Welcome to Back or Bolt, a newsletter highlighting what is happening in the world of early-stage investing/crowdfunding. I’ll provide a curated list of what’s new in the crowdfunding space around the world and one deep dive into a company of interest, then it is up to you whether to BACK OR BOLT!
The DEEP DIVE - The London Tunnels
This week I had the privilege of chatting to Angus Murray, CEO of the London Tunnels. I raised a series of questions/concerns related to funding requirements, debt, and the current raise on Crowdcube, and Angus was willing to spend 25 minutes providing insights and answers to my queries surrounding the project.
Note: the below are not direct quotes - the CEO's responses have been summarised, paraphrased and interspersed with my own commentary, and may not fully reflect his exact views. I am not affiliated in any way with the London Tunnels. I may hold or intend to hold a position in this company, which would create a conflict of interest. Every investment has risks and your capital is at risk. You should do your own due diligence or discuss with a financial advisor before investing. This newsletter is not financial advice, and should not be used as such. It is for information purposes only.
On the topic of debt, and the ~£60m funding requirement:
The plan for the tunnels is to open them as is (similar to the tour I took recently - you can read more about that here). The expected scale for these tours is similar to those of the Paris catacombs (500-550k visitors per year). To begin these tours, a moderate investment of around £800k would be required, which could in theory generate between £5m-£15m in revenues. For this process to start, it is possible for the business to fund it themselves (based on available cash and recent funding). This opening will be beneficial as it acts as proof of concept, and also will mean the business is revenue generating.
For a full-scale conversion, the cost is likely to be between £64-68m. To finance this, serious negotiations are starting in the coming six months. The reason for the delay is because they have been working to improve the asset and cost structure before getting it revalued. The announcement for the revaluation should be revealed soon (estimated to be around £51m). On the back of this, the company plans to secure some form of external debt funding.
Regardless of if the business is pre-rev, or post-rev in some format, the preference is still to secure a portion of the financing from equity investors. Equity investors give the business upside, as the provided capital is prepared to wait for a return in 2 or 3 years (once the conversion is complete) vs. debt finance which accrues interest immediately.
Angus has been connecting with people overseas to potentially raise this equity capital, with discussions in the US, Peru, Colombia, and South Korea.
On the minimum visitor numbers needed:
If the Company debt funds £60m, at a 10% interest rate, the interest cost per year is £6m. If they generate £10m of revenue (333k visitors at £30 per ticket), that leaves £4m to cover operating costs estimated at £330k.
If earnings were £12m (post conversion), that would require 400,000 visitors or 10% of the maximum allowable visitors. At a 10x earnings multiple (assuming the London Eye is worth £900m from revenues of £90m per year), the base case is the current valuation (of £1.80 per share for a pre-money valuation of £127m).
With regards to the smaller, £800k remodel:
The aim would be to improve the layout for health & safety, add in projectors, and move in the British Military Intelligence museum, who have already confirmed their plans to make the tunnels their new home. This section would focus on the history of the blitz, and include part of a v1 rocket and other memorabilia. They would also improve the bar and canteen area and add artefacts, signs, images and projectors to enhance the storytelling of the tunnels.
The conversion cost is estimated at £800k and this can be funded by the Company in its current format. The plan is to start the renovation in October.
For the larger renovation, this would be done in stages, starting with the historical section, and then moving onto arts and culture, with the bar being renovated in between. This means there could be 2 separate openings, enhancing the publicity of the tunnels.
With regards to the smaller debt falling due later this year:
The £410k debt outstanding can be repaid by current cash. The remaining larger debt of around ~£2m can be rolled over if required.
With regards to using a platform like Crowdcube:
If people go down and see the tunnels, they get a better idea of the scale, and on average they invest. The aim is to get people down to see it, and get people talking about it, as word of mouth is the most important thing for the business. The more people who see it and become investors/advocates for the tunnels, the more momentum it builds for the company, along with establishing a verifiable client base. If enough people went down, they wouldn’t even need to raise debt.
With Crowdcube, the amount invested is typically between £250 and £1k (at the time of writing £73k has been raised from 249 investors, which is an average of £290 per investor). If they could get 10,000 people down, and 5% invest, that’s between £125k and £500k raised. The company could in theory get ~300 people a day through the tunnels, so if they did it for a month they’d almost be at the required 10,000. They just need to line people up and get them down there (this could potentially explain the second deadline extension for this raise).
For Crowdcube investors, the asset is the value, people need to experience it, to understand how interesting and wonderful it is inside. The tunnels are semi-monopolistic, centrally located, and very impressive. In theory anyone can create a new app to compete with another, but you cannot build another set of tunnels on this scale in central London.
The London Eye shows proof of concept, that 3.5m people a year are willing to do these experiences. The Bassins des Lumières, the former submarine tunnels in Bordeaux (€16 per person), where famous art is projected on the walls is very appealing to people and shows that what the company are planning actually works.
There is also the possibility of doing an equivalent retail investor raise in America (although this will be more difficult to get people into the tunnels).
With regards to exit opportunities for Crowdcube investors:
The company is now able (based on the balance sheet) to list on the NASDAQ and that is one possibility they are considering. They have spoken to a number of US brokers and one has committed to listing the company if they wished - though this remains a longer term and uncertain prospect.
A secondary sale is certainly possible as well. This would probably be more likely after starting proof-of-concept visits.
Back or bolt?
⚡While initially I was sceptical, this has eased somewhat after speaking with the CEO, and hearing more about the project firsthand.
Some of the assumptions and plans now feel more coherent to me than before, particularly around funding and the potential path to generating early revenues (which if required visitor levels are met would support the current valuation). That said, there are still a number of key uncertainties that remain, especially around execution, financing, and achieving the required visitor numbers.
This remains a high-risk, early-stage opportunity, but I’m personally interested in the project and will be following its progress closely. For me, it’s a BACK (this is my personal view and not investment advice).
The Scorecard:
Backs: 1 - Bolts: 1
The Fund:
That’s all for now, gotta bolt and get back to it! ⚡
DISCLAIMER - This newsletter is not financial advice, and should not be used as such. It is for information purposes only. Every investment has risks and you should do your own due diligence or discuss with a financial advisor before investing. Early-stage investing is higher risk and you may lose everything you put in. It is also highly illiquid, meaning your investment is not easily accessible if you need the funds at short notice.