☎️📻✉️

Metrics such as LTV:CAC ratio (the profitability of the business model), churn (cancelled subscriptions as a %), net promoter score (how often users ‘recommended’ the app), etc have not been given. Citymapper cited the commercially sensitive nature of this information as the reason. Citymapper were also relatively evasive when it came to questions in the Crowdcube discussion forum.


For the reasons above, I am compelled to say Citmapper’s transparency has been quite poor. Given this transparency during the raise, I would expect their shareholder updates to be similarly opaque - if given at all.


COVID-19 strategy


It is not clear if Citymapper furloughed staff, made job cuts, or implemented a working from home policy. It's possible they may have raised a future fund round.


Citymapper are almost certainly a "COVID loser" - that is, a business that has been severely impacted by the lockdowns brought on by the COVID pandemic. This is evidenced by their decline in revenue (~-20% growth) and that 90% of subscribing users 'paused' their subscriptions.



| Not financial or legal advice | All opinions my own | Please do your own

research | Capital at risk |

| Startups are illiquid | Don't pay dividends | Suffer dilution | Usually fail |

| Even tax relief is at risk |

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Bye!



References (non-exhaustive)

  1. Citymapper Companies House filings

  2. Citymapper blog, website and social media

  3. Numerous articles and press releases on Citymapper


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