This is the second part in a two-part series examining the pros and cons, as well as a case study, of 'Reg A' offerings.
It's time for act two. In a column on Wednesday, we began looking at a "Regulation A" offering pitch by Audition Showdown, a company that's kind of like TicTok meets "American Idol." The mobile talent show will let artists create a profile on its app, and, for a one-time fee, compete in weekly competitions to win prizes and cash.
Picking up where we left off, we move to management review. The company's founder and managing director, John McMahon, has been on the financing side of private and public companies for 25 years. The plus is he's seen a lot of business plans. What has worked. What has failed. The negative is he hasn't built and sold anything like this on his own yet. That said, he was a founding investor in Pivot Tech, which was recently sold for $400 million.
The net takeaway leans positive.
The creative director, Damian Lee, has written, directed, and produced over 50 feature films and produced hundreds of TV sports shows. He had a good enough eye for talent to give Jim Carrey one of his first starring roles in the 1983 TV movie "Copper Mountain." With his connections to studios and talent agencies, he rounds out the duo quite nicely.
In terms of competitors, which I touched on earlier, the list is long, but there is no true competitor in the online talent show category yet. TikTok and Triller have the most similar platforms, but Snap is coming on strong, as well. YouTube and Soundcloud offer artist platforms. Twitter (TWTR) , Instagram, and Snapchat (FB) have similar social media and potential viral aspects. And while none is a direct competitor, the list is daunting. That is a valid concern.
It would be less of a concern if the Audition Showdown platform were active, but the company appears to be four to five months away from that happening. Obviously, that's another concern. Every day that passes is another day this company isn't cementing; their first-mover advantage potential is a ding against its potential success.
Being a pre-revenue company means Audition Showdown needs cash. Management believes $5 million gets them to a fully launched product with enough funding to run through 2021. It filed to raise $50 million, the max in its tier, at a valuation of $100 million.
These numbers give me a pause, because I feel there is a disconnect.
For almost any startup company, $50 million cash could do wonders. In my view, it's too aggressive at this early stage. Something in the neighborhood of $6 million to $8 million with a max of $15 million would be more reasonable. Just because you could raise $50 million in one offering doesn't mean you should try. Like a house for sale that sits on the market too long, an offering well short of its goal out in the market for too long can raise questions.
I do understand management's desire to let retail investors participate fully from the first stage, as this is the first raise. But that probably won't be enough to sway savvy investors. Anything over $5 million would help accelerate the company's launch and increase its chance of success. Plus, a raise closer to $10 million removes the need for a dilution in the middle of 2020.
Once the company raises above $5 million, this becomes as a positive in the consideration for making an investment.
I like that its need is only $5 million to really get off the ground. I don't like the filing is for $50 million. This is a situation where I would want to hear from management directly as to whether it is willing to adjust the size.
This naturally leads to a discussion on valuation. Is $100 million aggressive for a pre-revenue, pre-product company?
Is the total addressable market huge?
Admittedly, as much as I love the concept, this valuation likely answers the question as to why it hasn't found legs with the Reg A offering yet. You simply don't see many $100 million or more market cap Reg A offerings that have no revenue, no patents, no proprietary technology, and no product yet.
The founders have poured thousands of unpaid man hours, plus nearly three-quarters of a million dollars, into this, so there is significant sweat equity along with cash invested. The valuation, however, gives me pause. If this were priced between $20 million and $40 million, I'd be all over it. If it were in the $40 million to $70 million range, I'm still interested. Once we get north of $75 million, I have a lot to consider before pulling the trigger.
Will an artist pay $19.95 or $24.95 to get on the platform and compete? We're a narcissistic society, present company included, so even plenty of untalented people likely overestimate their own talent and believe they have more talent than they probably do. And before you get offended, I'm as untalented as they come.
Other potential revenue streams include a streaming show covering the success stories from the platform and a GoFundMe type of in-app program called "Enhance the Chance."
One thing Audition Showdown won't do is share in the rights to the artist's material. Remaining a pure platform should be a big benefit to user acquisition. I view it as a positive.
Lastly, partnerships will come into play. With Covid-19, the live concert landscape has changed. Live performances have moved online with some success. Audition Showdown has partnered with some high-profile names in the music business, including Revolution Recordings in Toronto and The Record Shop in Nashville.
After all the pros and cons are sorted, this winds up as a love-hate for me.
I love the concept. It may be a niche, but it has the potential to be a huge niche, especially if they could get some star power behind it.
On the flip side, the current valuation turns me off at this stage of development. At 30%-35% of the current offering valuation, I think the company could find all the money it needs for a first offering.
I love the partnership potential and secondary income generation opportunities, but I'm concerned there is nothing proprietary here and a low barrier to entry.
Even at $100 million pre-money, there's significant upside potential to the valuation if the company can raise the funds they need. Still, it's clear this falls into a high-risk, high-reward category. Should the company reconsider its valuation to a lower level, it would get me off the fence and onto the stage.
This is a case-study paired with my thought process when I examine Reg A offerings. Yours may differ. It should, as everyone's risk profile is different. If you found this interesting, let us know, and I can circle back around with a new case study every few months.
I hope you all have a wonderful holiday weekend.