Microcosm - 2nd Seedrs crowd-funding round

thanks for explaining, vb, hadn't factored in the re-valuation, your numbers make sense.

Hopefully that trend continues (i.e. we don't screw it all up) until such time that either we exit and you all get a big piece of cash, or a secondary market emerges (perhaps within Seedrs) that allows you to sell sooner than the exit event and you cash out sooner.

note that an SEIS holding must be kept for three years otherwise HMRC will reclaim relief from previous tax periods

note that an SEIS holding must be kept for three years otherwise HMRC will reclaim relief from previous tax periods

Yeah, I suspect that Seedrs have intent to create a secondary market, allowing you all to trade your shares... but because of SEIS they won't be able to do this until 3 years have passed, so they've got a while before they need to even consider what that looks like.

Happy for you to do so offline on email or whatever but can you be more detailed about how you've arrived or will arrive at your new valuation?

Happy for you to do so offline on email or whatever but can you be more detailed about how you've arrived or will arrive at your new valuation?

Sure thing.

It's still mission impossible without substantial revenue, and we are still in the early stage of getting the product right for the market we're aiming at... but I'll give you the gist here, and am happy to come to Wests and answer in detail. I won't share any detail of the opportunities online, but happy to do so offline.

First, our original valuation of £500k was too low. We based it almost exclusively on the acquisition offer for LFGSS and myself, and because we did not have what we felt were any assets we didn't factor in much else, we didn't even have staff, nor IP, nothing. That is, we are what the market thinks we're worth, and we just used that figure for the first valuation.

The new valuation is much the same in that we are what the market says we're worth. But whereas in the first valuation the figure came solely from the past and the past was LFGSS, the new figure comes from what we've achieved to date, what it would cost to build the equivalent, the assets now owned, and the revenue that is expected if the opportunities on the table are realised as a result of the investment.

We haven't reduced those things to line-item numbers, as some things vary from day-to-day (i.e. the email I received yesterday morning from a publishing company enquiring as to when we'll have the product available for them to use would greatly change any revenue numbers, and as not all opportunities will come to pass I am erring on the side of caution in guessing multipliers).

What we generally factored in:

1) We now have IP in the product architecture and implementation

2) We now have an actual product launched and a couple of genuine customers using it on a small scale (proving some product to market fit, small traction)

3) To build similar without our knowledge and domain expertise would require a dev team of a couple of people for a couple of years (it's not mission impossible but they'd have to figure out things we know from domain experience), the cost of that is substantial (and part of the value of the company)

4) We have the trademark for Microcosm

5) The market opportunity from one major customer has the potential to put us into the most profitable segment of the market from day one, and on a decent scale within that segment

6) Conservative projections without including that major customer but generalising the other go-to-market strategies were already fairly sizeable

7) We still have the historical offer for just LFGSS valuing the worth of a company hosting a site this size

8) We have a load of physical assets (drop in ocean compared to numbers above, but this number we know more accurately)

We took that and created a lower and upper bound range for the valuation, and shared the figure with the accountant, Seedrs, lawyer, and a few very seasoned (greybeard) investors to basically see what they thought was a fair valuation within that range (or to tell us if our estimation was junk).

What we were told (summary of all opinions) is that we could easily argue above the London average, but that a £2m figures put ourselves in the average valuation for early stage funding in London and no-one would have a problem with that given what we have accomplished to date.

An indication of the London average for early stage investment can be found here: http://citymeetstech.com/2013/06/stats-for-pitch-event-on-the-20th-of-june/

Another investor (who is likely to be in on the £100k round as well as the £400k round) suggests we could justify a substantially higher valuation, but reckons that we're very smart to offer the £100k to end users based on a lower valuation and to use that event to then demonstrate social proof of the product and increase the valuation before we actually start the £400k round. We hadn't thought of that, but we have now.

In essence, the valuation we're thinking of is roughly the average for London for the stage we are at, whereas others feel we should be more aggressive and go higher. I prefer to value fairly and not to overemphasize parts, so I'm happy going for the average if actually it's a figure that few would dispute and I can defend easily.

The really big factor is the market opportunity, which is the very reason we want to take investment to hire and grow. We do not expect all of those opportunities to come to pass, so we're not summing them and multiplying them... we are estimating potential revenue over 3 years based on the eCPM (effective revenue per thousand page views) rate that LFGSS earns, and only based on achieving half of the opportunities that are available to us. Hence the valuation, and hence the view that even in the ballpark of £2m we could still be undervaluing. I don't want to overvalue though, as it may create problems for future rounds of investment, so we'll stick with being fair and realistic.

Wish I'd put £10 in, will that be an option for us poor folk this time.

Wish I'd put £10 in, will that be an option for us poor folk this time.

Yes.

Or at least, some low figure will be available.

Shares in Microcosm need to be perfectly divisible down to the smallest investor. At the moment £10 = 23 shares.

So I'm not sure that it would be a £10 investment as that might not perfectly fit £10.

Seedrs will have the headache of sorting this. Either we invent shares through sub-division that could divide perfectly into a tenner, or Seedrs restrict you to making investments that are perfectly divisible by the share price... i.e. ask you to make an £11.55 minimum investment.

The general answer is yes, the details are a problem for us and Seedrs to resolve, but you'll see how we resolved it in whatever way you invest (that is, if you can invest a tenner, you'll know we sub-divided the existing shares).

Thank you, David. You're very considerate person.
I have to start saving now - need to think about my non existent pension plan.

That's cool, I'll try and find whatever a few shares is, just so I own a nominal amount, and obviously for the megabucks when you're the new apple.

Actually, thinking about it there's a third way in which Seedrs could achieve shares divisible by £10 without sub-division, they could increase the valuation so that the investment was for some strange and decimal place % but the investment was still £100k.

That keeps all of the share calculations simple, but would make the rest of the math hard. As long as it wasn't a major depart from whatever we finally agree to be the valuation, it wouldn't be a crazy thing for Seedrs to request.

Would def be keen on investing below £500. I'd be investing for a few reasons, chance of making a bit of money is one, but helping out is another, so to be able to invest say £250 is def interesting, especially with a kid (and a new camera, ehum) on the way.

(if this goes big, i'll regret that camera a lot. Hopefully not the kid)

Did I miss how much the min was? Also, wonder how this works for non UK investors

Did I miss how much the min was? Also, wonder how this works for non UK investors

You may have to check the Seedrs FAQ for non-UK investments. I'm not sure how it works, but obviously the SEIS benefits are UK taxpayer only.

Actually... just looked here: http://www.seedrs.com/faq/items/85_who_is_eligible_to_join_seedrs

Appears to be UK only, but you have that criteria right? I mean... I know you're in SF right now, but you only recently moved and aren't you a UK citizen?

Sure, still have UK address too. Will check it all when on a pc rather than phone. Cheers

....they could increase the valuation ...... As long as it wasn't a major depart from whatever we finally agree to be the valuation, it wouldn't be a crazy thing for Seedrs to request.

How do they make the valuation? Based on what factors? Is it seedrs hunch or is there an alogrithim? They must be able to adjust it to simplify investor comprehension and calculation *

We make the valuation until such a time that an exit event such as an IPO occurs and the market takes over fully.

What I meant was that it is conceivable that to allow you guys to invest round numbers like £10, that Seedrs could figure out a fractional difference in valuation +/- 1% that would result in £10 being divisible by the share price.

That is, if £10 invested acquired 6.997654 shares (fictional numbers), you could imagine a very small valuation adjustment could be made to make it such that £10 acquired 7 shares.

Clearly Seedrs have no business in valuing the companies on their books, the market effectively does that by investing or not, after the entrepreneurs have estimated a figure.

But Seedrs do get the headache of working out how to allow you to invest, and at what amounts. If they can't get it to work neatly then the only real tool they have is sub-division of shares where each existing share holders shares get split into more shares (which you own), and then as those shares are of lower value it becomes easier to group them into £10 increments (£10 being the lowest amount you can invest via Seedrs).

This is just all a headache for Seedrs, nothing in our valuation or the amount offered is dictated by Seedrs, though the staggering of the round is being dictated by the SEIS and EIS rules that require us to complete the £100k round and to have spent 70% of investment raised before taking investment under EIS.

Will there be an email going out existing investors when the 10 day period starts?
I would like to make sure my investment remains the same, but hardly ever come on here any more, so may miss it if the announcement only goes out on this thread.

Will there be an email going out existing investors when the 10 day period starts?
I would like to make sure my investment remains the same, but hardly ever come on here any more, so may miss it if the announcement only goes out on this thread.

Yes.

Original investors should all have had an email already outlining the intent to raise more investment in the form of an update every month or two.

If you are an original investor and have not received any emails from investors@ microcosm.cc then email me (or PM) the email address that you would like to have added to that list.

surprisingly a search for 'investors' in gmail did not turn up a lot of scam emails. Must Try Harder

In for the second round of investment, read through your initial post but still a little unclear as to how much that means I need to put in to avoid dilution...
#stupid

BTW Great work, guys... :)

what have the returns been like on the first round of investments ?!?!?!

;-)

There aren't any returns on the investments. Yet.

I've been doing some digging on the dilution bits to try and get my head round it, and found an excel calculator that I've stuck some numbers into, and I think that it works...

I've dropboxed it here for anyone else that would like to play with it - http://db.tt/JV2sF9OE

I think that what it's telling me is that you need to put in 1/5 of your inital investment to avoid dilution.
So if you invested £500 in the first round, you'd need to add a further £100 to keep your percentage the same.
The initial £500 would have bought you 1% of the round, and 0.1% of the whole company. Following the next funding round, this would become 0.095% of the company, requiring your to purchase 0.005% of it in the round of funding, which is 0.1% of the total shares offered this round, which would cost £100.

To answer Dicki, your intial shares are now worth 340% of their inital value (based on the valuations that David had given (10% was worth £50,000, 5% now worth £100,000)

I think that I've got that straight, but I'm not a financial anything, all advice is worth what you're paying me for it, and it's therefore all wrong. Use at your own peril, etc.

nice breakdown!

Having read Davids posts above again, that spreadsheet is fine, but missing some things that I don't have the numbers for (like the option plans, and amounts set aside for key employees) and is limited in that it doesn't allow you in increase those in further rounds.

Having said that, most of my calculations on it still stack up I think, and it gives a good overview.

Again, I think that I've got that straight, but I'm not a financial anything, all advice is worth what you're paying me for it, and it's therefore all wrong. Use at your own peril, etc.

---EDIT---

I'm kind of assuming that early investors will be able to hold their percentages, but not increase them in that pre-lanuch 10 days, does anyone know if I'm right on that?

You can only take up allocation but cannot increase. It can only happen when the normal drive starts where you have to fight with the plebs and the VCs in a fight to the death