For those who have missed things because they’ve been watching the football, Fanduel, the once darling of the Scottish Gaming industry has been sold on a basis which leaves its early investors with no financial return and its founders with no return. American Private Equity investors get all the sale value; cue wails of anguish, mutterings about legal action and a feeling the nasty Yanks have done a dirty on the plucky homegrown team.
A simple review of the facts shows this is a distorted perspective and, more usefully, reveals interesting lessons for growing businesses in Scotland.
The crucial thing about Fanduel is the latest sale values the company at much less than its implied value when it previously raised money from investors. The terms of the sale, which is a product of weakness not strength, represent collective disappointment for shareholders but the pain is not shared equally among them. The US investors appear not to have got their full entitlement and others further back in the queue got nothing.
This outcome is not a Fanduel only aberration. The problem it exposes, often a mixture of ego, poor advice and ignorance, is that companies try to raise money on a basis which apparently values their company highly but don’t realise the price they may have to pay.
Suppose you have a great idea and start a company, it makes some sales but is bleeding cash. You think the potential is enormous and have detailed projections which show a wonderful future with large profits and cash inflows - but you need to raise more money to get there. But what is your company worth £100 or £100 million?
The real answer is you don’t know but you want the number to be big because then the new investors get a smaller share. This seems smart but actually isn't.
Your advisers haven’t a clue what the real value of your company is either. There will be endless fancy spreadsheets showing what it might one day be worth - but most of the facts in the analysis are actually guesses or spurious comparisons.
Unfortunately, the Private Equity boys and girls are smarter than you. They offer you the £100 million you want in exchange for 20% of your company. You are ecstatic, this values your company at £400 million, you must be a genius - your advisers tell you so.
Just a small snag, a detail really. The new investors don’t want Ordinary shares, they want “A” Ordinary shares which on a sale get their money back first plus a premium of 100% and then its 80/20 in your favour all the way to the £4 billion you think you can get in 5 years time - so who cares.
Roll on 3 years, things have gone a tad slower than you expected and you have had to tap your investors for more money. As you were in a bit of a corner you had to accept their demands and now can’t go to the lavatory without their permission.
Shortly afterwards your investors get fed up waiting for profits to arrive so they force a sale of the company for £200 million which they take all of.
What are the lessons? First, most of the deals where Private Equity funds invest in companies apparently valuing them at huge numbers are just financial trickery.
Second, if your company needs money, consider selling a bigger proportion for the same money but insist the investors hold the same shares as you. Less bonanza if things go well but less chance of damn all if things go wrong - which they normally do.
Pinstripe is a senior member of Scotland's financial services community.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereLast Updated:
Report this comment Cancel