• no leather or any fabric of the sort,
• around £1,000 (most sofas in DFS, John Lewis were about £2,000),
• durable (i.e. hard cushions that stay hard for a long time),
• has to fit through our flat – we have a corridor making quite a tight angle into the room.

After much shopping and testing, we came across Nabru by searching for corner-sofa-bed on the Internet. In a nutshell, Nabru offers a few ‘standard’ configurations, which you can customize or you can design your own sofa. We went with the latter and visited their showroom to give us an idea of what the fabric looks like and what some of the options are (N.B. you can order fabric swatches to get a proper feel). The sofa arrived a mere 3 days (!!!) after ordering it (we ordered it on a Sunday). I didn’t take a picture of what you receive but you can imagine a pallet full of bits and bops about 6 feet high… quite daunting.

The following videos are to show what the bits look like and give you an idea of assembly. It was very easy but a bit time consuming to put together, but great fun overall. I love the fact that everything is modular and everything can be ordered-reordered afterwards. If you ever have a party and break an arm, you can order it! if you ever stain in in a way that is not washable (all covers come off), you can order new ones!! It is truly amazing.

The Business

I find the business truly remarkable and it must be even more fun from the inside. As a reference, we paid our sofa £755 (yes, no typo) and there were quite a few people in the showroom (I believe all of them ordered when we did). Let us assume that the 3 couples all ordered a sofa during the 2 hours we were there (a Sunday). That would be about 18 sofas ordered during the weekend. We can use an average price of £800 as there were cheaper options but also way more expensive ones. The week is probably a bit slower for business and Nabru probably still gets about 10 sofas ordered a day. Overall, this is about 70 sofas ordered for an average price of £800 or a revenue of £56,000 or for a 50 week year about £2,800,000/year. Not bad a business to be in, at least for the revenue side…

Having a look at the cost side is going to be a bit tougher. To start off, there is obviously materials costs. As an estimate, I would say that material costs (raw + transformation) probably make up about 40-50% of the total price. The reason for this estimate is as follows:

• the wood used for the frame is good quality solid wood, and is cut into specific shapes that look to have a sizable amount of surface loss (i.e. bits that can’t be used),
• similarly, the covers and the foams used for the cushions are of very good quality and are tailored to the sofa I purchased.

Overall, I think all the tailoring done to each bit is probably a higher cost factor than the actual raw material. The second cost center is logistics… I mean, this is impressive. If you have a look at the video you will see the pages of instructions and see how they are put together (you can get sample instructions on the website). Considering how many configurations there are and how many ‘bits’ each sofa has, the logistics must have been (and still be) a large area to sort out. The company looks like it does thing in an intelligent manner to scale things up. For instance, The instructions I had were not ALL about MY sofa: they looked like they were a collection of instructions for the large chunks I had (for instance a ‘corner’) that all tied up together. I would also like to add stock in logistics. Let’s face it, the company did not manufacture my sofa in 3 days, I believe they probably just put all the bits of the same palette. I believe the company is a bit like Dell: customers have the choice between a 100 different configurations but 80% will choose the same 20% configurations. I therefore think that Nabru’s stock is ‘optimised’ and has a good rotation to minimise cost. Overall, this would probably add another 20-30% on the cost structure. Finally, SG&A, website maintenance, personnel etc.. could amount to about 10%.

Overall, the margin is estimated to be between 10% and 30% giving a gross margin of £280,000-£840,000.

A worthy investment?

I have a strong belief in businesses that offer modular and high quality products. During my MBA, I learnt that high quality reduces costs by reducing non-quality costs. The dichotomy is that high quality usually rhymes with high price because an industry is so deep. For instance, the ‘basic’ quality for a sofa is Ikea at £400 and let’s face it, it’s not great – whereas a John Lewis sofa will set you back £2,000 but the quality will be great. If teh depth of the industry were reduced i.e. if Ikea sofas’ quality was excellent, we would see the reduction in price due to higher competition.

That is why I love businesses like Nabru: they have figured out how to deliver excellent products and still make a comfortable margin on them! – ask DFS how much profit they would make if they reduced their sofa prices to Nabru prices

So, yes, Nabru is an excellent investment.

Risks? What risks?

Does Nabru have a patent on their ‘technology’ or can anyone order a few sofas from them and start copying the pieces and start a similar business? Similarly, can the business scale? If all of a sudden they had 100 orders a day, what would happen? I think Nabru are aware of this latter issue because I do not see them advertising as widely as they could. If I were a Private Equity, I would seriously approach Nabru and see how the business can be built up – hey aren’t Cimven and Permira buying DFS? hint hint, synergies, mergers and cost reductions !!

‘Because we don’t like to see Rabbits die’ or because we are slightly crazy, Franck and I decided to rescue the company by placing a bid for it. Unfortunately, none of us had or have the adequate funds so we decided to crowfund the bid.

The story thus started with the launch of savenabaztag.com. Due to legal ramifications, we decided not to collect any money but to collect pledges. These pledges would entitle you to a share of the new business with the corresponding voting rights. The idea was to have a democratically ran business where X number of people would vote for Y representatives that would then elect the board. The advantage of this type of corporate structure is that the managers are totally accountable to owners (Warren Buffet would have been proud).

The website received a lot of publicity and visits (more than 1M hits and close to 30 000 unique visitors!!). The site collected a total of €166k in pledges. Unfortunately, the administrator was not that forthcoming and we never managed to access the dossier. We thus estimated how much it would cost to purchase the company and restructure it but we knew that these numbers were estimates.

We were contacted by several journalists and private investors who were keen to chip in if we went ahead. However, none but one were keen to get the dossier for us to carry out a proper due diligence. Unfortunately, the demand was late in the process (48H before deadline) and was rejected.

As it turns out 3 companies placed bids for the company and all 3 were rejected. The average bid was about €300k proving that we were not that far off target and had we had the dossier, we would have managed to collect at least that much from private investors. Currently, the decision as to who will take over Violet is still up in the air but only one company (the creator of the Adibou educational series) is in the loop and has until the 20th to place a reasonable bid.

All is not lost though. We do not know what Adibou’s parent has in mind and perhaps there will be an opportunity to create an Association and purchase the servers, the code to keep the Rabbits alive.

Business and Finance and Crowdfunding

From a pure investment point of view, the experience showed the limits of the current financing and investment models. Crowdfunding (i.e. calling onto public funding) is actually illegal if you ask more than 100 people. In this day and age when the human population getting cleverer and smarter, why should a startup not be allowed to ask the general public from some money. It would obviously need to be within a regulated framework with a limit on each individual’s contribution and some kind of light financial reporting. We think that this is a major lever for future innovation and funding.

As a simple example, take a company X part of a large conglomerate. Imagine X is profitable but not as much a the rest of the group. The group might well decide to liquidate and/or simply close the company. Why would, in these cases, the general public not be allowed to bid for it by offering, €10, €20, €100 euros? Politicians have to acknowledge this new source of funding and financial regulators need to create the appropriate framework. The ball is in your court…

• if the kid misplaces his/her security blanket at home, you can use the second ‘Retrouve Doudou’ to ping the first one. The first one will then emit noise, light up.
• if the kid misplaces his/her security blanket outside and you cannot ping it, there is a code on the back of the ‘Retrouve Doudou’ that allows the finder to get back in touch with the owner via the Iddoo website.

As it turns out (I chatted with the inventor/CEO at the ‘Salon Baby’ in Paris), he made a large proportion of his sales from…. adults (men) who consistently lose their keys!

Is this a good investment?

As usual, let’s have a look at the financials of this company and how much money they make on each product. The product is sold between €20 and €29,90 for two.

To start with, here is a quick component list with price estimates:

• RF chip (the website claims a range of 8m on 2.4GHz), which could be something like that: Freescale RF Transceiver. They cost about €3 each for a good quantity (100s).
• Casing is made of plastic and some rubbery bit that is safe for children. It also has a clippy bit to attach it to the safety blanket. Apparently this is 100% manufactured in France so I would estimate the cost to be in the area of €1/piece.
• Miscellaneous devices (little tweeter, LED, battery, screws etc.): about €1.
• Packaging in France: about €2

Just for manufacturing, we can estimate the cost of each unit to be about €7 giving a total cost per pack of €14 leaving a 30% margin for a €20 price and a 100% margin for a €29.90.

A 30% operational margin is quite low considering you still need to account for R&D, marketing, SG&A (especially in France), sales. The price point seems to be correct (it sells) however, I would have liked to see a consistent 50% margin rather than a discount that kills your margin: a 33% discount in price reduces your margin by close to 60%!! Also, I understand the manufacturer’s concern of safety and why he wants to keep the manufacturing in France, however this is not advertised strongly enough in my opinion.

From a technical point of view, I like the product and I think it will sell. I would have liked to a see perhaps a Zigbee technology (offering a 100m range) because outside of Paris, houses can be that big and probably bigger.

Competitive advantage

They are clearly first to market, at least in France! One of their main competitive advantages is the registration of the ‘Retrouve Doudou’ that helps them build a community and thus keep a certain level of interaction with its users. However, I have doubts whether this competitive advantage is sustainable especially when China will be pouring some cheap copies in a couple of years. Provided Iddoo can develop their brand and create new products or additions to the current products (e.g. pairing more ‘Retrouve Doudou’), they will be able to grow and become the reference for Children ‘gadget’ products.

Would I invest in it?

In this situation, I would like to know what the long-term strategic plan of the firm is. The product is excellent: it sells and will sell more. However, investments should be long term, in a good company that will be come great. I would be interested to see what they do with their profits, if it anything but reinvested capital, (in my opinion) this will forecast trouble ahead.

In order for an investment to give you a satisfactory return, you thus want to purchase a company (or part thereof) at a discounted price to its current or future value (as calculated during your analysis). This is when the stock price comes in… with a publicly-trading company, the price at which you will purchase the stock of the said company will be determined by the market. The key is thus to buy the stock when it is trading at a significant discount to what you have calculated previously.

Finding companies matching these criteria is surprisingly easy since it depends on the analysis you have carried out and how you interpret a ‘significant discount’. Here are a few examples:

• Ben Graham (and many other value investors) define this criteria as to when the stock is trading below the company’s net working capital
• Venture Capitalists and Private Equity-st understand a similar concept as they are investing with the assurance that the company’s present value is below the company’s future value

Because the market is not perfect (otherwise arbitrage companies would never make money), companies’ stock will sometimes match the above criteria on several occasions that do not change the company’s value (significantly). For instance:

• If the whole market is depressed like in a bear market
• If the company recently received some bad news (for instance, it missed its quarterly targets)
• If the company is currently considered ‘uncool’ by investors (c.f. IT bubble of 2000)
• Any other reason you could think of…

Obviously, this kind of investment assumes that the company’s ‘cheap’ stock price will eventually reflect (and surpass) the valuation that you have made above. This part of the theory is backed by empirical data and analysis provided by Ben Graham, Warren Buffet and many other value investors.

The question thus remains: how would you define a company that you think will make a good investment… and that will be left for another post.

• a round plastic disc with a sticky side
• a new way of communicating amongst people
• a shy guy’s way to a lady’s heart

However, since all good marketers know that a “product is what a product does”, let me describe to you a plausible situation. Imagine yourself walking down the street minding your own business, when you suddenly pass this wonderfully beautiful girl/man. You have the choice of either approaching him/her with the high and present risk of failure and looking ridiculous. Or, you can quickly text a message to the number on the wuiper and then launch it onto the girl/man (hence the sticky side). Later on, the object of your desire will find the wuiper inviting him/her to texting the wuiper’s number to retrieve your message. The beginning of a love story….

If this does not sound familiar or too converted to be economically appealing, imagine this other situation. You are 15 in high school and would like to talk to this girl on the other side of the classroom but do not dare to, so you send her a little piece of folded paper. Now place this 15 year old into today’s world of mobile phones, internet and…. wuipers!!! Makes business-sense now?

The picture on the left is to give you an idea of what one wuiper looks like. The image is dark and not very focused due to real-life testing conditions or ‘market research’. Applying Mr. Buffet’s principles (‘our market research consisted of buying the product and trying it out’), we set out to launch a few in a pub to get the people’s reactions. The result is that much money will need to be spent to educate the customer. Indeed, the first reaction was to throw the disc away. The second reaction (after a bit more quizzing as to what the object is) was a LOT of interest (hey, who doesn’t like to have a secret lover!).

Would you invest in the business?

Well, let’s consider numbers here. A little disc like this one probably costs about €0.01 a piece to manufacture in China. Add on top of that another €0.1 for shipping the wuipers to Europe. Finally, you’ll probably want to spend (at least) €0.2 on customers’ education. Finally, add another €0.1 for the servers, the phone line etc… This gives you a total unit cost of about €0.4 for a large quantity. This is of course purely speculative and will depend on volume amongst other things. For, say a first batch of 100,000 units, this sounds about right.

The retail price on the website is €1.5 for two wuipers – they come in what looks like a teabag. During our market research, we found a customer price point closer to the symbolic €1. This would give you a margin of about 20%-50% depending on scenarios and assumptions. So, for about 100,000 units, this could be a margin of €20,000 to €50,000 that could be directly re-invested in the business.

Let’s just look at UK universities as a market for now. UCAS tells me there are about 0.5M people enrolling into University every year. Since the average course length is about 3.5 years (make it 3 for easier calculations), this gives you a target population of 1.5M/year. Let’s assume 1 in every 10 people will buy the product once a month (this is likely to be more), this would give you roughly about €1.8M/year in revenue or about €360k-€0.9M profit a year! This is not bad for universities alone (considering the school population is going to be bigger than that – thank you compulsory schooling!!)

Is it a good business?

Let’s think about it from different aspects.

First of all, consider the novelty aspect and the marketing strategy. My opinion is that the target age group ranges from teenagers to mid-20 year olds (including university students and club-goers). This population doesn’t have very much cash to spend however they spend the largest proportion of what they have on… entertainment (and drinks)!! The wuiper would therefore be totally appropriate for these people at a price point of €1-€1.5.

In terms of pure marketing, this has the potential to become viral and to take off very quickly amongst the target population where ‘fashion items’ are taken up at a breathtaking speed. I would go round schools and universities and find ways to get the people interested. For instance: I could totally see this kind of product being sold at entrances to clubs where people queue, think about their ‘pulling strategies’ and what their night will entail. Raise their hopes by just 1% and wuipers will sell like hotbuns.

In terms of novelty, there is clearly an upside and a downside to being first to the market with this kind of product. The upside is that you will get brand recognition. The downside is that you will be the first (and only one) spending money on customers’ education.

Looking at competitors’ reaction, here is the most likely scenario (taken from ‘pogs’, ‘scoobidoos’, etc…). You launch the wuiper, it starts taking off because it is novel and people are interested and no everyone else has it i.e. it is a ‘fashion item’. Your competitors (probably in China) hear about it and start manufacturing bucket loads of the same product pricing it at €0.1 less – let’s face it, it’s a plastic ring with glue and a number, can you justify a price premium on it from a customer’s perspective? Wuipers (and their competitors) are everywhere making them ‘uncool’ (because not that unique nor novel anymore), the product dies. Now, I think this kind of scenario is likely to take 3-5 years, which is plenty of time to make (lots) of money and invest the proceeds into another business. The kind of the wuipers will be to act quickly and to target group leaders.

One potential pitfall: if the wuiper works, production and shipping will have to follow.. fast! This point is often overlooked: if people are ready to buy your stuff, you need to be able to sell it to them.

You will find below calculations carried out on the 6th of August to determine whether Le Noble Age was a bargain trading at €14.7.

I created this spreadsheet after hearing about their 3rd trimester results. What I started doing was to extrapolate the 3rd and 4th trimester progression with regard to current market conditions and specifically answering “What is a reasonable growth rate for these two trimesters?”. I only worried about these two trimesters because – for once – I took a short-term view of the company’s growth and value. Assuming constant margins and constant float, you can calculate the PER as it will be at the end of the year if the market decided not to reflect the new results (rendering a decrease in PER). However, it is safe to assume that the market will take into account the new results and that the PER will at least be that of today. Using this assumption you can calculate a share value for the end of 2009 of about €18. Given today’s price of €14.7, this could be a real bargain.

Update : You learn something new every day and today’s lesson is: “Always make sure you order went through”. I placed a purchase order at €14,9 and unfortunately, it did not go through so LNA will not be appearing in my portfolio.

Does this mean states should limit inflation by increasing lending rates? Isn’t this the most promiscuous way of then creating a bubble? The fundamental financial definition of a bubble is a state in which the company’s floating equity exceeds its book value assets. Of course, the difference takes into account band value, future potential, patents, ideas etc… . Fundamentally, all long term investors always avoid stock in which this situation occurs. Of course, they will miss out on extremely high return for 2,3,4 years however their “safe” position will eventually mark the underlying of the investment market.

Today’s market has touched rock bottom (or near there anyway). This is an ideal time for investment, safe long term investment in which individuals can get good rates over 5-10 years. In today’s market, many quoted companies have share values far below their asset value and – sometimes – even paying a dividend higher than the stock price !! How can this not be a win-win situation? The issue is always finding them, but you cannot get something for nothing, so time must be spent looking at the stock market and its companies.

In any case, Bubbles are understood and explained, and yet, every 10 year or so, the whole market is ‘tricked’ again and appears surprised that the new trend, which they invested in, collapsed and left them penniless. Growth cannot come without risk and without an underlying reason… The Coca Cola brand value was not created over 1 day, week, month or even year so if a company’s stock takes off, either find a sensible reason, or forget it!! It’s a Tit for Tat situation: if everybody did the sensible thing, Bubbles wouldn’t be!

1. the “community” is doing it anyway
2. the “community” will get the features it wants
3. the “community” will alleviate pressure on the developers
4. The first argument poses an interesting dilemma for most companies as it is/can be seen as pure “theft” of intellectual property – after all, people are reverse-engineering their software and releasing unofficial versions…
5. This argument is at the core of going open source… after all a company’s product is meant to give the customer what he wants. But what if it doesn’t know what a customer wants? then let the customer satisfy its own needs.
6. The 3rd argument is the easiest to see from a company’s perspective: programmers reuse code = they spend more time on value-adding bits = reduction in costs.

Where the value lies…

A company has developed a product that is currently selling very well. This product has some sort of software that allows it to do all the cool tidbits, which give the product its value (that’s why customers pay for it after all). There is however a gap from the customer’s point of view: the difference between gross value (what the customer thinks the product will do) and net value (what the product actually does). The difference being a perception cost, which importance can go from disappointment (”oh, it doesn’t do that”) to frustration (”I’m never buying from this company again”).

… in reducing perception cost

So far so good, all companies know they need to reduce this perception cost if they want to improve their turnover. The problem is however twofold:

• the perception cost is hard to qualify (what does the customer want?)
• in our fast moving world, the perception cost changes quickly (what does the customer want now?)

The first point should be addressed by a good marketing department. The second point can only be addressed through the constant release of new products (or new patches, updates, upgrades…). Firefox is a typical example is this domain. The customer wants Ajax support, here’s a release, the customer wants tabbed browsing, here’s another release1. I didn’t choose Firefox innocently because here is where the power of open source truly lies:

open source allows customers to be involved in the product fabrication

… in customer’s eyes

With this argument in mind, one could wonder: so where is the value of my product? and why would a customer pay for something he can get for free?

The answers to these questions are industry and sector specific, you cannot compare the way Nokia makes money to the way Talend makes money despite the fact that both companies use open source. Open source is a new dimension to the business world that will be explored in another post.

Firefox actually got a lot cleverer with the release cycle through the use of addons allowing it to provide and test new functions before official releases [↩]