• Admin

Coconut crowdfunding round (2020) due diligence

Updated: Sep 13, 2020

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. The campaign goes private live tomorrow, register here if you haven't already:

Please also make sure you see the disclosures, disclaimers and risk warning at the bottom of this post.


Sector: Fintech

Stage: Generating revenue/Scaling

Coconut is a tax automation app targeting self-employed people (primarily owner managed businesses, e.g. freelancers, gig workers, microbusinesses, etc) in the UK, a fast growing market. Coconut offers a current account and/or open-banking capabilities.

✔️Strong team (founded, ~scaled and exited intech business; >10 years

experience at PWC)

✔️EIS relief

✔️ High growth (22k customers, 1k accountants; (3.5x yearly growth)

❌Highly competitive industry (most competitors better funded/later stage)

❌ COVID impact (high)

❌ Technology risk? (is openbanking mature? e.g. slow API rollout)

Transparency key KPIs such as MAU are not publicly disclosed, but may be within the campaign materials or obtainable through a founder call.

Team 👪🧠💪

There is a wealth of financial/accounting talent in the UK. Engineering talent is scarcer, but Coconut outsourced some of this to Lithuania, mitigating this risk somewhat. Further, the prospect of redundancies given COVID may prove a hiring opportunity.

Product 📱💻🛍️

Coconut offers current accounts for sole traders and limited companies. Coconut do not have a banking license, they offer an e-money product (banking with no credit) via a mastercard subsidiary.

Coconut also offers an Open banking app, i.e. a product you can use on top of your existing bank. 80% of sole trader users don’t have a separate business account.

The above screenshot is a slide from the pitch deck, made public in their AMA

As above, the product offers a suite of features including: expense tracking , Invoice automation (incl. Auto-matching of payments to invoices, etc) and tax automation/an accountancy portal (incl. companies house integration, etc) as well as staple neobank features (instant notifications, card block in-app, etc).

Coconut seem to have executed product iteration best/fastest out of its peers, being the first to offer features such as digital tax return submission and standing orders. A milestone to look out for in future would be the implementation of a web platform, which few (if any) early-stage peers have.

Pricing: £0, £5 and (soon) £15 tiers (Paywall set by no. of invoices: >3 per month)

Partners: Mastercard (Current account), Yodlee? Truelayer? (open banking infrastructure), Payoneer (international payments), Paypal (card payments), swoop (covid loans)

N.B. A note on technology/product risk: Open banking (basically the sharing of data/payment capabilities between banks and 3rd parties) is a new concept, still unproven in many ways. e.g. many legacy banks have been slow to rollout their APIs. This places an element of risk on product quality.

N.B. Consider Coconut’s defensibility in your research; do they own patents, etc?

Competition 🏎️🏁🏆

My usual take is to include one direct insurgent competitor (Anna, CountingUp), an indirect insurgent competitor (Tide) and an incumbent competitor (Intuit/Quickbooks). Please do consider researching the other competitors in this space, as they are many in number and in their approaches, e.g: Receipt bank, Crunch, Taxscouts (pure accounting software plays), Mettle (SME banking), Pleo, Soldo (employee expense cards), Sage, Xero (Quickbooks alternatives (incumbents)), Qonto (European startup)

💡 An underestimated competitor is spreadsheets! Given the fees associated with accounting software, many sole traders might opt for a simple (and free) spreadsheet. A survey by Coconut of 500 self employed people found that 30% of used spreadsheets, 51% used an accountant, and 34% used accounting software.

💡 One might consider Challenger banks (Tide, Monzo, Starling, etc) potential partners rather than competitors; they typically use 3rd party products for their accounting automation (e.g. Xero, Quickbooks or Freeagent), which is Coconut’s core focus.

💡Intuit are pivoting from Quickbooks, their legacy software, to their subscription software Quickbooks online. Intuit has thrived on network effects (e.g. clients will be inclined to use the most popular software) and the reluctance of clients to switch accounting packages (a cumbersome process). However, through it’s fees and complexity, Quickbooks is more suited to larger business, leading to a potential gap in the market for sole trader or microbusiness focussed packages.

As growth is an important aspect of a startup, please see below a chart below of Coconut's user growth for your consideration:

KPIs 📊 📐🗄️

You might be able to obtain some of the missing metrics through a founder call. Alternatively, some metrics are easily inferred.

💡 Transaction volumes are an engagement metric specific to banking fintechs, omitted from the table above. A useful proxy is deposits, which were last known to be £1.5k/month per user.

Valuation 🏷️🛒📊

The round 3 valuation is an estimate based on company filings. I have excluded obscure raises (grants, ASAs, pre-emptions, etc) for simplicity. I’ve also done my best to account for share splits.

Comparables/Revenue multiple

Anna Money- With more employees and revenue, but similar growth, product development and users, Anna was valued at ~£70m pre-money.* The implied revenue multiple was ~35. One might therefore consider a pre-money valuation of <£35m as reasonable for Coconut.

Note that Anna’s goal is ultimately to become a bank, in stark contrast to Coconut.

💡 Comparables only offer insight into valuation relative to peers. If the implied potential returns are bested by that of SaaS startups, or even listed stocks(which are less risky), is the valuation fair?

Expected return

Fair valuations can be determined by deducing what valuation would give a reasonable return (often considered as an amount equal to your total portfolio). This ultimately depends on your exit valuation estimates, etc; It is a highly speculative process.

Consider the chart below for an idea of potential returns for Coconut investors at certain exit and ‘starting’ valuations:

💡 Please be mindful that this chart doesn't account for the (sometimes enormous) effect of dilution

Listed cloud accounting firm valuations are buoyant despite COVID, lending to a potentially strong IPO market

Strong M&A activity in this space, enhancing the exit opportunity:

-Freeagent acquired by Royal Bank of Scotland for £53m

-Anna money, acquired by ABBH group (owner of Alfa Bank) at ~£70m(£90m post-money)

-Albert, acquired by Santander Group for undisclosed amount

Commentary 💳🏦💸

Coconut’s business model is threefold: subscription revenue (i.e. users in a paid tier), accounting products (e.g. submitting tax returns or companies house filings) and marketplace products (i.e. 3rd party products, such as a pension). Coconut's revenues are modest, but arguably appropriate for their size.

Charles Brian Fox (founded & exited confirmation.com for $430m) is a key investor and board member, experienced in the space and is familiar with the founders, having acquired their previous startup. His equity stake is relatively small however (0.21%; ~£50k investment). Further key investors are Anthony Browne (CEO of the bankers association, no longer holding a board seat however), Robin Foale (ex-Director at Santander) and Aman Thind (ex-Morgan Stanley, also exited his own startup) although they have similarly modest equity stakes. There is no significant (>£500k) VC investment, although Coconut is a ~2017 graduate of techstars, a startup incubator/accelerator.

💡IR35 is an upcoming policy change from HMRC that, potentially, shrinks Coconut's potential target market. Regulation risk is therefore notable in this space.

Terms 📝🏛️🤝🏼

The terms are predicted based on those of the previous round. Note that a 'future fund' campaign is a possibility.

Shareholder Communication ☎️📻✉️

  • Expect regular (~quarterly) updates on Product development, User numbers, key hires, etc. They have communicated good and bad news, a show of transparency.

  • Financial information is a bit more sparse, typically given in the most detail during their crowdfunding rounds

COVID-19 strategy

It is not clear if Coconut furloughed staff, or implemented a working from home policy. It is also unclear as to whether they wll apply for the future fund.

Coconut did, however, report 30% reduction in user income during April; COVID has affected Coconut’s target market severely, albeit asymmetrically. The government has implemented a range of initiatives to mitigate this:

  • Coronavirus business interruption loan scheme

(80% Govt guaranteed loans of up to £5m, interest free for 12 months)

  • Self employed income support scheme

(grant for sole traders equal to 80% of earnings up to £2.5k pcm)

  • Bounce back loans

(100% Govt guaranteed loans of up to £50k, interest free for 12 months)

Coconut has since returned to pre-lockdown growth, with 1500 new accounts in May; currently sitting at a rate of ~100 accounts per day. As for what, if any, cost cutting measures have been taken, little is known publicly.

| 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 |

Disclosure: I am a shareholder of Crowdcube and Coconut. I am yet to decide, but I consider myself likely to invest in this campaign.

Whilst I can't share confidential information, for any questions please feel free to comment in the forum, or even email me (admin@crowdfeed.net).