Startup Opinion

The rise and coming fall of Updater, the unicorn that never was

Adam Schwab /

Updater

A screenshot of the Updater homepage.

When you write about suspicious or overpriced companies for 15 years, you get almost a sixth sense for impending doom. ABC Learning, Babcock, GetSwift, Slater & Gordon — they all have familiar, underlying characteristics: dubious business models, opaque financial statements, non-independent (or lightweight) boards, and flowing public announcement.

There has been a very similar odour surrounding Updater, a business that was allegedly worth more than $500 million, but always felt a bit more like Blue Sky than Atlassian.

Just a quick summary about what exactly Updater is and why it is suddenly becoming a story.

While billing itself as a “relotech” business (a term it seemed to make up), Updater is essentially a marketing business for utilities. This model is not new. Companies such as DirectConnect, iSelect and GoSwitch have been doing a similar thing in Australia for years (on a far larger scale). Essentially, these businesses acquire customers for electricity companies or ISPs and get paid a sign-on fee for doing so.

The difference with Updater is it was somehow able to get a US tech valuation for what is essentially an affiliate marketing business which provides basic relocation services (and remembers you for the next time you move). Updater spruiked its data capabilities to investors, but with stricter privacy regimes in the wake of Cambridge Analytica, monetising that data is becoming more difficult.

Updater’s supporters ignored that, with its valuation reaching almost comical levels, even by tech standards. Moreover, the company’s final financial report for the half year ending June 2018 was opaque, with Updater using a non-GAAP revenue number (that is, the company ignored accounting standards to report a higher income number than it arguably should have).

Even using Updater’s arguably goosed revenue number, it made only US$7.3 million in revenue for the half — and to achieve that it lost US$14.7 million. And while the business allegedly grew by 1064%, that number included revenue from several acquisitions (the company didn’t provide an organic growth number) and it spent US$3 million on marketing. So a business with three million customers makes only a few dollars in revenue per customer and has to spend 50 cents to acquire every customer. Since its founding, Updater has lost US$51 million, burning US$11 million in the last six months. So despite what looked to be a healthy cash balance, the business probably has less than a two-year runway, based on current burn.

Despite losing a lot of cash and making meagre revenues, speculators bid the company’s share price up 500% since it’s 2015 IPO, the company was valued at almost $600 million.

Industry insiders also told Crikey that Updater’s technology platform is old and far from the cutting-edge tech needed to justify such a lofty valuation.

Updater — which is run by young American lawyer Dave Greenberg, whose stake was worth upwards of $100 million — was also recalcitrant when it came to corporate governance. After strangely listing on the ASX (despite being ostensibly an American business with an American executive team), its board of five includes three executives, and none other than former Domain boss Anthony the Cat Catalano. The only other director is a US investor who was appointed in 2018.

Telling the market it was seeking to raise $100 million to fuel its growth, the business then bizarrely de-listed from the ASX in October. Under the de-listing, the company offered to buy back up to $10 million worth of shares at a 20% premium to the prevailing share price. Updater shareholders kept the faith though and sold only $2.6 million in shares. (One person who seemed a little less confident in Updater is Greenberg himself, who sold $11.3 million worth of shares back in May 2018.)

Meanwhile, Updater’s delisting was opposed by 21% of shareholders (a huge number by ASX standards). Well-regarded investor Neil Carter of IFM noted: “I think Australian shareholders are much better served by keeping the company public … the valuations here are excellent [noting] other top ASX performers such as Wisetech, Altium and Afterpay.”

Carter made a fair point: it made no sense for Updater to de-list. If venture capital firms were desperate to purchase a stake, they could have done so on market. The most obvious reason to de-list from the ASX is to avoid public scrutiny, that implies that something was wrong at Updater and it needed to try to raise cash while avoiding continuous disclosure requirements.

This view was reinforced by the time delay between the de-listing, and anything happening at all.

It seems that was too much for former BidEnergy chair James Baillieu who raised queries with Updater as to the progress of the capital raise. As the AFR reported, rather than give Baillieu the information he asked for, Updater started urgently telling shareholders and potential investors that it may be hurt by Baillieu’s legal action.

This explanation would make Joseph Heller proud.

Updater essentially claimed that VCs were about to invest, but they now wouldn’t, because a shareholder was asking why they hadn’t. As Baillieu noted to the AFR: “Updater’s obsession with secrecy is abnormal. In big private transactions … larger shareholders get regular briefings on deal progress … my very strong suspicion is the capital raise is well off track … and then I’ve turned up acting a little bit assertive and they’ve just had a light bulb go off and have thought, ‘holy smoke, we’ve got to deliver this bad news. Let’s deliver bad news that it is his fault’. It’s insane.”

It’s possible that Updater could pull another rabbit out of its hat and get the capital raising away at a big valuation. Or, more likely, they won’t, if history is any guide.

This article was first published on Crikey. Read the original article.

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Adam Schwab

Adam is the co-founder of The Lux Group and author of Pigs at the Trough: Lessons from Australia’s decade of corporate greed. He is also a Private Media board member and former corporate lawyer.

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