Going Public, Part 1: Converting Early Backers into Equity Holders

Disclaimer: This is not investment advice nor solicitation. Investing in private companies involves high risk and you should consult a professional investment advisor before making any decision. It is recommended to ask for and read the Memorandum of Understanding available to existing investors already before proceeding further.

TL;DR I am taking my holding company public in three stages. The first involves converting loan notes issued to seed investors into equity and restructuring the business into a Public Limited Company under Irish Law. We will have an accelerated bookbuild for early price discovery and lay the ground for a Private Placement Memorandum to engage another 170 public shareholders before applying for dual listing in Canada and the US. Reading the full article might require 5-10 minutes of your time. Familiarity with my LinkedIn timeline will make some of the references here appear less obscure.

Introduction

Startup culture has a well rehearsed approach how to attract capital with a story before scaling the idea to the point where the new company can be subjected to an Initial Public Offering (IPO) and its stock unloaded onto eager public investors.

I know it because I have been on all sides of such deals - as a public investor since 2007, then as an angel investor in 13 startups since 2013, and even as a founder myself a few times over since 2004.

No surprise then to see me in February 2020 promoting my then 2-year old company Advanced Radio Mapping at the HBAN All Ireland Angel Investors event and talking to investors myself:

Business background

Our growth path made looking for investors seem like a no-brainer. From 10 paid deployments in 2017, to 160 in 2018 and a stunning 1,452 in 2019 we were looking at 2020 with a mix of hope, fear and greed. Fear was the one growing fastest, as I had been following the news from China for a few months by then. So at least the surprise element was missing when our event and out-of-home advertising industry came to a halt.

By March we had revisited our plans, let go one team member and divided our efforts 80/20 between the legacy asset management business (which is a pretentious name for my investments in other companies and the broader financial markets) and iterating our technology platform in ARM in the hope there will be a use case for it at the end of the pandemic. The only thing that seemed out of place was raising capital at that time, given the uncertainty derived from lockdowns and the ill-named "social distancing" that were clouding our future.

Then I posted this and decided we could still take investors with us on the journey. Some would call it a massive pivot, from wifi sensors and "Google Analytics for the offline world" to "shorting volatility in the wake of the largest change in public spending and monetary policy since WWII". But it worked, as celebrated here.

The 20 investors that put their capital since April 9th, 2020 have seen their courageous attitude rewarded, one year later. Not without ups and downs, mind you - but the experience forged a deep understanding of markets, financial analysis and risk-management which I have synthesized and published on the (in)famous WallStreetBets subreddit for others to use and profit from. If this stilted narrative is giving you headaches you are right to stop now but bookmark the last link if interested in taking your investment strategies to the next level.

The current investment thesis

The Administration change in Washington, DC has played a massive role in shaping my view of macroeconomics. I believe the biggest force influencing the markets is policy - fiscal, monetary, trade, defense. I also belong to that minority that studied Modern Monetary Theory (MMT) long before it got mentioned on CNBC, which removes the element of surprise many are dealing with in the current economic environment. Explaining my macro views can be frustrating, so I feel relieved when others vent about it and I can just quote them to save my time.

I think 2020 was a great year to pay attention to the Fed and US Treasury. I anticipated the reflation trade correctly in my March article and profited from it with little downside risk. But 2021 is a bit more complex. With Dems in (partial) control and releasing more stimulus, it is already clear the current Administration is prioritizing Main Street vs Wall Street this time. It does not mean equities will not push new all-times highs since the SP500 is trading above 4200 at the time of writing this. But many analysts focus so much on the 10,000 or so publicly listed companies they ignore these represent less than 1% of the operating companies registered in the United States.

Capturing the next wave of growth means switching the 80/20 focus back from investment and volatility trading to operating profits from technology - subscriptions, licensing agreements, custom software development.

Diversifying our income streams back from treasury management and capital gains to commercial activities and operating margin is the way to insure growth and hedge our risk in the current climate, going at least until midterm elections in November 2022 and possibly extending into the presidential elections in 2024. This single statement includes granular themes such as re-opening, conversion to EV cars and further investment in infrastructure and Biden's American Families plan. And I think I have the right strategy to execute on this.

Taking the company public in three steps

Our existing investors have provided capital in multiple instances over the past year. I have deployed this together with my own funds into a diversified portfolio of public companies (taking both equity and derivatives positions) and several private companies (SpaceX and Stripe the most notable among them). The following extracts from our trading account show the asset class and financial instrument allocation.

The equities position above does NOT include SpaceX and Stripe stakes, which operate as side-pocket investments before rolling them into the consolidated balance sheet in Part 2.

The hedging of the public assets is done using options and a long/short portfolio approach. I favor securing the assets and managing capital gains tax liability in exchange for accepting a higher-than-usual volatility in the basket's PnL, but still running a solid Sharpe ratio.

This leads me to the immediate challenge we are facing this summer.

Price discovery for low liquidity assets

If you read the Memorandum of Understanding mentioned in the beginning, you already know this part. The holding company (with its subsidiaries, the technology company and the asset management company) can be valued at this stage as the sum of its parts. Advanced Radio Mapping has obtained an independent valuation from an interested market maker, so that part is taken care of and the value itself is unlikely to change until the reopening starts impacting our revenue and profitability projections for the remainder of 2021.

The treasury function though (asset management company including the portfolio above plus the side-pocket investments in private companies) is harder to price accurately because of its inherent volatility in mark-to-market terms but also its potential to deliver asymmetric returns (it has "positive convexity") as seen in this equity portfolio projection below reflecting the Net Liquidation Value change of the portfolio in relation to 1% variation in the underlying assets value on the X axis:

In the interest of fairness and transparence, it is crucial to understand how severe short term changes in this portfolio can be. For demonstration I have taken the stats from our audited account on FundSeeder and shared the daily underwater curve since the beginning of the year and the cumulative return chart, to put things into perspective.

If you want to appreciate the rarity of any investment manager showing you this daily curve, I invite you to watch a video by Ron Bertino here explaining it better than I can do.

It is at this stage that some of my advisors say "just abandon this chase for financial profits and reduce the volatility of your portfolio, this is too complicated to explain". Others would probably listen, I for one chose to get different advisors. Here's a quote from Harley Bassman, known to some as the Convexity Maven:

Imagine you are placing a bet on a coin flip, and if you win you receive $3 and if you lose, you pay $2. Assuming the odds of winning or losing are the same, this would be a Positive Convexity bet because the payoff is not linear. Conversely, again assuming a fair coin flip bet of equal odds, if you could lose $5 and only win $4, that would be a Negative Convexity bet. And for completeness, a game where you would win or lose equal amounts is a zero Convexity (linear) bet.

 The reason Wall Street hired Physics PhDs in the 1990s was that we literally needed rocket scientists to figure out how to value the Convexity of various securities. We knew the price (yield) for a risk-free bond that matured in seven years, but we did not know how much extra yield was required to make one indifferent to owning a negatively convex security; in other words, to make it a “fair bet”.

I don't have a PhD of any kind, Physics included. But I also decided to part ways with my last corporate employer when I was told this in a private conversation:

We're not here to solve complex problems. You're here to make the complicated appear simple. (Source: unnamed CEO)

I did leave that place a few months later, and I have been nurturing my disagreement since, but it does not hurt anymore when someone tries to wave away complexity with a dim explanation. Not because mastering complexity is not important to me anymore, but for a much simpler reason:

I ran out of f_cks to give.

Let the coarse language sink in, please. It is not unwarranted because it reflects reality.

Pricing the company I have built together with my team and backed by our early investors is not easy, if we try to discover fair value. So with the risk of sounding complicated, this is what I have decided our best path forward is:

1) Starting May 10th, I will be recording the Net Liquidation Value of our basket of public assets at the end of each day until one of the following conditions is satisfied:

2) The Underwater daily reading prints 0%, at which point I will call the valuation of the basked at the average of the NLV readings across a total of 9 days, four prior (T-4, T-3, T-2, T-1) and four past (T+1, T+2, T+3, T+4)

3) or the Underwater daily never prints the 0% level in which case the valuation of the basked will be the average of the NLV readings across of all the trading sessions included in a period of 60 calendar days (the last being July 9th, 2021).

The result should be referred to as a Fair Average Value of the basket and contribute to the final valuation presented to the early investors.

The earliest this exercise can conclude is May 19th, 2021. Until it is completed, no redemptions or deposits will be taken into account. The investment objectives will remain unchanged.

New Investors

Any new investors expressing interest to participate while the value discovery exercise is underway will have the possibility to contribute minimum €35,000 which will be converted in new dilutive shares above the valuation of the holding company after the assets basket has been priced using the process described above. Until then (and no later than July 16th, 2021) any deposits will be held in escrow.

Timeline for Part 2 and Part 3

I estimate we will need about 30 days to complete any outstanding paperwork once the price discovery element is complete, so you can expect by August 16th we will announce two important updates:

• a view on re-opening and future projections for both the financial and operating income expected from the two subsidiaries until the end of the fiscal year
• the Private Placement Memorandum opening the public limited company to new shareholders as I had flippantly described here

Part 2 is the PPM execution, which will again be openly and transparently described in a post like this one when the details become available. I expect it to have once again an independent trigger condition for completion (170 new shareholders and €1,000,000 in subscribed funds are top contenders) and I am committed to screening each application internally for KYC/AML purposes.

Since we have already done all the preparation work to apply with the Canadian Securities Exchange and OTC Markets Group in the US, we expect the listing to go live in the next 3-6mo after Part 2 is completed, or the earliest in Q4 2021. This will conclude Part 3 of the plan.

In place of conclusion

I am not here to fool you. This is complicated. And no amount of disguise can make it appear simple. But my own money, time and effort are on the line - and they are the tip of the iceberg represented by the resources and trust put into me by my team and existing investors. We believe collectively this can be done. Which is why it will suit joining only those who believe the same thing. Trade accordingly.