What3Words crowdfunding round (2020) due diligence

Updated: Sep 13

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TL;DR

Sector: Mapping

Stage: Generating revenue/Scaling


What3words (W3W) is a mobile and web app that aims to replace postal addresses, instead giving every 3 metre space in the world a unique 3 word address, a more precise (but just as simple) system. Common use-cases include emergency services (e.g. lost and hurt in the woods) or last-mile delivery (e.g. DPD delivery). The app is free to use for consumers, but charges companies for use (e.g. Mercedes-Benz) . The app is available globally and has over 26m users/downloads.


✔️ VC and Corporate VC involvement (Corporate VCs often end up

acquiring/partnering with their investments)

✔️ High growth (26mn users in 7 years ain't bad!)

✔️Loved, scalable product with strong USP


❌ Extremely tough competition (mainly Google; who have a reputation for

innovation, £90Bn in cash and 7k employees in their maps division)

❌ High cash burn/losses (losses of ~£14.5m vs revenues of £400k in 2019, with

£23m remaining in the bank, giving ~18 months runway. The revenues suggest

W3W might be struggling to monetise the product; see the notes in 'KPIs')

❌ No EIS relief


⚖️ Team (no previous startup exit/mapping sector experience amongst founders,

although they have started & scaled businesses in unrelated sectors

(education & music) previously.


⚖️ Valuation Estimated to be ~£144m. It is difficult to judge if this is fair; there are no perfect valuation comparables, and the imperfect ones have little or no information pubicly available on their valuation metrics, making valuation difficult.


Transparency (KPIs) As it stands, very few financials/KPIs are known (8/24)


Ofcourse, the campaign hasn't launched yet, so some of the points above

might be swiftly dealt with upon launch. e.g. the wider team might have

mapping experience.



Team 👪🧠💪


As above, W3W's team is decent; they have founders that have founded, scaled and exited businesses. However, there seems to be a lack of talent in the team from the mobility/navigation sector (i.e. 'mapping industry veterans' needed). There could be talent to poach in the UK (Deliveroo, Citymapper, etc). What3Words also has a satellite office in Germany (the EU boasts companies like Cabify, Bolt and BlaBlaCar), another possible talent market to dive into. In any case, it may transpire upon campaign launch that the wider team has veterans from the industry already.


Product 📱💻🛍️

The app is effectively Google maps with What3Words functionality on top. The app UX is exceptionally simple and intuitive; On installation, users go through a 10 second tutorial. Users may click a location on the map, 'hone' into their current location, or search a location (through voice or type) to find the equivalent 3 word address. There is a 'share' button that enables users to share this address via text, email, social media, etc. W3W have a web app with similar functionality also.


Above is a screenshot of the app



The app has a 4.7 and 4 star rating on the IOS and Android apps respectively.

The few negative reviews reference the sometimes inaccurate location given by the app. This highlights the technology risk: As W3W relies on GPS, things like telecomunication infrastructure (how many satellites are there?) and signal obstruction (are you in a building?) can drastically affect W3W's functionality.


Speaking of tech risk, W3W's tech stack (i.e. the technology services used to build/run the app) is quite unique, but loosely similar to that used by Slack and Snapchat. It should (continue to) scale well - no outages, etc. Furthermore, as it's built over Google maps, this should reinforce its reliability.


Partners: Note that the app is built 'on top of' Google Maps; W3W did not build the maps they use, but rather the 'engine' that changes a location into a 3 word address.






Competition 🏎️🏁🏆

See below for a (noncomprehensive) chart of What3words competitors:



Defensibility


What3Words' defensibility lies in it's network effect; the more emergency services, food delivery apps, etc that use W3W - the more people will use it, and vice versa. This eventually reaches an inflection point where any companies that don't use W3W are doing themselves a disservice, as that's what the majority of their customers are already using.


Competition commentary


Google (Maps) is probably the last company you'd want to be competing against in tech, making this a potential David vs Goliath story. Google are known for their innovation, have a workforce of 7k employees in their maps division, and the parent company (Alphabet/Google) has a cash warchest of £90Bn. Their data took many years and heavy investment to collect, and they benefit from being able to bundle Google maps into android, Google search, etc (strong barriers to entry and competitive advantages). There is a risk that, rather than acquiring W3W, Google would simply build similar functionality into Google maps. Google did exactly this with Tele Atlas, a startup that used to provide their mapping data. However, W3W's network of clients, engineering team, user base, etc may justify acquisition.



💡 Note that you can use 'exact' location co-ordinates in Google Maps, but it's given as a hard-to-remember 16 digit number (they also have a 'share location' feature); it's the easy-to-use 3 word interface that is W3W's Unique selling point.




Growth


Although we know W3W have 26m users/downloads globally as of recently, they have not publicised any of ther download metrics or user numbers over time, so I have opted to use google search data and app store rankings as a proxy:


Google search volume for W3W is highest in Mongolia (it is the national standard for addresses there!). Also, Search volume spiked in mid-August, when the BBC published a viral article on how W3W saved lives.


Above: app store ranking for W3W 2013-19. Note that the y axis is non-linear,

making the growth seem less impressive than it really is. Also note the sharp uplift when the BBC article was published

(note: jumping from #1000 to #100 > # 100,000 to #10,000)





Financials/KPIs 📊 📐🗄️

Note: W3W is a B2B business. This means they make their money from businesses using their apps (e.g. Ford, AirBnB, DPD, etc) not their users (e.g. you and me). This means the KPIs we need to pay attention to are slightly different to what you've seen here before. Because some might argue that W3W is, in fact, a B2BC business, I have included B2B and B2C metrics in the following chart:




Poor transparency at the moment, but remember the campaign hasn't even launched. Furthermore, many B2B metrics are commercially sensitive information - so I could accept they might be tight-lipped on a few of these. You might be able to obtain some of the missing metrics through a founder call. Alternatively, some metrics are easily inferred.


💡 The KPI table is not exhaustive. The key takeaway is that we should

pay close attention to how W3W acquire, convert, upsell (etc) leads. However,

these businesses will only be interested in the first place if their is high consumer

traffic on the app/website, so the usual B2C metrics should be considered too.


💡 Business model/fees: The fees/pricing for W3W starts from £35/month for 1k API calls (app tech usage) - the fee applies to businesses only. This is more expensive than TomTom and begs the question of how revenue can be so paltry given these prices, and such notable clients.

Valuation 🏷️🛒📊



What3Words' funding rounds are quite messy, with rounds spread across many years, investors, share classes, etc. They've raised around £40m across 9 major funding rounds, but I've simplified them into four rounds for ease of reading. Please note these are estimations based on press releases and company filings - I expect a wild margin of error on these estimates.


Comparables/Revenue multiple


Citymapper

- ~50+ employees, ~nil revenue (£6m loss), growth n/a, £250m valuation

MapBox

- 400 employees, £100m revenue, growth n/a £540m valuation

MapAnything

- 161 employees, £15m revenue, 70% YOY revenue growth, £200m valuation


This is where revenue multiples fall apart; the comparables are very poor (different industries, different stages, lack of information). I'd personally opt for the 'expected return' method for a better idea on valuation. But whilst we're here: using MapAnything's 13x revenue multiple, a target valuation for W3W (based on 2019 revenue) would be an unlikely ~£6m, which is less than they've received in capital! It will be interesting to apply this multiple to their forecast revenue for Y2020.


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 W3W 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.

So given that What3Words is at series C (well past the 'early traction' stage), and therefore less risky than series a, let's go for a 25x multiple.


Based on this logic, you might say that:


- **If** What3Words becomes the next HereMaps (owned by Audi, BMW &

Mercedes-Benz), £100m (2.5billion divided by return multiple of 25) would be a fair

post-money valuation. So, at a £144m post-money valuation for the crowdfund, W3W would be ~44% overpriced.


💡 A high valuation doesn't mean no return. W3W could go on to great success and make it's shareholders some money. 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 for a stab at winning a pound when you could take a different dare to jump off a coffee table for a tenner.






There are virtually no IPOs in mapping, therefore one could reason that the likeliest exit will be via M&A (merger and acquisiton) as has happened in the past:

- Mapillary

A Swedish version of Google Streetview, was acquired by Facebook for an

undisclosed sum (est. ~£70m) in 2020.

- Waze

An israeli mapping tech company, was acquired by Google for ~£750m in 2013

- Tele Atlas

A Dutch mapping data startup, was acquired by TomTom for £2Bn in 2007



If W3W grow to a multi-billion pound valuation, the scope for an m&a shrinks (few companies have the capital to acquire a company this big), so an IPO becomes more likely.


See commentary below for why the W3W's corporate investors might make an exit more likely.


Commentary 💳🏦💸

W3W boasts several corporate VC investors (AKA 'strategic investors'). Corporate VCs are the investor branches of large companies, used to acquire companies that are relevant to their industry. W3W's strategic investors come from the automotive industry, logistics, tech, etc: e.g. Subaru, Mercedes-Benz/Daimler, Intel Capital and Sony. Its companies such as these that might ultimately acquire W3W, so their investment at an early stage is validation of exit likelihood. For example, Salesforce invested in almost every fundraising round of MapAnything before acquiring them in 2019 for £200m.


The most notable 'traditional' VC firm invested in W3W is JamJar investments, (Founded by the founders of Innocent drinks, which sold to CocaCola for £380m) they exited Graze and have a portfolio that includes early stage investments in unicorns Deliveroo and Bulb, suggesting they can 'pick winners'



Terms 📝🏛️🤝🏼


The terms above are predictions, the reasoning behind which is set out below. Greyed out terms are those I predict won't be offered/valid.


I have predicted the terms for the round with the following logic:


- Nominee: almost all crowdfunds are held under crowdcube's nominee structure. It means the companies raising don't have the hassle of dealing with 1000s of shareholders, Crowdcube does the work.

- Drag-along and Tag-along rights: Drag along means investment/exit deals that are conditional on acquring *all* the shares can go through rather than banking on unanimous shareholder agreement.

- Preference shares: Usually only issued when a VC round has been completed recently. As there hasn't been one, I expect Ordinary shares will be issued.

- Voting & Pre-emption rights: As I expect Ordinary shares to be issued, investors should get voting rights (according to company filings). No mention of pre-emption rights is made in company filings as far as I could tell.

- Vesting: As VCs have invested, vesting ( legally destroying founder shares if they resign prematurely) is likely. It would also explain why a founder that left early on has less shares than the current founders.



Shareholder Communication ☎️📻✉️

Few, if any, startups of this scale and industry have ever crowdfunded, so it is difficult to judge how forthcoming they will be with shareholder updates. However, the transparency of a raise is a reliable indicator of how forthcoming a company will be with investor updates; if you find W3W tight-lipped with information you need to invest, it might be best to expect they same if and when you are already invested.


COVID-19 strategy


It is unclear of the effect of COVID on W3W; the mobility sector (e.g. ride-hailing companies/Uber) would've been hit hard, whilst last-mile delivery (e.g. Deliveroo) would have seen increased demand. It is also unclear if W3W furloughed staff or made them redundant. They didn't undertake a hiring freeze however, which is a positive. Hopefully all will be revealed in the campaign; If COVID has materially impacted the business, I would, ofcourse, expect a discount on the valuation.



| 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. I am yet to decide if I will invest in this campaign (need more information).

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. What3Words crowdfunding campaign

  2. What3Words Website, blog and social media

  3. What3Words companies house filings

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