Unicorns and Nightmares

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Let it not be said we’re asleep on the job here in our dismal pit. No wide awake are we. Hence, immediately a quill pen started scratching when we read this story on Sky News:

Simba nightmare as mattress start-up’s value crashes to £20m

What’s going on in dreamland? Ah! The lure of riches. It’s that chasing after unicorns that’s got people terrified:

The online mattress retailer has been forced to slash the price at which it raises new funds for the second time, Sky News learns Shareholders in the online mattress retailer promoted by Gareth Bale are facing a nightmare after the company’s valuation was slashed to just £20m in a bid to secure new funding.

This—and this comes from the news story, not us—is that Simba Sleep (strap line: The Perfect Night’s Sleep) seems to have a little value problem. What seems to be happening is the much hyped start-up balloon is deflating. This new venture started in July 2015 with all that promise of gold isn’t delivering.

We know that start-ups before they start trading are all promise. In that little book called the business plan. The hopes and dreams of the founders to revolutionise and disrupt an industry with…?

Well, some new social network might do, a tech finance new bank, a new taxi service, maybe. They’re those mystical beasts, unicorns that somehow merit a valuation of a billion dollars or more even before they turn a profit or make a single cent in sales.

But mattresses? Who you’re kidding?

Let’s do some little back of the envelope sums here, as Tim would say. We have seen him use a napkin or two (valuable souvenir items we can offer you at their fair value, if you’re interested Just drop us a few mangy fifty pound notes (about 20 should suffice, we’re not greedy—but the wife is muttering about a new pallet)). There’s 27 million or so households in the UK. The average is 2.4 people per house. Now let’s be generous and say 3 beds. That’s 81 million or so beds out there. Add in a few from the hospitality industry and we’ll be generous and round it up to 90 million.

A little commercial run on those cable channels advertises a rival sleep product. They suggest replacing that sweet slumber pallet every eight years. Let’s be a little aggressive here, as Tim might say, and say it’s every 7 years. That means there’s an annual market for 13 million mattresses out there.

Now we’ve laid out on such delectable items as encased coil and memory foam types, so the product is somewhat differentiated. What does Simba offer? The whole range? Apparently their major items are a memory foam and a hybrid—a cross between the encased coil and the memory foam ones. Unless suddenly everyone goes for their types, they’re not going to get all those juicy sales they’ve put down in the plan. Some proportion. What? We don’t know. A king-sized segment, perhaps.

What we do know is that there’s competition out there, from mass furnisher Ikea to specialised manufacturers such as Casper and Eve to name just a couple. (No Caster and Eve aren’t an odd couple—that’s the brand name of two providers. Stay awake, please.) It’s a competitive market. Price sensitive and suppliers have to “persuade” customers of their product. Simba has a 100 day free return policy. What? Customers won’t like it? Hurts the back? Um, anyone for a somewhat used once-loved mattress out there? No, don’t mind the stains.

Say a mattress costs five hundred pounds, that’s the revenue. Our BOE numbers suggest sales of the order of 6 billion—if we assume a unit price of 500 pounds. Statista tell us that the manufacture of mattresses in the in 2016, the last they provide, is 813 million pounds. Perhaps we’re being too generous to the dream makers.

So profit margins? If we assume a margin of 10 per cent before financing costs, then we’re talking some 600 million pounds in possible contribution from the mattress market in the UK. That’s per year. As we expect people to still want to sleep comfortably at night, that little amount of income is going to be earned every year. Applying say a 10 per cent return factor on that gives a total value of 6 billion pounds for the sector. What does our analysis tell us about Simba’s prospects? We could be out by a few bits here and there. It’s valued today, three plus years in—high risk disrupter, unicorn and so forth—at 20 million quiddys. That’s not even in the rounding error, is it?

Even if our analysis is out by a bit (and we’re not saying it is, mind you), having a value in a manufacturing sector that turns over 800 million pounds (revenue, not profit) still doesn’t make it, does it?

We rest our case.

They’ve failed to make it, haven’t they? To be honest, we feel as if we’re the sandman causing little ‘uns to rub their eyes here when we read this:

Sources said that several million pounds of the new funding would be underwritten by Allan Leighton, the company’s new chairman, and Nigel Wray, the Saracens rugby club owner who is a long-standing Simba shareholder.

Perhaps Al and Nige need to lie down and take a little rest and sleep on the idea? We’ve got a once-loved mattress we’re prepared to let go cheap.

A unicorn start up? In your dreams, maybe.

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