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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.


  1. Have you been in their office? Call them up and go see for yourself with what kind of brands they are working at the moment? :)

    Well, that is not quite true about their workers just sitting their time. They have good people working there, who where always up with something and as far as I know, they have had their workers with suitable looks modelling for them.

    I have been in their office as a model and even during weekends and late hours they have had some robot managers and models working - you need different models for different brands.

    1. So what are the revenues from all these brands they are working with? Based on what is written above, it doesn't look good.

    2. If you have information, don't hold it back. You claim they have "good people" - would you please mention some of them? Also, I haven't yet understood if they even have a single client? On their website, several are listed, but if you see the online stores of the customers, you actually do not see the solution implemented.

      I do not have a horse in this run; I'm just curious how the things actually have worked out for them.

    3. One client is Sangar, click on fitting room button on this page: http://www.sangar.ee/en/mensshirts/rob-s310189860.html

    4. Thanks. I tried that out and I don't see what's so great about this. Your link is to a nice blue and white striped shirt, but when I click on the fitting room link and put in my measurements, it shows me a generic white shirt, not the shirt I picked.

      I wonder how much, if anything, Sangar is actually paying for this. Sangar is an Estonian company so I wonder if this "deal" was just through the usual Estonian old boys network.

    5. Well, I guess the fit is more accurate than the displayed color and this is what matters. And the wearing was 3d probably according to the almost random sizes I've entered. More interesting is that I've got a message that the neck would be too too tight. This is discouraging the buy, but probably also avoid a return which precisely is what fits me tries avoiding.
      So the experience is still a bit bare bone, but one can easily imagine a second step to couple this input to other sales suggestions, such as similar shirt colors and motives but with a better fit.
      Maybe a reason to inject more more into R&D...
      And I reiter that tax money is not lost when paid: it comes back as new taxes on income, vat on salary purchase, I wishes a better micro economic model would be provided (even with forgetting the keynesian multiplier...), on tax "loss" rather than quoting the invested number.
      Also nothing demonstrates me that these taxes would have been better invested anyway nor that the other issues in the country are purely relying upon a lack of financial investment.
      Now regarding the money transfer between subsidies, I don't see that as a meaningful number unless you have the full picture for the company. Fiscal optimization is in full play there. The fact that it was shown as revenue can be presumed that it really was, for billed customers outside of Estonia which is likely to be more often the case given the inside market.
      UK balance sheet has to be studied as well to really be informative.

  2. Did you call them? Or lurked with binoculars? Don't be a anonymous internet superhero with fictional agenda.

    You are really impolite to the effort of many people.

    1. Seems like the blog post is saying that Fits.Me isn't really making much revenues at all. Is that not true? Either the blog posted incorrect data, or they aren't making sales. Which is it?

    2. "Did you call them?"

      If you use public money, you must be prepared for public criticism as well. As a taxpayer, I didn't get any call either before my money was wasted on Fits.Me.

      "You are really impolite to the effort of many people."

      Many people have been forced to pay taxes in order to finance somebody's bad business. They really should stop this madness. The founder of Fits.Me has compared his start-up with Amazon. The people at Arengufond, EAS and other public money distributors can't see the difference between Fits.Me and Amazon - and hence it's better not to give them money to waste.

  3. Thanx, once again. Great. However, Baltijaam is a railway (not bus) station, and "pie" in Estonian is "pirukas", not "pirukat":) Cheers,

  4. Once again, I read this article I find it ridiculous. Not that Fits.me is making enough money to cover what they spend, making then profitable. No. Ridicilous because if your level of journalism and critic is that bad, you clearly should close your mouth, stop bitching around and use your time to play with your kids. I don't work for them but maybe should snoop a little more (way more) to get accurate information before you write anything. Fits.me was funded by EAS at the beginning, you can easily find that info on the web as it's publicly available. For the rest it's privately funded you can find all info here: http://www.crunchbase.com/company/fits-me.

    So if they fail the money will NOT be supported byt the tax payers more than the first invested by EAS.

    Therefor, re-read my first advice. Close this blog and go play with your kids. You'll be more important and useful to the world this way.


    1. Sorry, but you're an idiot.

      Fits.Me got money from 3 different taxpayer sources: EAS, SmartCap/Development Fund, Eurostars.

      They reported it on the blog already:

      Looks to me like the bloggers DID do their homework. Actually, I haven't found any other news source the uncovered all this information about Fits.Me, so I'd say these guys are better than most journalists in Estonia.

    2. Seems like you should get a brain ...
      They actually did the research that other so called journalists did not. Instead of stupidely stating that the company's revenues soared by XXXX%, they checked the source to see that it was a simple accounting manipulation (legal?).

      And people like you can vote... that's what makes me sad because you elect those people who distribute and waste taxpayers' money !

  5. But why do half of the reasearch - not all of it??? For your presumptions to work one should compare the books of the parent company and see whats up!
    Just maybe sales of the service are routed through the parent company for tax, ip or other reasosn

    1. I don't think financial reports in England are publicly available.

      But anyway, my guess is if Fits.Me really did get 2 million in actual sales revenues via their parent company, they'd be shouting it from the rooftops.. and they aren't.

  6. It is always a bad sign when the politicians and not the industry insiders promote and advertize companies. Estonian startups are always advertized by the politicians, which should be treated as a warning sign not to invest in the country.

    This blog is doing a great job disclosing information not found in the Estonian and foreign corporate press.

    It may be worth doing a blog post about Estonian politicians who promote startups on their Facebook and Twitter. The country's president Toomas Hendrik Ilves has promoted certain startups more than 10 times on his official presidential Facebook and Twitter. This is not right - a president should not favor certain companies over others, and if he does so, he probably has personal investments in the company. (Ilves deletes his tweets and facebook after a while, presumably not to incriminate himself, but you can always take screenshots.) It would be useful to see a list of Estonian politicians who take special interest in selected startups.

  7. So, Norma, the company that was mostly owned by Autoliv and whos products were mostly sold through their parent (rather typical way of doing business in subsidiaries) wasn't making anything either?
    Should have digged deeper - services might have been actually valuable to the parent and might have been sold to client with a markup by the parent.

    1. That is possible, but if that were true, and you were the CEO, wouldn't you be publicizing this? You'd be proud that you increased revenues so much, not hiding it, right?

      So far, Fits.Me has refused to provide any revenue numbers for their UK parent company. Äripäev asked them specifically about it a few weeks ago.

      If they had such great revenues, why are they hiding it?

      The more logical explanation is they don't have much revenues at all, and that's why they refuse to provide the numbers.