Startup Pitch Night: Part 2

Color Commentary

1. Incomplete Information

As I said in the last issue, #17, being one of the judges of the Pitch Arena startup competition took me back to the root of pure Mungeristic Investing Practice. Do I understand this company and can I understand what they want to do? Are they going to get killed by their competition? Who is the team who will be stewards of my money? What are their prospects?

Here are the companies that pitched at Pitch Arena, with their websites.

Yova
ScanTrust
Just Egg
SwissLoop
Pairfect (website is in German only, but you can use Google translate)

Before the event, I spent a few hours finding what information I could about each company and writing down my unanswered questions for each one.

What did I need to know to decide if I would hand over a chunk of my money to these people?

Everything that follows is, as it always is herein, entirely my own opinion and based on incomplete information. I can completely imagine one of these companies saying “but you completely missed the point!” as, indeed, I did with ScanTrust before seeing their presentation. Incomplete information. The one constant and the bane of every investor’s existence.

2. Yova

Here is the summary provided: Yova Impact Investing makes it easy to invest in companies that create positive environmental & social impact – without compromising financial returns.

OK. What the heck does “make it easy to invest in companies” mean? Do I do the investing myself? Do they do it for me? Makes it easy to invest in Misson-oriented high-return companies…HOW?

Obviously I was extremely interested in this one, considering, you know, I’m also an investor. It turns out they’re trying to say that they’re a robo-advisor. The user puts in their interests, and their algorithm chooses from their internally-approved list of companies to match those interests and set up a Modern Portfolio Theory type of weighted portfolio.

Again, HOW? I want details. How does the algorithm pick these companies, and by what criteria does the company offer certain companies but not offer others? If I delete a few companies, how can I be sure what I’m left with are actually good investments – beyond the Mission itself? Finally, what differentiates them from the many, many, MANY other robo-advisors that claim to offer Mission-oriented companies?

I reviewed their website to try to understand what their version of sustainable investing really means, but they don’t explain their system.

Therefore, before the presentation, my questions were:

1. If people lose money, no matter how great they feel about the impact of it all, they will leave the service. How do you achieve that competitive financial return?
2. Which companies it is will make or break the investment. How does it decide?
3. It invests in individual stocks. So why do I need to pay you to do that?
4. A big issue for robs-advisors and investing apps is How do users pay? Could be per transaction, or based on assets. how does that align users with the company?

I learned from the presentation:

Yova claims that sustainability indexes are biased and wrong, and their value proposition is that they provide much “better” picks of sustainable companies. I put “better” in quotes because WHAT DOES THAT MEAN? Their picks are actively chosen by them, to my understanding – they still did not explain exactly how. If a company is not available through their app but I want it – what then? If a company does get on the list and user does not want to invest in it, the user can then remove it and the computer will re-weight the portfolio. What that actually means, I don’t know. I find these same problems with all these “purposeful” and “ESG” robo-advisors and ETFs. By using them, you buy into their black box of systems and standards, and don’t really know what companies you’re missing out on or how the magically uncompromised financial returns are going to pan out.

The person from Yova who presented failed to tell us how they make money, so that’s what I asked him about, and his proud answer was that they charge users an annual management fee – some percentage of assets you’ve put with them – which includes everything, so there are no transaction fees or other fees. He seemed to think that was a big plus. However, as someone with a lot of questions about how their service works, it made me think I couldn’t try it out without paying them a large sum of money. I have a lot of questions about this company and they have a LOT of competition. I don’t know why it will win over anyone else doing pretty much exactly the same thing – and there are a lot of them in this space.

3. ScanTrust

Here is the summary provided:ScanTrust provides a secure cloud-based IoT platform for production authentication and supply chain visibility solution.

I’ll admit it. On my first look, I did not understand this company.

They make QR codes, but secure ones. Ok. Do we need secure QR codes? My only experience with QR codes is once scanning one just to find out what would happen, only for it to take me to the company’s main website. That’s it. I could have just typed the first three letters of the company name into Google and it would have come up rather than having to go to the camera and figure out how on earth to scan a bloody QR code. Never again.

Therefore, before the presentation, my questions were:

1. Seems dependent on consumers downloading the app and using it to be valuable to companies. Most people don’t care about instructions, don’t register their products. Why would a consumer scan the QR code?
2. How does ScanTrust make money? Does it charge the product company, the consumer through advertising, or both?

I learned from the presentation:

ScanTrust’s presentation did what a great presentation does: it completely turned my opinion around. It started with the story of the founder looking for safe baby formula in China for his baby. There were contaminated and counterfeited cans of formula that had killed some babies, and no one knew how to tell if the one they had was legit or fake. So, he though, why not slap a unique QR code on each can that is secure and can’t be copied, so that the end consumer could easily scan it and know if it is a safe product? Furthermore, that scan could bring the consumer to an informational website or provide promotions, etc. Additionally, the secure code would allow the company to track its products individually through their supply chain and get much more information about how their products are spread.

I mean, to me, that’s a great value proposition. Life-threatening problem, clean solution, and ancillary commercial value as the cherry on top.

My only question was the one I listed first above – outside of a dangerous baby food situation, why would a consumer scan the QR code?

The answer cracked me up. First, he asked, “Are you American?” Definitely, I answered. He responded that Americans hardly use QR codes, but the rest of the world – particularly the third world – uses them regularly. ScanTrust doesn’t even intend to focus much on US companies or consumers and they are based in Europe. Good enough answer for me.

Another member of the panel asked how they make money. They are a business-to-business model and are paid by the businesses. Any advertising or consumer information collected is entirely gravy. So this company is making money, has a strong business model and strong value proposition, and patented technology. I like it.

4. Just Egg

Here is the summary provided:JUST Inc., a San Francisco-based food tech company disrupting the food industry with plant-based products.

Hmm. Well, that’s a broad description. They make a vegan egg substitute. They don’t have any other products right now, to my knowledge. It’s in the popular industry of meat-free foods, so it’s automatically a serious contender IF the product tastes good. And it must – it’s already the second-best performing non-egg product after Egg Beaters.

All I wanted to know were the ingredients. When I’m in the grocery store, I go straight for the ingredients, and I don’t care how “conscious” and “sustainable” a product is: if the ingredient list isn’t what I want it to be, I put it down and walk away.

In big letters, their ingredient list states this egg substitute is made of mung beans and turmeric. That’s what they want us to notice. The rest of the ingredients are in much smaller font and include various binding ingredients such as gellan gum, natural flavors (which is usually code for soy), soy lecithin, tapioca syrup, and a few science-y things I can’t pronounce. I find that formatting interesting because many natural foods companies trumpet their ingredient list proudly, and sometimes even put it right on the front of the package as part of their branding. Not so with Just Egg.

Once I read this ingredient list and nutrition information, my next question was “how does the nutrition compare to just…um…an egg?”

If I were packaging this product I would want to say something like “5 grams of protein, compared to only 3 grams in an egg!” or something along those lines. Or, “We have Vitamin C and Calcium in this product!” I don’t know. I’m not a marketing person. I AM a consumer and what I want to know is how this compares to an egg. But Just Egg didn’t tell me.

So… I opened a new tab on my browser and looked it up. According to incredibleegg.org (an egg industry group, so they are very biased for eggs and exactly what Just Egg is up against), an egg has 70 calories, 6 grams of protein, 30 mg of calcium, 185 mg of cholesterol, zero sugar and zero carbs.

Just Egg’s serving size of 3 Tbsp has 70 calories, 5 grams of protein, zero calcium, zero cholesterol, zero sugar, and 1 gram of carbs. (I can’t link directly to their nutrition label, but go here and then click on “Our ingredients make it JUST”.) No mention of whether that corresponds to one egg or two eggs, so I still don’t actually know how the two products compare head-to-head.

So, you know. Pick your poison. I’m a food weirdo who reads labels with great interest, and most people are just thinking “whatever, I’m excited to reduce those horrible chicken farms and eat something that’s not made of animal products.” This thinking is exactly why Beyond Meat and Impossible Burger are, like Hansel, so hot right now. (Yes, that’s a Zoolander joke. I am an Old.)

The truth is that the ingredient search and egg comparison I went through really doesn’t matter to the market as a whole. What matters is that consumers want alternatives to animal products, and they want those alternatives to be sustainable and better for the environment and not hurt any little chickies. This company is being driven by the want for healthy, sustainable protein—not egg replacement. We seem to be excited to buy the strange manufactured substance that was engineered in a factory to taste like a different food entirely. Therefore, as an investor, and not a consumer, the question I have is: which company will win? Will Just Egg win over its undoubtedly well-funded competitors?

Therefore, before the presentation, my questions were:

1. WHY EGGS? How did you decide on making an egg substitute instead of meat substitute, butter, ice cream, etc.? Eggs are hard to stack up to the real thing. Eggs help make a cake or bread rise. Can you bake with them? Why eggs?
2. How does it compare nutritionally to eggs? I didn’t see that on your website anywhere.
I really love eggs. This is processed food with additional ingredients like soy lecithin and tapioca. 3. What makes this mung bean product better for me than an egg?
4. What’s your competitive advantage over other meat-free companies coming in and making their own egg replacement?

I learned from the presentation:

Just Egg brought a chef and made scrambled “eggs” right there on the stage, and served them to the judges. They were GOOD. Tasted just like eggs. I see why consumers buy this product.

They chose eggs basically, from what I understood, because that’s what they discovered they could imitate well in the factory. It’s not usable for baking, though they are working on that. How sustainable their mung bean product is, really, is still a question mark for me. They claim it’s more sustainable than chicken egg farms, but mung beans require a lot of water and the product requires a lot of processing, so I’m not convinced.

Still, they gave a great presentation. They explained their manufacturing process and how they hope to change the food system with more products. They trumpeted their competitive advantage. What I particularly loved about this presentation was that the CEO regularly mentioned mistakes he had made, assumptions that had been wrong, and pivots the company had made. That is a person I want to steward my money. I came away with a strong understanding of why this company is winning against its competition – at least in fundraising hundreds of millions, if nothing else. They’re already in stores worldwide. These guys are going to go far.

5. SwissLoop

Here is the summary provided: Swisspod Technologies develops the first, cheapest and most efficient Hyperloop solutions in Switzerland.

Whoa. This one is nuts. Hyperloop!? And so much fun to read about! I spent by far the largest amount of my research time on SwissLoop because it’s an entirely new transportation technology about which I knew nothing, and space-agey gadgets and gizmos are just cool, what can I say? This is what makes working with startups so much fun. What’s our world going to look like – not in ten or twenty years, but in fifty years? One hundred years? (These rail guys think this hyperloop shenanigan is stupid and I really enjoyed their polemic.)

Therefore, before the presentation, my questions were:

1. As an idea, this is exciting. As a business, talk to me a little more about your business model. How to build the infrastructure? What is needed?
2. Switzerland does seem like a great testing ground for new technology, but it has invested a huge amount in rail infrastructure. How will you convince the country to veer away from railways?
3. Major obstacles are government permission and financing. How much does building this infrastructure cost and how does it compare to trains? Or to put it another way, why would the Swiss government spend on this?
4. Main competitor? Branson in USA with Hyperloop One, and other hyperloop teams from the competition. What makes you different?
5. What’s your path to revenue?

I learned from the presentation:

Not much. The presentation merely described the technology and completely ignored the potential of the company itself. Our questions were all about how it would make money and why they would expect to raise any money, and they weren’t exactly answered. They had a huge opportunity to argue that Switzerland, with its small geographic size, heavy usage of public transport, and worldwide status as a safety and manufacturing leader is the perfect place to build a realistic Hyperloop – but they did not make that argument. These guys have a cool technology, but they weren’t ready to present to investors as a real money-making outfit. I think they’re crazy geniuses, and I really look forward to following their company as it matures.

6. Pairfect

Here is the summary provided: PAIRfect is a unique digital program for couples to maintain and improve their relationship.

A friend texted me after looking up this company, and asked, “Do we really need an app to tell us if our relationship is working?”

Turns out, this app is way past that stage of relationship crisis. Pairfect is what you turn to once your relationship is no longer working all that well, and you need some outside help. (We’ve all been there, right??!) Their website – with the help of Google Translate, because my German is not good enough to decipher relationship-y words – explains that the app is really a communication method between partners. You both sign up and the app essentially facilitates messages between the two, such as desired gifts and appreciations.

My first question with any app is always about its competitive advantage. It’s SO easy to delete an app. Even if I desperately want to use a relationship-facilitating app, what would keep me coming back to this particular app? Why wouldn’t I use one of the other ones that do the same thing – of which I’m sure there are many?

Therefore, before the presentation, my questions were:

1. How does it make money?

2. What is your competition?

3. Many theories of how to improve relationships out there. How did you choose this particular paradigm of improving relationships?

I learned from the presentation:

Pairfect makes money by charging its users a subscription fee. Hearing that only made me more skeptical of its competitive advantage, because I’d rather get a free app than one I have to pay for regularly – and it isn’t cheap. I don’t remember the exact amount, but I remember my reaction to the amount was “there’s no way I’d pay that for this app.”

They also didn’t explain their relationship-communication model or why they chose it, so that’s what I asked about. They answered that there’s some research underway to prove their method. So, in other words, it’s totally untested and unproven as of today. I think Pairfect needs to go to a freemium model and lean heavily on justifying why anyone should follow their methodology over a competing one.

7. Results

After the presentations, we judges huddled and agreed that the competition between the companies was actually rather apples-to-oranges. These companies were all at different stages of growth. SwissLoop had really just been formed and doesn’t even know how it will make money, while Just Egg is worldwide and has raised hundreds of millions of dollars and has revenue coming in. That said, Just Egg was by far and away the best. It had a proven product, strong track record, and the competitive advantage of in-store placement and patents. It also won the award voted by the audience in the room.

Knowing that, we decided to award our judge’s award to one of the other companies. With its strong value proposition, ScanTrust won.

LET’S GET PRACTICAL

Were your questions different from mine?

Probably. That’s investing practice. Practice makes perfect, but nobody’s perfect, right? We each have different backgrounds and interests that create varied perspectives, and that’s ok. It’s quite cool, actually. After the event, I debated the merits of these companies with some friends who were in the audience and their impressions, in some cases, were diametrically opposed to mine.

Take a moment to notice your reactions compared to mine, and don’t dismiss either one immediately. What did I miss? What do you know about or wonder about that I did not address?

Does that express any biases you have, or show where you tend to go with your investing practice internal checklist thought process?

Which companies did you ENJOY looking at the most? Which ones sparked your interest, and did that correlate to in which ones you would potentially invest? (Like, for me, Swissloop was the most fun to research but I would not invest in them at this stage. Once I understood what ScanTrust does, however, it became a lot more interesting. Good note to myself to sometimes burn through that initial stage when the company might be hard-to-understand.)

Noticing is everything – it develops awareness. Conscious noticing becomes unconscious awareness pretty quickly. It’s worth the time to develop that muscle.

Also, if you live where Just Egg is sold, go try it. It’s really good!

Ownership Disclosure: Danielle Town owns shares in Berkshire Hathaway (BRK) and Square (SQ).

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