THIS™ Crowdfunding round (2020) due diligence

Updated: Sep 13

No confidential information has been given here. Please consult the campaign materials for any such information.


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TL;DR

Sector: Food (Plant based meat) / Fast moving consumer goods

Stage: Generating revenue/Scaling


THIS is a plant-based meat alternative food brand based in the UK. They currently offer chicken (e.g. chicken goujons) and bacon prodcuts in both the ready-to-eat and ready-to-cook categories. Their stockists include Tesco, Ocado and Holland & Barrett. The plant based food market is fast-growing, with the key drivers being the consumer behavoural shifts to healthier, more ethical and more eco-friendly diets, as well as increasing intolerance to animal proteins.


✔️ VC involvement (including the backers of Revolut, Transferwise and Made.com)

✔️ Large, fast-growing market opportunity (plant-based food market is growing at ~6% annually, forecast to be worth ~£35Bn globally by 2025)

✔️Team (The founders, one of whom is ex-CocaCola, have founded, scaled and exited their own restaurant chain 'Chosen Bun')


❌ Highly Competitive Industry (e.g. Meatless farm co in the UK, Beyond meat in the UK/US. There is also Indirect competition from e.g. lab-grown meat (e.g. Memphis meats) & meal kit startups (e.g. Allplants). More so, incumbent brands (e.g. Quorn) could amp up their efforts.

❌ Fast-moving-consumer-goods (FMCG, i.e. food company) associated risks These are risks that you mightn't get with, say, a software company. Such risks include: supply chain risk, brand risk, IP risk, regulation risk, changing consumer behaviour, etc.

❌ No EIS relief



⚖️ Convertible note/valuation - rathering than issuing you shares, THIS will issue you shares at a future date at a discount to the going price at that date, which could end up good or bad (depending on how over/underpriced the round is). The convertible terms are middling, with a discount of 20%, a valuation cap of £50m and a longstop/'share issuance/conversion' date 2.5 years away.


⚖️ No secondary market - You will only be able to sell your shares when the company IPOs or gets acquired. This is usually the case with most crowdfunding anyway, but the crowdfunding platform THIS is using (Seedrs) offers a secondary market, it's just that THIS have opted not to use it.


⚖️ Transparency (KPIs) As it stands, very few financials/KPIs are known. In fairness, most metrics in this industry are commercially sensitive.



Team 👪🧠💪



As above, THIS' team is small but decent. The founders exited their restaurant chain business 'chosen bun', which should give them insight into the food and restaurant industry (useful in negotiating partnerships, etc). The wider team also boasts talent from Unilever (Ben & Jerry's, Marmite, etc) and The Hut Group (Myprotein.com).


Product 📱💻🛍️

THIS currently offers chicken (e.g. Goujons, BBQ, chicken tikka) and bacon products across the ready-to-eat and ready-to-cook categories, with sandwiches pegged as their next product. The company forecasts ten product launches in the next year.


Above is a mock-up of THIS' (potentially) upcoming sandwich product


Most literature outlines key barriers to adoption of plant based/flexitarian diets as: taste, nutrition concerns (e.g. lack of protein) and the time/expense involved. I believe the ideal product would tackle these pain points,, so my assessment of THIS' products will hinge on how THIS tackles these pain points.


On taste:

  • In my view, there is no substitute for trying THIS yourself when it comes to taste - so I highly recommend doing so, and comparing it to competing brands (e.g. Meatless farm co, Tesco's Wicked Kitchen, Iceland's NoBull, etc).

  • For what it's worth, i've found the chicken products near-enough indistinguishable from meat and much better than e.g. Vivera's chicken products. I very much prefer beyond burgers, but I accept this is subjective.

  • The products have been awarded best vegan bacon & chicken by The Times, DailyMail & PETA.


On nutrition:

pros:

  • THIS products are fortified with Vitamin B12, iron and protein (pea & soy), in a nod to the consumers' nutrition (protein) concerns around plant-based-diets.

  • The products are relatively low in calories, key in engaging health conscious consumers

  • GMO free soy is used, another positive for health-conscious consumers

cons:

  • It's a shame to see soy as THIS' key ingredient; soy remains a highly controversial ingredient amongst consumers (concerns around alleged estrogen content); Beyond meat dropped soy in their recipes for this very reason, opting instead for pea protein.

  • Due to a manufacturing technicality, THIS cannot claim to be gluten-free, which may be a write off for many consumers.


Other:

  • Strong eco-friendly message and branding, key in engaging 'eco-conscious' consumers

  • Consistently bestsellers on Ocado, TheVeganKind, etc; ranking level with Vivera and meatless farm, and at the same time well ahead of Quorn, Linda McCartney, etc

  • No vegan socciety or soil association organic logos on the packaging, potentially a missed opportunity to elevate the brand



Competition 🏎️🏁🏆

I have opted to focus on UK competitors, including direct and indirect insurgent (i.e. new) competitor(s) and incumbent commpetitor(s) operating in the UK, as that is where the so-called serviceable available market is (i.e. the immediate opportunity).


See below for the chart:




The 'threat level' indicated in the chart above is, ofcourse, subjective. My rationale is that the older meat alternative brands are known as vegetarian/vegan brands that have a reputation as healthy, but compromising on taste; the challenger brands are, however, tackling this perception through flavour innovation. There is an argument that the incumbent brands could invest more heavily in R&D, marketing, etc to compete more aggressively, ofcourse.



The table above is non comprehensive, and I would encourage further study of the wider competitive landscape. There is a wealth of indirect and direct competition, e.g. :

  • Other plant-based meat substitutes (e.g. Impossible Foods, Vegetarian Butcher (Unilever), Naked Glory (Kerry Group), NoBull (Iceland), Wicked Kitchen (Tesco), etc)

  • Lab grown meat (e.g. Memphis meats, JUST (formerly Hampton Creek, involved in egg substitutes also), etc)

  • Mealkits/Meal delivery (e.g. Allplants, Gousto, Mindful Chef, etc)

  • Meal replacement (e.g. Huel, JimmyJoy)

  • Restaurants (e.g. The vurger co.) - partner rather than competitor, perhaps?

I would like to highlight the risk that incumbent meat brands could simply pivot to plant based products, which could pose a great threat to challenger brands given their resources, brand value, etc.

Above: A plant based meat product range from BirdsEye,

a large european frozen food (fish) brand owned by Nomad Foods.




Defensibility


Brand - A good brand is an invaluable asset for a business. Oat milk company Oatly has proved particularly successful, leveraging it's vegan-focussed brand to demand premium prices, customer loyalty and to diversify (e.g. vegan ice cream). Please do consider the risks associated with Brands, e.g. any reputational harm/scandal that hurts THIS' ethical brand. Some have remarked that the name 'THIS' is confusing, but personally I feel it makes the brand memorable (improving brand awareness, etc) - it probably makes search engine optimisation a nightmare though!


Intellectual property - two patents have been applied for by THIS. Some of THIS' initial products were outsourced for creation, so this IP is owned by a 3rd party (which apparently licenses it to THIS excluisively) - the exact terms of this requires scrutiny. THIS are using the raised funds partially to invest in R&D, developing their own IP. Do consider the risks surronding IP, e.g. changes to IP law.



Financials/KPIs 📊 📐🗄️

Note: The chart below is an amalgamation of metrics tracked in the fast-moving-consumer goods, Ecommerce, Restaurant (, etc) sectors, as THIS technically operates in all these industries and more. The take-home is that (I believe) any asssessment of any business should be data-driven.






Note that few metrics are disclosed, but most of the KPIs in this sector are extremely commercially sensitive, so I think this could be justified.


💡 The KPI table is not exhaustive; The key takeaway is that (I believe) we should

take a(n) -atleast partially- data driven approach to investing.


Valuation 🏷️🛒📊


Please note these are estimations based on the amount raised (e.g. founders rarely offer >20-30% equity). There is very little publicly available information on previous raises, so I expect some margin of error on these estimates. I have omitted obscure raises (e.g. small angel investments) for simplicity.


Comparables/Revenue multiple


Light Life foods

A Canadian plant based meat (burgers, sausages & chicken) company.


~90 employees, 4% yearly revenue (2000-2016) growth, ~£30m Revenue , ~£105m Valuation; 3.5x revenue multiple


Light life, being founded in 1979, isn't *quite an emerging/challenger brand like THIS - so it's not the perfect comparable. However, it is a recent acquisiton (2017), operates in the plant based meat category, and is of a similar(ish) size . There isn't much publicly available information on valuations in this space, so it's quite handy that, being a listed company, their acquirer 'Maple Foods' had shared some useful information on Lightlife in their company reports.


At a 3.5x revenue multiple, THIS would be valued at ~£17m based on their annual revenue run rate (monthly revenue x 12, more appropriate for high growth Companies). THIS' valuation cap (£50m) far exceeds this, but you may well end up being issued shares at a valuation well below this (such is the risk of a convertible note). I should note that, because of the valuation, means you are 'locked in' at the £50m valuation cap for 2.5 years; you will only ever be issued shares that reflect a £50m valuation at the most, even if the company grows spectacularly in the next 2 years (e.g. to a company worth £1Bn). This can lead to attractive discounts.



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, so that one moonshot isuccess will cover any other investment failures). 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 THIS investors at certain exit and ‘starting’ valuations:





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


30x is often touted as a fair return for venture (Series A round) investment risk, which is roughly where I feel THIS is at.


Based on this logic, you might say that:

  • **If** THIS becomes the next Bird's eye, £80m would be a fair post-money valuation ( ~£2.4Bn valuation divided by return multiple of 30). So, at a £50m valuation cap, THIS is undervalued.


💡 You're expected return, and therefore target valuation, ultimately comes down to what your bull/best-case scenario is for an exit. If you're very bullish, you might envision an extreme exit scenario where THIS becomes as big as Kerry Group (owner of the Wall's, Mattesons and Richmond sausagebrands), a ~£17Bn listed sausage company. I would personally advise being conservative wherever possible, however.



💡 A high valuation doesn't necesaarily mean no return. A high valuation simply means you're taking too much risk for too little reward, and could be better off investing in 'fairer' opportunities elsewhere (e.g. better-value startups or less risky asset classes like public stocks) instead. You wouldn't take a dare to jump off a cliff to win a pound when you could take dare to jump off a coffee table for a tenner.


There have been both IPOs (e.g. Beyond meat) and Mergers/acquisitions in the plant based food space, suggesting a healthy exit environment:

- Vegetarian Butcher

Acquired by Unilever for an undisclosed sum in 2018

- Gardein

Acquired by Pinnacle foods for ~£106m in 2014

- Quorn

Sold to Monde Nissin corporation for £550m in 2015




Commentary 💳🏦💸

THIS has some interesting VC investors, particularly Seedcamp. Seedcamp have backed numerous unicorn/multi-billion pound startups (e.g. Monese, Revolut, UIPath, etc) at seed stage, which is no mean feat. Seedcamp have various prominent later stage VCs (e.g. Index ventures, investors in Facebook, Skype, etc) invested in them, which offers an extremely valuable network of contacts for seedcamp investees/founders.


Business model: THIS are well diversified, selling to wholesalers, restaurants and supermarkets. A D2C (direct to consumer, like Allplants) offering is rumoured too; D2C, although tricky to make work, is the holy-grail of consumer businesses - you are in full control of your brand/customer experience and can maintain healthy margins as nothing is payable to retailers, etc.



Terms 📝🏛️🤝🏼




The terms above include the convertible note terms, and the rights/terms attached to the shares that will be issued from the convertible.


I think the simplest way to think of the convertible terms is as follows:

  • You are buying shares that will, at the very most, have a share price that reflects a £50m valuation.

  • *If* THIS raise funds within 2.5 years, you'll get shares at the price set by the new investors, but with a 20% discount.

  • You will be getting ordinary shares

Given THIS' runway and growth, I expect a funding round before the longstop date that is likely to hit the valuation cap (they just need to reach a £14m Annualised revenue run rate, which gives a ~£50m valuation on a 3.5x revenue multiple); i.e. I personally wouldn't hope for the shares to be issued at a valuation below £50m.


Shareholder Communication ☎️📻✉️

The most similar company to crowdfund has been Allplants, who have given reasonable progress updates detailing product development, (revenue) growth, press, etc.


COVID-19 strategy


the effect of COVID on THIS is unclear; Ecommerce boomed during lockdown, so THIS' online exposure (i.e. via Ocado) would have proved a valuable hedge. Equally, woes in the hospitality sector may have hurt their restaurant partnerships. The hit taken by the restaurant sector may provide a source of invaluable talent (due to the job losses in the sector) for THIS going forwards. It's unclear whether or not THIS undertook a hiring freeze. It is also unclear if THIS furloughed staff or made them redundant. They are not taking advantage of a future fund campaign, which is often an indicator they haven't experienced -and don't foresee experiencing- any difficulties fundraising.



| 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 Allplants. I have decided to invest in THIS' crowdfund raise.

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).



References (non-exhaustive)

  1. THIS' crowdfunding campaign

  2. THIS' Website, blog and social media

  3. THIS' companies house filings

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None of the content at crowdfeed is financial advice. Remember when investing that your capital is at risk.

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