Like the feeling you get when you watch a movie you haven’t seen in decades, it’s easy to look back at the 1999 tech bubble through an indistinct haze. Bubbles — like what we’re seeing develop on the ASX — are largely driven by FOMO, where rationality is cast aside on the basis that your brother-in-law is making a bunch of money on shares and bitcoin.
What seems to be playing out on the ASX is a renaissance of garbage tech companies getting obscenely high valuations. This is very different to the US, where the largest companies are now tech businesses, like Facebook, Apple, Amazon, Netflix, and Google. The key difference is the FAANGS largely (Amazon aside) churn out billions of dollars of profits. In Australia, the scenario is very different. The briefest of reviews of these business’ ASX filings, and a little common sense, would quickly reveal the extent of the impending calamity — but as former Citigroup CEO, Chuck Prince once noted, “as long as the music is playing, you’ve got to get up and dance.”
Raj Gupta, a leading long/short hedge fund manager with Alium Capital told Crikey, “Today, less than 3% of the top 300 ASX companies are technology companies. In the US, 65% of the top 100 companies are in fact technology companies. In Australia we need faster growing, larger technology companies to be listed on the ASX. This requires companies with history, traction and greater legitimacy. The more nascent the company to list, the greater the risk.”
So just how legitimate are some of the tech businesses which have recently listed on the ASX? It would appear not overly.
One such ASX market darling is GetSwift, a “software as a service” company that allows businesses to optimise delivery routes and tracking, which is valued at around $564 million (down from around $800 million a few weeks ago but significantly higher than its float price of $25 million in late 2016).
GetSwift appears to be very good at building hype, giddily informing the market every time it signs a contract (whether binding or not) without ever actually specifying how much revenue (if any) will actually be derived. GetSwift was founded by Joel McDonald (a former AFL footballer) and Bane Hunter (whose resume appears to be focused around content roles at Foxtel and A&E as well as professional networking website TheLoop, which has extremely low traffic according to SimilarWeb).
The problem? GetSwift has virtually no revenue (total cash flow from operations in FY2017 was a miserly $290,301, up from $107,554). And more worryingly, industry insiders suggest that GetSwift’s technology is decidedly average. But even if GetSwift had a cutting edge platform, most venture capitalists believe that technology is not a competitive advantage in all but the most high-tech of businesses. In any event, it seems that a teenager working out of his bedroom in Tel Aviv could probably create a better tech platform than GetSwift during their summer holiday.
GetSwift’s initial public board consisted of McDonald and Hunter, along with Brett Eagle and Jamilla Gordon. None had ever been a director of an ASX listed company (unusually, Eagle and Gordon had been gifted shares currently worth almost $8 million by Hunter and McDonald). Gordan mysteriously resigned in November, without explanation, replaced by former Telstra exec Nevash Pillay, who also had also never held an ASX directorship.
What really set GetSwift’s share price alight was the announcement late last year (naturally, without any detail) of it signing a Master Services Agreement with Amazon. Whether GetSwift ever gets a cent of revenue from Amazon remains highly doubtful. This is reminiscent of 1999, where companies announcing partnerships (while reporting no revenue) received huge valuations, only to implode months later when it was realised they had no actual way of making money and lots of expenses.
A stinging investigation of GetSwift by the Australian Financial Review laid bare even more cause for concern — some of the partnerships GetSwift gloated about no longer exist, with multiple partners like Fantastic Furniture quietly dumping GetSwift’s apparent market leading technology shortly after their free trial. It appears GetSwift is far more dedicated to fulfilling its continuous disclosure obligations when the disclosures relate to good news.
But GetSwift is far from the only highly valued company on the local bourse. Another market darling is tech business Updater (valued at $700 million), a US-based service which allows people to switch their utilities more easily when they move home. Updater appears very fond of telling the market its level of market penetration in the United States, releasing an ASX announcement every time penetration rises by a few basis points.
None of these announcements refer to revenue. In its most recent announcement, Updater claimed a “potential” revenue of US$85 million. However, the last time the company referred to actual revenue was way back in August 2017 (25 announcements ago), where it begrudgingly stated that total sales for the six months ending June 30 were $505,017 (up from $170,723), and a loss of $57 million (up from a loss of $3.5 million). Not quite $85 million.
Then you’ve got Perth-based automated bricklayer, Fastbricks ($200 million), which like GetSwift, is very fond of announcing its scant achievements to the market, like non-binding memorandums of understanding with the Saudi Arabian government.
However, Fastbricks is has corporate governance issues. It too has a board of only four, of which two members are senior executives. Fastbricks’ CEO, Mike Pivac was gifted hundreds of millions of performance shares and is paid a relatively high salary of almost $500,000 (he also collected $133,967 through related party transactions with his entity). Not bad for a company which recorded $1.4 million in total revenue in 2017.
Then spare a thought for software and encryption Ixup, currently valued at almost $70 million. Ixup had an oversubscribed listing in November, raising $12.5 million at a valuation of $31 million. While Ixup has a (relatively) star-studded board, including former LinkedIn Australia boss Cliff Rosenberg and former Oracle Australia chief Tim Ebbeck, what it doesn’t have is revenue, and certainly profit.
In fact, last year Ixup’s revenue actually fell (from $247,610 to only $153,695). Meanwhile, its losses were a hefty $2.99 million. It appears that Ixup’s float came at the right time, with the company’s cash balance dwindling to $1.39 million as at June 2017.
In 1999, backed by investing luminaries, businesses like Davnet, Newtel, Sausage Software and Voicenet reached extraordinary highs. All would soon collapse in a smouldering wreck, taking with them gullible speculators who were shown to no more sophisticated than punters at a roulette wheel. It appears those lessons have quickly been forgotten, or perhaps never learned.
Adam Schwab is a company director, former lawyer and the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.