"DotEEBubble is one of the most controversial startup blogs in the world and you've probably never heard of it." -TechCrunch

Friday, December 20, 2013

Christmas Wishes : .ee Bubble Style

A Very Bubbly Christmas

 

Even Santa knows about the bubble
Yes, it's that time of year for reflecting back on 2013. What better way to do that than with our favorite Christmas poem? In our constant pursuit of perfection, we modified it a bit, and included links to some of our favorite posts from this year.

You can also find the original, and if you're too lazy to read the original, then listen to Emma Thompson and other famous people read it to you.

A Visit from Saint EAS



‘Twas the night before Christmas, when all through Tehnopol’s house
Not a startup was stirring, nor a computer’s mouse;
The stockings were hung by the chimney with care;
In hopes that Enterprise Estonia soon would be there;
The startups were nestled all snug in their incubator beds;
While visions of free taxpayer money danced in their heads;
And mamma in her ‘kerchief, and I in my cap,
Had settled down like United Dogs and Cats for a long winter's nap,
When out on Vabaduse Väljak there arose such a clatter,
I sprang from my bed to see what was the matter.
Away to the window I flew like a flash,
Tore open the shutters and threw up the sash.
The moon on the breast of the new-fallen snow,
Gave a lustre like a Robbie Williams concert to objects below,
When what to my wondering eyes did appear,
But a miniature sleigh and eight incubator rein-deer,
With a little old driver so lively and quick,
I knew it must be EAS, also known as St. Nick.
More rapid than the Complus bankruptcy they came,
And he whistled, and shouted, and called them by name:
"Now, Startup WiseGuys! now, GameFounders! now ViljandiIncubator and Vixen!
On, Eagle Nest! on, Räpina Incubator! on, Mektory and Blixen!
To the top of the Nevsky Cathedral! to the top of the wall!
Now dash away with BIF’s 200 million euros! dash away all!"
As leaves that before the wild hurricane of euros fly,
When they meet with an auditor’s obstacle, mount to the sky;
So up to the top of Arengufond’s building they flew
With the sleigh full of EU money, and St. Nicholas too—
And then, in a twinkling, I heard on the roof
The prancing and pawing of Baltcap’s little hoof.
With talk of Publification’s failure getting around,
Down the chimney St. Nicholas came with a bound.
He was dressed all in fur, from his head to his foot,
And his clothes smelled like the inside of Subway and soot;
A bundle of ill-guided grants he had flung on his back,
And he looked like Fits.Me just opening his money receiving sack.
His eyes—how they twinkled like Liviko full of EU money, how merry!
His cheeks were plump like Yoga’s tax debt, his nose like a cherry!
His droll little mouth was drawn up like a bow,
His beard, like the face of an STD test taker at Quattromed, was white as the snow;
The stump of a pipe he held tight in his teeth,
And the smoke, like Fits.Me revenues, encircled his head like a wreath;
He had a broad face and a little round belly
That shook when he laughed, like a bowl full of jelly.
He was chubby and plump, a right jolly old elf,
And I laughed when thinking of foreign companies that claim to be Estonian, in spite of myself;
A wink of his eye and a twist of his head
Reminded me that InkSpin1’s non-existent product was no competition to dread;
He spoke not a word, but went straight to his work,
And filled all of Rate.ee’s stockings; then turned with a jerk,
And laying his finger aside of his nose,
And like the revenues of Creative Mobile, up the chimney he rose;
He sprang to his sleigh, to his team gave a whistle,
Like nearly 12 million euros we wrote about this year, they all flew away like the down of a thistle.
But I heard him exclaim, ere he drove out of sight—
“Happy Christmas to all of our thousands of readers, and to all a good night!”

Make It A Real Christmas

25% of the Estonian population lives in poverty, according to official statistics. Consider making a donation to charities like the Estonian Food Bank, so the less fortunate can enjoy a nice holiday. As we've written about all year, the government is wasting a lot of money on some projects, while ignoring more basic needs of society. At the very least, we as individuals can make a difference in the lives of some.

We'll be back in 2014...

Wednesday, November 27, 2013

Yoga Intelligence : Bad Karma for the Taxpayer

Yoga Intelligence : A Downward Dog Pose for the Taxpayer


Yoga Corporation, also known as Yoga Intelligence Corporation, Yoga Intelligence Limited, Yoga Limited, Estomatic Solutions Limited, and Mokomat Limited (more on the name fun later), is a company providing "intelligent control for all buildings."

"Oh Yoga, you complete me!"


The company has ambitious plans. In a presentation given by their managing director (Priit Vimberg) in 2010, he spoke of their plans to have an IPO by 2015, while raising 4 separate rounds of venture capital funding prior to that (see slide 19).

Mr. Vimberg is indeed a dreamer. In 2008, he told the Äripäev newspaper that his company had a valuation of 1 billion Estonian Kroons (64 million euros), and needed to raise 150 million kroons (9.5 million euros) from investors. They had it all planned out too: of the 150 million, 100 million would be spent to enter new markets, 40 million on product development, and the remaining 10 million on "other expenses" (Hookers and blow? Fast cars? We can only speculate.).

"We're worth one BILLION kroons!"
Now, before we tear them apart like a vengeful Hindu god (hey, they named it Yoga, not us!), let's have a look at the idea.

Building Intelligence for All

 

Bear with us here, as their product is a bit difficult to understand, which is why they have numerous pages on their website dedicated to explaining what it is.

So the general idea with an "intelligent building" (also known as building automation) is that the building has feelings. It can tell you when it's too cold or hot, turn on the lights for you, and try not to use too many resources (power). It's like a good wife, but without the nagging and with much worse cooking skills. Some of the more intelligent buildings can even ask you if they look fat in this dress.

"Care to join me, or would you rather just discuss building automation?"

The building develops feelings reminiscent of a middle-aged women's book club after 2 bottles of wine, through the use of sensors. Just like your thermostat at home or in your car, various sensors report about room temperature, who is in it (through motion sensors), and so on.

The idea is this: why bother to heat, cool or light a room if no one is in it? That's a waste!

You must be thinking that Yoga then makes the sensors and hooks it all together, for a happy building that needs no antidepressants. Nope, they don't make sensors. They don't make lights. They don't make thermostats. They only make the software that controls all of it.

That's not so bad in itself (though we wonder why they needed a further 40 million kroons for product development). Let's have a look at their two markets, consumer (residential) and commercial buildings.

Let's start off with the easy one - residential.

First, there's price. According to this article, the price for an average apartment would be 1,500 - 4,000 euros to make the apartment into a "smart home". We're not sure if that's just for the software, or also all the sensors and installation, but let's assume it's fully inclusive. Remember, savings are marginal, so if your energy bill is 100 euros a month and they save you 10%, you're saving 10 euros a month or 120 euros per year. Even the yearly number is hard to predict, since heating and cooling needs vary drastically depending on the time of year. Who is going to spend 4,000 euros for such modest savings? Not many.. and here's another reason why:

Think of the last time you were out with friends, and talked about your house. Was it about energy savings? Probably not. It's just not an interesting topic. Do your friends (or you) care that you saved 10 euros a month? What's the motivation to go through all the hassle and effort to get this product, have it installed, and set it up?

Then, there are the alternatives for people who want to save money. Programmable thermostats have been around for years, and cost 20-100 euros. With those, you just program what day and time you want it to be a certain temperature, and it takes care of the rest. So it can basically turn off while you're at work, then have things all ready and cozy when you return in the evening. Simple solution, good savings, and low cost. Some vendors even make wifi-enabled thermostats so you can adjust it on the go. Who needs Yoga?

Now let's move on to business. Envision a large building, with the accompanying large costs to keep it heated, cooled and lit.  Yoga would be great for this, right? Well... maybe not. Large buildings are usually staffed by a maintenance person (building engineer) at least while it's occupied. This is often for insurance reasons -- someone needs to be on hand to fix anything that breaks, and in a large building, maintenance needs arise pretty much every day.

But surely the Yoga system can solve problems, right? It can adjust the temperatures automatically. Sure, it can, but so can the building engineer. What makes it even easier is that buildings lead a fairly boring life. They open at a certain time every day, and close at the same time. Usage is very predictable, so it's easy to plan ahead and warm the building up for Monday morning, turn off the system on Friday evenings, and so on. Easy tasks for a building engineer.

Of course, we could be wrong. Maybe every building and home needs this great technology, and we're just idiots. Ultimately, the measure of that would be the results, right? Now let's have a look at those.

 Taxpayer : Take Your Downward Dog Position!

Poor taxpayer. They thought it was just a yoga position.



Time for our history lesson of the day. Yoga Intelligence Corporation (business registration 10681001) started out back on July 2000. Yes, more than 13 years ago.

They got millions of kroons in investment from private investors, including a prominent investor from the UK. They also took on numerous company names during this time, including Yoga Intelligence Limited, Estomatic Solutions Limited, and Mokomat Limited, before finally settling on Yoga Intelligence Corporation.

The many faces of Yoga.


If the story were to stop here, we'd have nothing to complain about. Private investors invested into a startup company, and they changed names a lot (is this what they call a "pivot"?). Typical stuff.

Now let's move forward 8 years from their founding in 2000. Yoga Intelligence Corporation declares bankruptcy in 2008. They weren't meeting sales targets, ran out of money, and the current investors decided it wasn't worth putting any more money into this company.

Still OK in our book. The professional investors analyzed the company and the market, and decided it was not worth further investment. Totally normal.

Then things start to get messed up.

First, the bankrupt company shuts down with a tax debt of 99,809 euros. (The bankruptcy is so old this information is not readily available -- we verified it directly with someone at the tax authority.)

Then, the original founders of Yoga create a new company (Yoga Limited, registration number 11486721), transfer over all the intellectual property from the bankrupt company (without compensating the original investors, is our understanding), and.. get money from Enterprise Estonia (EAS)! How much money? Yoga received 442,624 euros of taxpayer money from EAS:



So let's review: a company is doing so poorly that professional investors decide it's not worth it to dump more money into. Instead, the founders run off with a tax debt and the intellectual property, create a new company, and get money from EAS. So, EAS is dumping money into a company that professional investors deemed to be a dud. Brilliant!

Was it just a matter of timing? Perhaps Yoga was just a technology too advanced for its time back in 2008 when they went bankrupt, and now they're flourishing. We don't think so. A review of their recent (2012) financial report shows a company that has racked up losses for each of the last 3 years (as far back as we have data), is heavily in debt to its investors, and has few sales to show for it.

This company is a dud, and EAS should never have dumped money into it.

Total loss to taxpayer: 544,433 euros.

Lessons Learned

There are lessons to be learned here. First, if a company has gone bankrupt, they shouldn't be allowed to just create a new one to run away from tax debt. On top of that, they certainly shouldn't be allowed to receive EAS money if they're not paying their tax bills.

Is Google blocked in EAS offices? A quick search would have revealed numerous articles about the first company's bankruptcy (they even had a similar name - Yoga!). A quick search of the commercial register would also reveal the questionable situation.

Our suggestion for EAS: before handing out money, type the company name and its founders' names into Google first.

Tuesday, November 12, 2013

Complus Consulting : One Big Minus for the Taxpayer

Complus Consulting : One Big Minus for the Taxpayer


Remember the old saying,  "If it's too good to be true, it probably is."?

With all the talk lately of a grand project to build a 600 million euro datacenter in Estonia (more on
that later), we thought it would be a good time to visit one of the grand projects proposed in the past.

Skeptical about large projects in Estonia. And the moon landing.


700 Jobs and Prosperity for All


Complus Consulting is an Estonian IT firm that handles data processing and back-office IT support.  Think of them like server monkeys, doing basic tasks like swapping out broken hard drives in computer servers, checking that a nightly report ran OK, and so on.

They write novels (and this blog) in their spare time.



Complus attracted great attention back in 2010 when they announced plans to create 700 jobs.  700 jobs! That’s huge for Estonia! To put this in perspective, Swedbank, one of Estonia’s largest companies, has 2,454 employees, and they have offices all over the country and an enormous operation.

Who would work in these jobs? This is where it gets interesting, especially to politicians. Complus’s plan was to take low-skilled workers (without IT skills) and train them to change hard drives and so on.

Now if you’re a politician, this is great news. A lot of the unemployment in Estonia, especially back in 2010, was comprised of low-skilled workers. The 17 year olds who dropped out of high school in 2006 to go work in lucrative construction jobs found themselves unemployed when the building boom went bust. Lacking a proper education or any skills other than swinging a hammer, their prospects were bleak.

(For those who were not aware of the situation in the Estonian economy back then, the market for construction workers was so red hot that it was not uncommon for a construction worker to earn a salary 2-3 times higher than a lawyer. We saw many of these construction workers wasting most of their hard-earned salaries at clubs like BonBon and Parlament when the weekend arrived, but we think that’s because the course on money management was given in 12th grade and they had already dropped out by then.)

We heard their BMW has new tires.

So as can be expected, the politicians rapidly appeared touting the great plans by Complus to help make a dent in unemployment.  It also appeared they were ready to help with funding:

"Timo Vaartman, adviser to the minister of social affairs, said that the company was keen to use the subsidies offered by the government to the companies that create jobs for the unemployed. "The state would subsidize the creation of these jobs," said Vaartman."

Here's a video report from ERR News about these plans, complete with the CEO of ComPlus (yes, he's French), and then-Social Minister (now Justice Minister) Hanno Pevkur praising ComPlus and the good benefits this will bring to the Estonian working man.

Now you’re probably expecting us to jump on this and be critical of the use of taxpayer money. Actually, if the money is used to train people with new marketable skills, we think that’s a good use of taxpayer money. Education provides great benefits in the long term, and improves society overall.

According to information we received from the social ministry, no taxpayer money was ever paid out for this anyway, at least from their department.

What happened? Complus went bankrupt. According to official records, Bienvenue OÜ was liquidated earlier this year (they renamed it to Bienvenue from Complus):




The bailiff even had to step in and auction off some of their old computer equipment in an attempt to recover some money.
"Help! I'm trapped in the empty ComPlus offices and I'm lonely!"

One Big Tax Scam?


Why was the bailiff auctioning off their equipment? Maybe because they owe the taxpayer over 1.3 million euros in unpaid taxes! To be more precise, Complus has a tax debt of 1,379,061 euros!

Taxpayer's money, in the hands of ComPlus



One does not build that much tax debt overnight. In fact, Complus was in the top 10 of largest tax debtors in Estonia (see Bienvenue).

What raises our eyebrows is the type of tax debt they have. Let’s have a closer look:

  • Erijuhtude tulumaks 806 570,70 (Special Income Tax)
  • Intress 408,61 (Interest)
  • Kinnipeetud tulumaks 120 557,65 (Withheld Income Tax)
  • Kogumispensionimakse  3 561,57 (Pension Tax)
  • Käibemaks 194 412,85 (VAT – Value Added Tax)
  • Sotsiaalmaks 227 375,00 (Social Tax)
  • Töötuskindlustusmakse  26 175,05 (Unemployment Tax)

Let’s leave aside Social Tax, Unemployment Tax, and Pension Tax, as those are the taxes the employer pays for their employees. Same with withheld income tax – it’s the income tax employers withhold when they pay their employees. Those tax debts are nothing to be proud of, but they’re also not suspicious. We’ll also leave off the Interest item because it’s small.

Now let’s look at VAT. This occurs when you sell a product or service, and collect VAT from the customer, on behalf of the government.

And now the big one: Special Income Tax. This comprises over half the company’s tax debt. There are a few types of taxes that can end up in this category, including fringe benefit tax, tax on interest payments on overdue taxes, taxes on expenses not related to the business and… dividend tax.

Here’s our theory, and note it’s just a theory since we don’t have all the information:

Complus set up this whole charade as a way to skip out on taxes. The company had operations outside Estonia, so they move those profits to Estonia, take the dividends, and never pay taxes. Brilliant! Too bad the taxpayer got screwed in the process. This company basically stole money from the taxpayer's pocket, with virtually no consequences.

Why do we think this was suspicious from the start? Well all the announcements about 700 jobs came out in the spring of 2010, but according to the tax data, the company has had a tax debt since 2009.  (It makes you wonder if any of the politicians bothered to research the company at all; tax debt is public information.)

They also haven’t filed an annual report since 2009. If the company was really serious about creating 700 jobs, wouldn’t they pay their taxes every month, and file annual reports?

Of course, we could be wrong on this. Maybe in the last 4 years, they were so busy creating 700 jobs that they forgot to pay their taxes every month, forgot to file an annual report, and forgot to stop from going bankrupt.

It’s possible, but unlikely.

 

More Grand Projects


So this is why we get worried for the taxpayer when grand projects like this are announced.
We’re still waiting for the billion kroon (64 million euro) Risti Club luxury golf course housing development to open, with housing for 780 families. It’s located at least an hour away from any major employment center in Estonia, but apparently location isn’t important in real estate. Our concern is that EAS has given significant taxpayer funding in the past to golf courses around Estonia, some of which have already gone into bankruptcy, so we’re skeptical Estonia needs another golf course, unless ice golfing becomes an Olympic sport. (More on taxpayer funding of golf courses in a future post.)

Estonia's next Skype?


And then there’s the 600 million euro datacenter that we referenced earlier, from Data Valley.  It would use so much power that it’s equivalent to half of Estonia’s entire power consumption in the winter, and would require building 3 more power stations. All we can hope is that no taxpayer money is wasted on this adventure.

 

Lessons Learned


Complus was too good to be true. Numerous news sites and ministries reported their great plans to create 700 jobs, but apparently no one bothered to look into the company even the slightest bit. Just a basic search of the commercial registry would have revealed their months of unpaid taxes dating back to 2009.

The situation has only slightly improved when it comes to Data Valley and their datacenter plans. ArcticStartup did some digging into the details behind this, but there are still a lot of questions.

Maybe it’s time for the Estonian media to look into these grand projects further, instead of just rewriting press releases?

Monday, October 7, 2013

The Curious Case of Fits.Me Revenues

Fits.Me Reports 2012 Revenues : Turnaround Story of the Century?

 

Tasty Meat and Rice Pirukat (Photo Credit)

With the internet all atwitter with talk of Twitter’s IPO, and every journalist tearing apart Twitter’s financial books like a Balti Jaam bus station resident to a discarded pirukat, we figured maybe it’s worth it to take a look at the books of everyone’s favorite Estonian startup – Fits.Me.

Does the one on the right come in a C cup? We're not greedy!

It’s a favorite of people with a sexy robotic mannequin fetish because they produce robotic mannequins with at least a Miley Cyrus level of sexiness (if only mannequins could Twerk!). It’s a favorite to us because by our accounts, they’ve wasted over 3.7 million euros of taxpayers money. They’re a favorite of impoverished Estonians because that same money could have been used to help them. But enough about discarded pirukat, let’s have a look at the books, shall we?

Yikes. We'll take the robotic mannequin, please.
 
Founded in 2006, Fits.Me is now 7 years old. In marriage, that’s known as the 7-year itch, and the turning point where things really go to hell or improve remarkably (we’ve heard the latter is helped by key clubs and swinging, but that depends on the attractiveness of your neighbors).

Thanks to a copy of their 2012 annual report for their Estonian subsidiary (the one that sucks in all the taxpayer money) which we obtained, we can get a relatively clear picture of their situation.

To our non-Estonian readers, you may wonder how we obtained the annual report for a non-publicly-traded company, since typically those are not available to just anyone. We’d like to say it involved big payoffs (in discarded pirukat, of course) to a low-level bureaucrat in the Estonian Companies House. An even better story is that we seduced such a bureaucrat, a lonely unmarried mid-30’s female roaming the aisles of Selver purportedly in search of the perfect pirukat but in reality in search of true love. Or maybe we won the annual report in a high stakes poker game at Olympic Casino, James Bond style.

Sadly, none of that happened. Turns out we’re banned from all Olympic Casinos due to an unfortunate incident involving “spreading the love” and a poker table, but with no poker chips involved. The seduction of a bureaucrat story sounds good, but we think Selver smells like the inside of a Subway and we prefer Rimi.

No, what really happened is that annual reports in Estonia are publicly available to anyone for a small fee. Go e-Estonia!

Before we have a look at a few numbers, let’s get one thing straight. We didn’t actually want to write any more about Fits.Me. Our position on them is already clear, and that’s it. However, when we noticed some recent articles in ArticStartup and Äripäev where Fits.Me revenues were trumpeted, and their CEO compared their progress to internet powerhouse Amazon.com and pointed out how Amazon operated at a loss for many years, we couldn’t resist but having a closer look.

What drew our attention was their statement of how revenues skyrocketed from 22,869 euros in 2011 to over 2 million euros in 2012. That’s impressive, by any measure. Do we have the company turnaround story of the year? Were we all wrong about their path to failure?
As usual, journalists (who had access to the same annual report as we do), didn’t quite dig into the details. Let’s take a look at their revenues as reported in their 2012 annual report:

Müügitulu = Sales Revenues. Kokku = Total.

Well nothing strange there, right? The 2 million revenue number is clearly visible (Ok, it's 1,961,708 euros here for sales revenue, because there is another 116,970 euros in "revenue" from the taxpayer reported elsewhere in the report). Ahh, but hold on one second there, Buster! What are the two different rows that comprise the revenue numbers above?

First, a quick explanation. Just like rules prevent civilized (or is that uncivilized?) society from descending into anarchy, accounting rules prevent companies from descending into deceptive practices. Ok, every Enron accountant just had a good laugh at that statement, but the point is that at least in simpler cases where Jedi and Chewco-style holding companies are not involved, it’s a bit more difficult to hide the financial truth about a company.

In this case, accounting rules dictate that you separate revenues earned from your main business activities from revenues earned from other means. An example would be if you’re a book publishing company (do those still exist?) and you have some extra office space that you rent out to another company. You’d declare the tiny income earned from office rental activities separately, since it’s not your primary business activity. This helps people figure out how much money you actually earn from your company’s primary activity, and not from distractions like taking in wash or pimping.

Notice something with the Fits.Me numbers? They have two categories of revenue reported:
  • Virtual Fitting Room (Virtuaalse proovikabiini teenus): 58,626 euros
  • Sale of Services (Teenuse müük): 1,903,082 euros
97% of revenue is from the "services" category, from which they made 0 revenues in the previous year. Only 58,6262 euros -- 3% of sales revenues -- came from their primary business acrtivity (Virtual Fitting Room).

Sounds kind of suspicious, doesn’t it? A company boasts of their huge revenue jump, but where did the 1.9 million euros in "services" revenue come from?

Thankfully, accounting rules again are our friend. They require companies to report separately any transactions made between related companies. The Estonian branch of Fits.Me (Massi Miliano OÜ) is actually owned by a British parent company. This was done because many people in Fits.Me had ugly teeth and it was felt they’d fit in much better in England, the land of poor dental work. Ok, we’re joking. Actually the people in Fits.Me have quite nice teeth and the NHS now funds dental work, so the only bad teeth you’ll see in Merry Old England are from truly aging East Midlands cocktail waitresses who are known for saying “Freshen ya drink, guvnor?

Probably when Fits.Me got some non-taxpayer funding (Yay! Let the VCs suffer too!), which came from UK investors, they required an ownership structure set up in the UK.

So let’s see what happened with transactions between related companies:



Ahh, looks like we’ve found our 1.9 million! It appears it came from sales to the parent company! Now let’s be clear, the transfer of money between a parent company and its subsidiaries is not in itself problematic. Probably the investors put their money into the UK company, and then it was transferred to the Estonian company to fund operations there. That’s normal.

But, is this revenue? Perhaps. Maybe the Estonian branch invoiced the UK parent company for “services rendered” and it was treated as revenue. We’re not accountants, so we’ll just assume that’s acceptable under accounting rules.

But does this present a fair and balanced picture of the company’s revenue situation? Note how they were touting their big jump in revenue, but could it be that nearly all their revenue comes from inter-company transfers, and not actually from sales of their main product? We can’t be entirely sure, but to us, it appears that is the case. So our assessment based on the numbers is that Fits.Me revenues from selling their core product (Virtual Fitting Room) were only 58.626 euros last year, and this disappointing result was despite their great efforts to increase sales, as their CEO said in an article about their 2012 financials:

"For a very long time we were a technology development company, however last year was the first year when we turned Fits.me into a sales machine." (emphasis ours)

That brings us to profit, which is what really matters. They ran a loss again, though it was reduced considerably from 1,246,886 euros to 167,694 euros. Good news, great improvement, right?

Well let’s think of how a profit number is derived. In the simplest sense, it’s revenues minus expenses. But as we’ve seen above, 97% of their "revenues" appear to be just from the parent company giving them money, so they aren’t real revenues to us, and can easily be adjusted up or down by asking for more from the parent company. What does that mean for the profit number if the revenue number means nothing? You guessed it – worthless! How can you trust a profit number if you can’t trust the revenue number?

We Are Zee Robots


1977 Fitting Solution
 
There was another item in their annual report that drew our attention. They have 48 full-time employees (up from 21 in 2011)! What do they do all day? Not selling to customers, apparently!

That gives us an idea about how to turn the company around. With that many employees, they probably have enough of the different body types among them. Why not just get rid of all these mannequins and just line up all the employees and photograph each of them wearing the garment? Skip the robotic mannequins entirely. It will probably be cheaper too!

Typical Lunch for Fits.Me's chunkiest employee


Ok, Estonians aren’t as fat as your typical American, so they may not have an employee who wears size XXXL, but just pay one of the chunkier employees to eat a Supersize Me-style diet of only McDonalds for a month, and that problem is solved.

It turns out our great solution may not be needed much at all. TechCrunch reported last week that Fits.Me is finding the robot mannequin solution is too expensive for many retailers, and is pushing a more limited mannequin-less solution called FitAdvisor.
 

Lessons Learned


What can we learn from this? The Fits.Me numbers were reported by both Äripäev and Arctic Startup. It appears neither of them bothered to look into the actual numbers on the annual report. Even a brief review would show this situation. If math is hard, simply asking the CEO what drove the huge revenue growth would (ideally) lead to the same information. Is reporting about Estonian startups really that shallow? It doesn’t have to be.

Saturday, August 24, 2013

Robbie Williams : Feeling Real Love From the Taxpayer

Robbie Williams in Tallinn : The Taxpayer Comes Undone

 

Is this what he thinks of the taxpayer? (Photo Credit)
The Estonian press was busy last week with full coverage of Robbie Williams' concert in Tallinn. Every little detail was covered, including photos of him arriving at his hotel with a towel draped over his head (Muslim chic?).

By all accounts, this was an excellent concert. Despite some back pain, Robbie put on a great performance, to an audience of more than 60,000 fans, in the historic Lauluväljak (Song Festival grounds). Even the weather was nice!

Candy from the Taxpayer

So why are we bellyaching about the concert? Because we as taxpayers paid for part of it. Let's have a look:
  • 300,000 euros from Enterprise Estonia (EAS)
  • 90,000 euros from the Tallinn city government (60,000 and 30,000)
So what does 390,000 euros of taxpayer money buy? This was part of an elaborate campaign where the live concert would be broadcast at movie theaters throughout the world, with a DVD of the concert to follow. There would be images of Estonia shown during the intermission between songs, as a way of encouraging tourism.

Was it worth it? To start, let's make a few assumptions in favor of this. Let's assume Robbie Williams is a popular singer with people who would be potential tourists to Estonia. If a DVD were produced, would anyone buy it?

Advertising Space for Sale 

 

Official Robbie Williams Sun Visor - Popular among Swedbank employees

Robbie Williams didn't end up with a net worth of $160 million just by selling a couple CDs. He knows how to sell and market everything Robbie. His online store has everything from the usual Official Robbie Williams t-shirts and Official Robbie Williams posters to Official Robbie Williams iPhone cases and Official Robbie Williams coffee mugs.

Official Robbie Williams Dog Tags - Popular among troops in Iraq
Official Robbie Williams Skullcap - Popular among violent gangsters

So as far as we can tell, if Robbie were to release a concert DVD, people would buy it. They might even pick up an Official Robbie Williams shot glass and Official Robbie Williams scented candle and make a drunken yet romantic evening out of it.

How We'd Do It - Making the Deal Pure

Again, why are we bellyaching about this? Sounds like we have a popular singer, who's going to sell a lot of DVDs with great views of Estonia. Isn't that a good thing?

Actually, we think it may just work, but we don't think the taxpayer should pay the bill on this.

Here's our guess about how the conversation went at Robbie's record label (Universal):

Slimy Record Executive 1: "Hey boss, you're not gonna believe this. Remember our plans to make a DVD of Robbie's concert?"
Slimy Record Executive 2: "Sure. We were going to film one of the concerts, sell the DVD, and make millions from all his adoring fans. We'll make nearly as much money as we'll make from selling the Official Robbie Williams scented candle!"
Slimy Record Executive 1: "Yes. Well get this. Some Estonians called me and they want us to film it there. I checked out the place and it looks really nice. But here's the best part: they're going to pay us nearly 400,000 euros to make the DVD!"
Slimy Record Executive 2: "Get outta town! They're going to pay us to make a DVD we planned to make anyway? Do we have to give them a cut of the sales?"
Slimy Record Executive 1: "Nope! We keep all the revenues from the sale. We just have to includes a few scenes of Estonia, which we'd do anyway if we filmed it there."
Slimy Record Executive 2: "Wow! I have no idea why the Estonians agreed to that -- that's a sweet deal! Hey, I heard the Official Robbie Williams scented candle contained some hallucinogens. Perhaps the Estonians were sniffing those when they thought up this idea?"
That's the thing. We think the DVD would have been made anyway. They have been selling live CDs from every concert he did on this tour, so surely they had plans to make a DVD to go along with it.

Would they have picked Tallinn anyway? We think they would have, based on the list of venues where the concert took place. Let's face it - Lauluväljak is unique and picturesque compared to places like the Veltins Area in Gelsenkirchen, Germany.

Perhaps it's risky to assume that they would pick Tallinn. Maybe the DVD producer has an ex-lover in Gothenburg so he'd prefer to spend a few days there.

There's an easy way to structure this deal to ensure it's filmed in Tallinn, while saving the taxpayer some money. They should have told Robbie's people that they'll pay the money up front, but then get 50% of the profits from the DVD, until all the taxpayer money is recouped. It's a good deal for both sides, as EAS takes the financial risk (making Universal more likely to agree), but also gets its money back if the DVD sells well.

Sadly, it didn't work out that way. Instead, Universal and BDG (the local concert promoter, who made a tidy profit from ticket sales), get a government handout from the taxpayer.


Lessons Learned - Think Different

This is one of those cases where government fails to think creatively. We think EAS is so used to just handing out money that no one stepped back to realize they're basically paying a major corporation to make a product that would have been made anyway, and then reap all the profits from it. In the future, if EAS wants to embark on such promotions, they should look at ways to do them as partnerships (known as PPPs) instead of just handouts.

Monday, August 5, 2013

Quattromed : Failing the Taxpayer's Sniff Test

Quattromed : A test no taxpayer wants to take

The Estonian startup world was aflutter later week with the news that Tartu-based laboratory testing company Quattromed HTI was acquired by the German company Synlab. Exact terms of the deal were not disclosed, but given that Quattromed is a profitable and successful company, we can only assume the deal worked out well for both sides.

Interestingly, the acquisition received a lot less press than we expected, with most of the usual Estonian startup cheerleaders focused on an article in the Economist about Estonia last week, at least until the comments section of the article started going in a direction they didn't like.

Ok, there were two articles in Äripäev about the Quattromed acquisition, though details of the deal were lacking. We just expected this to be celebrated far and wide. After all, here is a company that was basically a spin-off of the esteemed Tartu University, employing over 150 people at offices throughout Estonia, and gets bought by a larger company. Isn't this how it's supposed to work? In our minds it is, except for one small detail we'll get to later. First, let's have a look at the business.

The Kind of Test You Can't Cheat On

A Quattromed lab in Estonia. Ignore the lab technician in a miniskirt.

So what does Quattromed do? Well if you've ever been to a doctor in Estonia and had some type of bodily sample taken for testing (blood, urine, your right arm), then it was probably tested by Quattromed. Because of the wide range of tests, and the special equipment needed to analyze the samples, it's difficult to do this in a hospital or doctor's office. Quattromed has the equipment and skills, and they have offices throughout Estonia, even in places like Võru, Elva, and Jõhvi.

Damn the diabetes, I want my Kalev Mesikäpp chocolate bar!


In fact, they offer over 200 tests, from testing your blood glucose and iron levels, to testing for chlamydia and HIV. So whether your weekend bender was spent at Club Hollywood with women of questionable repute, or at home with a box of candy bars at your side and Bridget Jones movies on the TV, Quattromed can test you on Monday. Just avoid candy bar orgies with club girls -- that will require more tests and things can get pricey.

"No Chlamydia here! I can't even spell it!"
So is this business sexy? Only to the point that many of their testing services are for STDs. It's actually kind of a boring business, and perhaps that's why it never got much press. However, we like it. Sometimes it's the boring businesses that make all the money.

Quattromed made over half a million euros in profit last year, and has seen revenues rise steadily the last few years. They also have great long-term prospects, for two reasons. First, the population in Estonia, like in the rest of Europe, is getting older. That means more health issues, necessitating more tests. Second, as medical technology advances, there will be new tests being developed to check for diseases.

Finally, this business is good for Estonia. They employ 150 people at their labs throughout Estonia, including in cities where there are few other good job opportunities, like Põltsamaa and Narva.

To summarize our take on it: the medical lab testing business is not going away, and Quattromed, as the market leader in Estonia, looks like it will maintain continued success in the market. It's no surprise they were acquired by Synlab. It's a good business, and we expect most operations and jobs will remain in Estonia after the acquisition, since it's not really worth it to fly blood samples to Germany for a 20 euro test.


Hey Taxpayer, Bend Over!

Bend over, taxpayer!
This all sounds great, until you dig a bit further into the details. In 2008, BaltCap acquired a majority stake in Quattromed (which was already profitable at the time). BaltCap, who we've written about before, is a venture capital fund.

So what they did is they acquired a controlling share in Quattromed, helped them build the company further, and now it has been sold off to Synlab. We assume Baltcap and Quattromed both made some money out of the deal.

Nothing wrong with that. That's how it works in most markets. BaltCap took a risk by investing in Quattromed, provided their expertise to build the company, and now profits when it gets sold off. Deals like this happen all the time.

Sadly, there's more to this story. After BaltCap acquired a controlling share in 2008, Quattromed received huge grants of taxpayer money, via EAS. In total, Quattromed has received 1,091,681 euros of taxpayer money!


The largest grant was given in 2010, well after the BaltCap acquisition, and the second largest grant was approved in May of this year. Surely Quattromed had already started talks with Synlab about the acquisition by then. Did that come up during the discussions? "Why yes, we're a profitable company and doing very well, but we still get free money from the taxpayer. What, they don't do that in Germany also?! Germany spends that money on roads!? That's crazy talk!"

This is not how it's supposed to work. It's not fair to other companies, and it's not fair to the taxpayer.

In unrelated news from last week, more than 1,000 children in Tallinn are without a place in public nursery schools, due to lack of funding. (And since we know you'll ask: Quattromed's taxpayer funding came from the ERDF and ESF funds, which are eligible to be used for projects like building schools for young people.)

Lessons Learned

What can we learn from this to prevent such nonsense in the future? EAS can easily ask their applicants for funding if they have already received private equity investment, and disqualify them based on that. In fact, there's even a handy list of all private equity investors in Estonia, and BaltCap is on the list.

What is troubling is that funding applications to EAS are apparently reviewed by a team of experts and even outside consultants. Did none of them think to simply search for Quattromed on Google? The BaltCap investment was reported about in Äripäev as well as on BaltCap's site. How did they not know?

We hope this was just a one-time oversight, and not the result of some old-boy's network (semuäri in Estonian) where certain people can just walk in the door of EAS and walk out with taxpayer money with few questions asked. Sadly, we know there are even more cases like this, and we'll be writing about these in the near future.

Monday, July 15, 2013

Liviko Turning Japanese : We Don't Really Think So

Liviko's Venture into Asia : One Big Hangover for the Taxpayer

 

A Typical Friday Night
 
You can break out the seljanka and aspirin, but even that probably won't cure the hangover caused by this waste of taxpayer money. Liviko recently announced that they will be closing their office in Japan, and shifting all sales to go via a distributor for that market. In other words, they will be going back to the same strategy they had for the Japanese market before they opened an office there -- using a distributor. They claim this is more productive and cost-effective, which we interpret to mean their venture to open an office in Japan did not go as planned.

First, a bit of background. Liviko is the producer of a number of alcoholic beverages, most notably that sweet, sweet nectar of the gods known as Viru Valge. They have a dominant position in the Estonian market, and it would be hard to find an Estonian who has not tried Viru Valge at one time or another. They're like the Coca Cola of the vodka industry, though we suspect a lot more Estonian children were conceived as a result of Viru Valge compared to Coke.

Now we will admit, Liviko was founded way back in 1898, so it's not quite a startup, except perhaps to the oldest person in the world, who happened to be born that same year, though we doubt she remembers being born nor the founding of Liviko. The reason we're writing about this is it's a good example of wasteful corporate welfare.

Selling Alcohol to the Japanese

 

At first glance, this may seem like a great idea and very lucrative. Liviko has had great success selling their product in Estonia and neighboring markets. Why not sell to Japan? It's the third largest economy in the world. Surely they'll be lining up to buy the esteemed Viru Valge, right?

Maybe. Let's look at a few factors that make this difficult:
  • Branding. Viru Valge has no brand recognition in Japan. It's not like the Japanese will flip on the latest James Bond film and see our favorite spy ordering his trademark martini made from Viru Valge. So Liviko would have to spend massive amounts on marketing to build brand awareness. Since this is a consumer product, marketing costs are even higher as this is more likely to involve mass marketing campaigns.
  • Competitive Industry. The beverage industry is highly competitive. You can't just walk into a retailer and say "Hey, sell my product!" Where are they going to put it? It's not like they have an empty space on the shelves. So they'll have to kick out some other product to put in your product, and sometimes there is a cost for this (known as a "slotting fee"). This isn't as common in Estonia, but if you go to a major grocery store in larger countries, walk down the cereal aisle and notice which brands are on the shelves at eye level. It's likely they paid for that positioning.
  • Transport Costs. Beverages are heavy, and thus expensive to transport. Their cost relative to weight is also low. Consider how much one case of vodka weighs -- that amount of vodka probably costs 100-200 euros. Now, think of that same weight but in mobile phones -- it's probably worth 100,000 euros for the same weight, and yet both cost basically the same to ship. Major beverage companies know this, which is why Coca Cola sets up bottling plants all around Europe, instead of doing it all in one country. It's a long journey from Estonia to Japan.
  • Cultural Differences. It's one thing to export to Latvia or Russia. The cultures aren't that different from each other. Japan is a whole different situation. It's so unique that there are entire websites devoted to how weird Japan is (possibly NSFW). For example, many Japanese women do not drink in public, as that would make them a "bad girl".
  • Japanese are Allergic to Alcohol! Anyone who has been to Japan is probably thinking we're crazy writing this, as there are plenty of drunken Japanese salarymen out in the Roppongi district of Tokyo every night. We are being a bit dramatic, but in fact it is estimated that 30-50% of people of Japanese descent have the ALDH2 gene which makes it difficult for their body to metabolize alcohol. Ever seen a person of Japanese, Korean, or Chinese descent get all red-faced after having a drink? It's not your good looks and they're not blushing - it's known as Asian flush syndrome. Our point here is that it can be difficult to sell a product to a market where half of your customers are going to have some type of reaction by consuming it, and by "reaction" we don't mean increased confidence.
With all that said, it's still not impossible to sell in Japan. It's just difficult. Liviko has the experience and a good product, so maybe they can pull it off.

Time for Some Corporate Welfare!

 

But of course, to pull off such a feat, tiny, little Liviko will need help from the taxpayer, right? Apparently, that's what Liviko thought, and Enterprise Estonia agreed, and gave them 439,168 euros!


Did Liviko need the money? Well, their total profit for the last 2 years was over 3.5 million euros!

Why does a large corporation making millions of euros in profits need help from the taxpayer?

We heard a rumor that Liviko's next big project will be to sell vodka in Saudi Arabia, and Enterprise Estonia is eager to fund it. They'll start their promotions during Ramadan :)