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.

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.

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 :)

InkSpin1 : Spinning Through Taxpayer Money

InkSpin1 : Spinning Through Taxpayer Money

Think back to the year 2007, 6 years ago. The world was a lot different then. Apple had just introduced their first iPhone, George W. Bush was still the US president, and being a hipster wasn't yet hip.

It's also the year that InkSpin1 (now Vispel -- more on that later) was founded, with the goal to provide video calling through your TV set.

InkSpin1was founded as an incubator company from ASI (Ambient Sound Investments). ASI is a private equity fund financed primarily through the success of Skype. Skype, a company registered in Luxembourg and founded by a Dane and a Swede, is heralded as an Estonian success story. This point was hotly debated in a previous post on this blog (see comments). In the end, we just flipped a coin to reach a conclusion on the matter.

Regardless, one thing everyone seems to agree on is the 4 Estonians who founded ASI played key roles in the early development of Skype, and they used some of the wealth they gained from Skype's sale to eBay and later Microsoft to build ASI.

This is how it's supposed to work, right? ASI is a private firm, funded with private money, investing in new technology firms. Can't complain about that, can we? Well, let's take a closer look at things.

Enter the Taxpayer

In 2008, shortly after InkSpin1's founding (and still a time when being a hipster was not hip yet), there was an interview with the CEO of the company at the time, Martin Villig. According to the article:

"InkSpin1 will conduct preliminary studies in a number of countries; monetary support for this will be applied for with Enterprise Estonia."

Wait a minute. Isn't this an ASI portfolio company? What do they need government money for?

Maybe it was just a few thousand euros. Let's have a look:

Sadly, it wasn't. InkSpin1 has received 542,663 euros in taxpayer money!

What's worse is this wasn't just a one-time thing. The money started flowing to them in 2009, and continued to flow through 6 different projects. They even received new funding last month!

But maybe we're being too critical. Sure, this company was originally funded from ASI, but maybe those Skype guys funding ASI simply ran out of money. Maybe they went on a week-long party binge and wasted all their money on hookers and blow. Perhaps they woke up with Mike Tyson's tiger in their hotel suite?

As much fun as that sounds, we doubt that happened. First, the Skype guys seem like cool and sensible fellows. One of them, Jaan Tallinn, recently did an AMA on Reddit so you can see what makes him tick. Second, we know they still have money because Aripäev reported that ASI's balance sheet at the end of 2011 was over 87 million euros.

The Product : So Call Me, Maybe?

Let's have a look at the product. Perhaps it's a real winner, and thoroughly deserving of all this investment.

As far as we can tell, it's a solution that can be integrated into a set-top box (STB) that hooks up to your television. So you can sit on your couch and make video calls with your TV set.

Actually, that doesn't sound so bad, assuming you remember to sweep the Doritos crumbs off your pants and change out of your sweat-stained shirt first. Video calling is growing in popularity, and people use it every day with their smartphone, tablet or computer, and it works well.

Ahh, but there's the catch! People do it already! On some other device! Will they move to doing it with a TV?

Maybe they will, but we're not convinced the call will be done via the set-top box. All TVs these days are basically just a larger version of a computer monitor, with plenty of HDMI and VGA inputs on the back. Wouldn't it be just as easy to have your existing device, like an iPad, output to the TV and bypass the set-top box altogether?

It's a tough call (pun actually intended). There are some merits in the idea, but also some significant risks. In other words, the perfect scenario for a venture capitalist. Why is the taxpayer taking the risk?

What's In a Name?

You may have noticed that one of the taxpayer-funded projects for this company was for branding. The InkSpin1 name isn't catchy, and also goes against the trend in Estonia to name all websites with "24" at the end, like Elu24 and City24. Presumably this is to make it clear that the website is available 24 hours a day, unlike all other websites, which shut down at 6pm (damn those union workers!).

So with that money, they end up with Vispel? As far as we can tell by looking at a version of their website from 2012 (when it was still InkSpin1), they adopted the Vispel name this year.

Rule number 1 when choosing a name. Google it first. We see that there is a blog by that name, and it's from an Estonian woman (Kristel) who writes about her cooking:

Kristel's Apple Blackberry Crisp

Ok, from a company branding perspective, they probably don't need to worry about Kristel, but what about this:

So it looks like HP, a major multinational corporation, has a video-based product called VISPEL. Sure, it's not the same thing, but it's video-related, and our guess is it's close enough to make HP's army of lawyers worried.

We can't find dates on when HP released their product, so it may have been fairly recently. So maybe InkSpin1 is fine then, except it appears they have not registered the Vispel trademark in the EU or the US. Anyone want to bet whose lawyers will win, HP or InkSpin1, if this goes to court?

Very effective use of taxpayer money on branding, isn't it?

Use It If You Can

So let's go over this in summary. We have a company that was funded by wealthy private investors, with no apparent success in the market for the last 6 years. Yet, they receive taxpayer money, again and again, with a sum of over half a million euros.

What is particularly troubling is it seems this company was set up from the start with the plan to suck up taxpayer money. Some claim that all this taxpayer funding is needed because there is no private equity available in Estonia, but this is a perfect example of where that's not the case. This company got investors first and then they go to the taxpayer. Is this how it's supposed to work?

Summer Update

Checking In

Summer in Estonia. Sun is shining, weather is sweet. Many Estonian startups seem to be taking time off to enjoy the weather.

While they're out relaxing (and their competitors in other countries are hard at work), we thought we'd take this time to provide an update on a few companies we profiled in the past.

Fits.Me : Taxpayers Out Another 1.8 million

In our post last month about Fits.Me, we calculated that they received around 1.9 million euros of taxpayer money.

It turns out our calculations were wrong. They were too low.

After some further sleuthing, we found that the EU's now-defunct Eurostars program (yes, they gave it the same name as the train - brilliant!) also gave them money back in 2011. 1.87 million euros, to be exact:

So that brings the total amount of taxpayer money wasted on this company to 3,773,456 euros, for those keeping track.

Startup Wise Guys : Where's My Million Euros?

As we wrote earlier this year, we don't have high hopes for the Wise Guys. It looks like the wise guys (and girls) behind the Wise Guys have also wised up and mostly moved on to other opportunities. Looking at the list of their team members on their site, then checking the corresponding LinkedIn pages for those people, it looks like only two of the team members work exclusively for them, and one of those two is just an intern. All the founders have other jobs listed on their LinkedIn profiles as well. To us, it doesn't look good when all the organization's founders no longer focus on the organization.

In the meantime, they just announced they're accepting a new batch of applications for an intake this fall. Have a look at the description of the program, where they mention the up to 15,000 euros of funding available for each team.

Notice what's missing? How about the 1 million euros of funding available via SmartCap, which they announced last year? As far as we can tell, 250k went to VitalFields so there's 750k left.

Now, if you were running this program, and trying to get companies to apply, wouldn't you mention this huge amount of funding available? Why did they leave it out? Our guesses are that either the funding has been pulled due to limited success of the Wise Guys, or they are not confident they'll find qualified (good) companies for the money. Whatever it is, it makes us awfully suspicious when key information like this is left out.

Baltic Innovation Fund : Millions at Stake

As we've written about in the past, we're not happy about the Baltic Innovation Fund, which plans to use 100 million euros of taxpayer money to invest in companies in the Baltics.

How are things going so far? Let's have a look.

In February, it was announced that 30 million euros has been given to BPM Capital to invest in Baltic companies. As noted in that press release: "The investment period of the fund is expected to begin in Q2 2013" Well, we've got only about 2 weeks left in this quarter, and BPM Capital doesn't even have a website yet! Is this really the right group to trust with 30 million euros of taxpayer money?

Then, earlier this month, the Baltic Innovation Fund announced they're giving out another 20 million, this time to BaltCap. We've written about BaltCap in the past, because they already received 40 million euros of taxpayer money for investment, through other programs.  Then they got another 136,000 euros of taxpayer money as a grant from Enterprise Estonia.

Will BaltCap benefit Estonian companies? A look at their list of investments shows that since 2010, they've invested in only 2 companies in Estonia. One investment is in a wind park, and the other is in a company that does aircraft maintenance. Presumably these investments were made with the help of the previous wad of 40 million in taxpayer money. How will they spend their next 20 million of taxpayer money they just received?

As we've said in the past, we have no problem with private investors taking risky bets on new companies. This private equity process works amazingly well in other countries. Why does the taxpayer need to get involved in Estonia? Some will say the reason is that there is not a sufficient private equity market to fund good ideas in Estonia. We disagree. There is plenty of private equity available for good ideas, as can be seen by perusing the list of members of the Estonian Venture Capital Association (also note BPM Capital, mentioned above, is not a member, yet they still got 30 million euros).

We think there are insufficient good ideas, not insufficient funding. Handing out 50 million euros in taxpayer money to BPM Capital and BaltCap is a waste.

GameFounders : Full of GameFailures

GameFounders : Half a Million Euros Wasted

Does Estonia really need another incubator, paid for by the taxpayer?

GameFounders was launched last year with great fanfare, billing themselves as "The First Gaming Accelerator in Europe", a claim disputed by some in France, where a gaming accelerator was launched the year before that.

GameFounders attracted a lot of attention, and in the end, 122 gaming startups from 41 countries applied to join the 3-month program in Tallinn, which provided funding of up to 15,000 euros per company, along with coaching and access to a mentor network.

Speaking about the high interest in the program, Dimitri Burnashev from Enterprise Estonia said "I am happy to see that so many gaming startups see the benefits of bootstrapping in Estonia." (Apparently his definition of bootstrapping is different from ours.)

The Teams

While there was talk that up to 10 teams may be accepted in the first intake, in the end only 6 out of 122 applicants were selected.

With all that interest, and such selectivity, the teams must have been pretty good, right? That selection took place last summer, so let's see where they are now.

Our friends over at PocketGamer wrote their own analysis of the teams in November. They know a lot more about games than we do, so their analysis is helpful from that perspective.

So it's been been about half a year since these teams finished up at GameFounders. How are they doing?

• Akira Mobile. Last update to their website was in September 2012, when they joined GameFounders. No updates since then. We tried to find their game online, but no luck with that either.
• Bad Seed Entertainment. This is an interesting one. Their apps are listed on their website as "Coming Soon!", and what did they do after GameFounders? They joined another gaming accelerator, this time in Silicon Valley. This accelerator appears to have provided some benefit, as their app was finally released on Apple's App Store about 2 weeks ago.
• Baila Games. This Estonian company makes a physical game (yes, some people still play those) and also has an app. Their app has not been updated in over a year and ranks below the top 200 in the gaming category in their home country (Estonia). On another note, they also received 6,092 euros from Enterprise Estonia. 
• GlowForth. No game released. They did receive 4,000 euros from Enterprise Estonia, which apparently they used to make a trailer video that reminds us of only a slight improvement over Super Mario Bros on the original Nintendo.
• Mind on Games. Their Manager Mania product was supposed to be released for Android, but we couldn't find it.
• Plan B Labs. On the plus side, this company has actually released some apps. On the minus side, there doesn't seem to be much success. Based on App Annie statistics, their apps rarely make it even into the top 1,000 in their category and also by revenue. We have not heard of ThinkInvisible nor LearnInvisible (their apps) before. Have you? Oh, and they received 5,000 euros from Enterprise Estonia.

So let's re-cap. These were the very best teams that GameFounders could find, after carefully reviewing 122 applications from 41 countries. What did GameFounders provide to these teams, in terms of experience and mentorship? Based on the results, not much.

Inexperienced Management

We've had a lot of requests from readers to write about GameFounders, including from some teams who were planning to apply to the program. One reader pointed out that none of the people behind the GameFounders organization actually have any experience in the gaming industry!

The only member of the team with real experience and a successful track record is Paul Bragiel, who does not even list GameFounders on his LinkedIn page. Perhaps he doesn't want to be associated with them any longer?

A Risky Business

Some may say we're being too critical. After all, isn't the gaming industry risky to begin with? Sure it is, and we even wrote about that in our profile of Creative Mobile, which is an example of a successful Estonian gaming company. Not only are they successful, but they did it without taxpayer money.

Others may point out that we looked only at the first batch of GameFounders teams, and they have since accepted another cohort of teams that is currently being incubated. We feel that it is too soon to look at their success, compared to the first batch which have had at least 9 months (a lifetime in this industry) to produce something.

Bring in the Taxpayer

What do we have? An incubator with little to no success in nurturing successful gaming companies, with an inexperienced team running it, and in a country with plenty of incubators already.

What kind of project does that sound like? One that EAS (Enterprise Estonia) would eagerly fund, of course!

We said the management of GameFounders was inexperienced, but not when it came to riding the taxpayer-funded gravy train. Here's a tally of all the funding they were able to obtain:

1. 501,000 euros from the Start-Up Estonia program via EAS.
2. 5,305 euros for Summer of Games program from EAS (section VII.3.2)
3. 7,700 euros for IGDA program from EAS (section VI.3.2)
4. 1,900 euros for start-up from Tallinn city government.
5. 1,500 euros for start-up from Tallinn city government.

That brings us to 517,405 euros of taxpayer money, just for Gamefounders.

Then add in the EAS money for their incubated companies and that's another 15,092 euros, bringing the total taxpayer money wasted to 532,497 euros.

Should incubators receive taxpayer money at all? The co-founder of TechStars thinks they shouldn't, and he's probably a lot smarter than the people who decided to give money to GameFounders.

An EAS Cover-Up?

One reason it took us a while to get this post written is it took us a while to track down all the numbers. Let's just look at the EAS funding for GameFounders, so numbers 1-3 in the list of funding above. A search on their database of funded projects will reveal no results related to GameFounders.

Other incubators, like the Viljandi incubator we reported about earlier, are listed there.

Let's just give them the benefit of the doubt for a moment. They would probably say that the GameFounders funds were provided via a special program, so were not loaded into their standard database of funded projects.

Surely then, they would mention it in their press releases about the program instead, right?

The answer to that would be no and no. They do mention how the funds are provided by ERDF (EU money), but not how much. Isn't that an important fact? Why was it left out? Are they trying to hide how much money is being wasted?

Well those are old press releases. Maybe they've learned from their mistakes (perhaps even from reading this blog - imagine that!).

Sadly, nothing has changed, and in fact it's gotten worse. Earlier this month, EAS announced a second stage of the same program that provided funding for GameFounders. They must have liked how well GameFounders is doing, according to the press release:

"In the summer of 2012 Enterprise Estonia provided financial support to launch the first gaming accelerator in Europe, Gamefounders. Positive results of the first batch of start-ups completing the Gamefouders [sic] program have proven suitability of vertical accelerator format." (emphasis ours)

Again, EAS never mentions the amount of money involved, but luckily that can be found in the public tender. They have increased funding by 40%, to 700,000 euros!

Is EAS trying to cover up how much money they waste? Wouldn't it be better just to stop wasting the money in the first place?

Fits.Me : Unfit for Success?

Fits.Me : An Ill-Fitting Waste of Taxpayer Money

Fits.Me was in the news recently, after closing a 5.5 million euro round of Series A financing.

A recent article in the Business of Fashion blog, titled "Is There a Fashion-Tech Bubble?", drew our attention, and in particular this paragraph:

“Yes, too many companies don’t have a business model and don’t understand this industry,” Lawrence Lenihan, managing director of FirstMark Capital, an investor in Pinterest, Ahalife and Sneakpeeq, told BoF. “We have to stop backing stupid, business school whiteboard businesses that are ignorant of the industry and lack heart, soul and beauty. Moreover, companies that have gotten some degree of success have been so overcapitalised and their ultimate returns so overestimated that those investments will never create a return and will detract from the returns that founders and early shareholders should have gotten,” added Lenihan. (Emphasis ours)

Could this be the case with Fits.Me? Let's have a look.

The Product

Fits.Me calls themselves a "virtual fitting room." Their key product is a robot mannequin, and here's a picture from their website:

Basically, the mannequin can resize itself to mimic the size of a particular person. So what an online retailer can do is put a shirt of a particular size on this mannequin, punch a few buttons on a computer, and the mannequin will resize to all possible permutations of measurements (like varying neck size, chest size, etc.). They can take a photo of each variant, and then if a customer wants to see how that shirt will look on a person with a 33-inch waist, 28-inch chest, and 18-inch neck, the retailer can show the photo of the mannequin wearing each size (small, medium, large) of that shirt.

This sounds like a lot of photos and work, but apparently the photography part is mostly automated, so the entire process for one size of one shirt can be completed in a few minutes.

We think this robot mannequin is pretty cool. If this fashion retailer thing doesn't work out, maybe they can adapt it to be a sex doll and compete with Realdoll! (NSFW link)

The Business Case

We've written in the past about companies that were a solution in search of a problem. We don't think that's the case here. There is indeed a real problem they are trying to solve. For online retailers, returns are a costly part of doing business. It takes a lot of staff time to process returns, and it's costly in terms of shipping costs and restocking.

It's such a big problem that in our eyes, if someone came up with a solution to consistently reduce returns by 50%, we'd invest in them.

The big question here is: Does Fits.Me have the solution?

Their Solution

So far, the main mannequins from Fits.Me are of a man's torso. They probably chose to start with that because it's the easiest in terms of the simplicity of shapes. As any teenage boy can tell you after vast internet research, women have a lot of curves, and in all sorts of places. The variation in women's bodies is just much greater.

Fits.Me has indeed recently released a women's version, but as far as we can tell, it's barely (or not at all) used in a real environment by retailers.

We think that it's going to be tough to perfect the product for women. There is just too much variation in all places. Can they really manage to simulate a muffin top? How about a Jennifer Lopez booty? Pear-shaped vs. apple-shaped women? Octomom?

Who has more curves?

At best, they would need to ask a customer to take a large number of different measurements before trying the virtual fitting room. Suddenly the process gets a lot more complicated. We think this is one of the big weakness of their solution.

Why do we focus on women? They spend by far much more on clothing than men. Ever notice that when you walk into a department store, the women's section is at the entrance, and the men's section is in the basement, wedged between the bathrooms and the employee break room? Fashion retailers know where the money is.

Let's look at the actual process involved. Here's what TechCrunch had to say about it:

"And with 1,500 to 2,500 photographs required per garment — and a cost that’s in the “mid to low £100s” to capture all the data required for one garment in all its size permutations — it’s not cost effective for every type of garment or scalable for every fashion retailer." (emphasis ours)

So let's think about this. There is a cost involved to photograph each garment on the mannequin, and we presume it also takes time to get things set up, get it loaded into the Fits.Me tool, etc. Meanwhile, fashions change at least every season, or in some cases, every few weeks (like with Zara). This is especially the case with women's fashion, where a new style or color becomes popular every season (we're still waiting for leg warmers and football player-sized shoulder pads to come back into fashion).

This process seems like a lot of work and expense for a garment that may only be offered for sale for a month or two anyway.

So are fashion retailers interested in such a solution? Maybe not. In February, they announced a lower-market product called Fit Advisor:

"Fit Advisor uses a shopper’s measurements to generate and display intuitive graphical indicators showing how an item will fit, but – unlike the Fits.me Virtual Fitting Room – does not display a photograph of the item to show how it will fit."

So basically, you give it your measurements and they compare it to the dimensions on file for the garment you would like to buy, and they indicate if it will fit well or not.

Not much of a virtual fitting room any more, is it? What's worse, without all the fancy robot mannequins, what makes Fits.Me so special? How difficult is it for a competitor, or even just a fashion retailer, to do the same as Fits Advisor? It's not that difficult to figure out that if the customer has a 17-inch neck, and the shirt you want to try has a 16-inch neck, that it won't fit that well.

Let's go over this again. We have a flagship product (the mannequins) that is costly to retailers, has questionable accuracy for the largest part of the market (women), and is a lot of effort for products that go out of fashion in a short period of time. Then, we have their the secondary product (Fits Advisor) which is not very unique.

This doesn't sound very promising to us, but what do we know about fashion? Our idea of dressing up is a wifebeater and pair of Levi's 501's. What do fashion retailers think?

Customers - Don't Believe the Hype?

Many of the company's press releases tout all the big-name customers they have. Let's look at a press release from January. In it, they state they signed some new customers, and also who their existing customers are. Let's look at those existing customers specifically. We realize it can take a while for a customer to implement their solution, so by using their list of existing customers from January, those should surely be using it by now. From that press release:

"Its roster of clients includes Barbour By Mail, Boden, Ermenegildo Zegna, Gilt Group, Hawes & Curtis, Otto, Pretty Green and Thomas Pink."

Want a challenge? Go to their sites and try to find the virtual fitting room they claim to have. Where would you look? We figured it would be on the sizing guide, which helps us determine the best size for us. Here's our results:

• Barbour By Mail - Didn't find it in the sizing guide.
• Boden - Didn't find it, and instead found a link to an outfit maker from MixMatchMe, a competitor making online dressing rooms.
• Zegna - Their site is difficult to navigate and didn't seem to have a sizing guide, but we clicked on the first men's shirt and found no virtual fitting room.
• Gilt Group - We got frustrated with this one. Apparently you have to register and log in to even look at stuff for sale. Maybe we should write a post about them.
• Hawes and Curtis - Didn't find it in the sizing guide.
• Otto - We hit a wall on this one, because Otto is too common of a word. We couldn't find their online site, though we did find plenty of photos of babies named Otto.
• Thomas Pink - Didn't find it in the sizing guide.
• Pretty Green - Success! Sort of. We got discouraged with the above sites, so we really worked our way through Pretty Green's site (it was so pretty, we just couldn't resist!). We found this nice trendy Lennon jacket. Looks nice, huh? Click on the Try It On Size Guide to be taken to the Fits.Me fitting room. Notice one big issue? The jacket in the fitting room isn't a Lennon jacket at all!

Product Photo: Cool as Lennon

Fitting Room Photo : Cool as a chav in winter

So is this virtual fitting room really providing a benefit? You want to buy one jacket, and you are taken to an image of an entirely different style of jacket for fitting purposes.

Some may argue that this is fine, especially in cases when the goods are quite similar, like a man's button-down shirt of varying colors and cuff styles. We don't think this is fine, and the reason has to do with how the garment industry works. Have you ever gone to a store to try on a size Medium in a shirt, and then picked a different color of the same style and size of shirt, and it fits differently? The reason is that nearly all clothing is produced by subcontractors in many far-away countries and production is a labor-intensive process. Retailers are always looking for the lowest costs, so you may find that one color of the shirt was produced by a supplier in Pakistan, while the other color of the same shirt was produced in Bangladesh. Small variances in quality and sizing are sure to occur between different subcontractors, and even by the same subcontractor (there's not a lot of ISO9001 quality certifications in the industry).

It should be noted that we didn't spend a lot of time going through retailers' sites above in search of their virtual fitting room. We shouldn't have to. If this is such a great technology, then it should be prominently features and easily accessible. It wasn't. Why?

 

Seven Years of (Market) Solitude

Maybe the issue here is the company is really new, and so they haven't had time to really develop and market their product. We're just being too critical of this new company, right?

Wrong. Turns out they started business in June of 2006. Massi Miliano OÜ (that's the company name - Fits.Me is the trading name) with registration code 11259853, has been in business for 7 years!

We think this is an important indicator. What this means is the public has been aware of their technology for many years now. If it's so great, why haven't a bunch of smart Stanford engineering grads developed the same thing, then gotten funding from the VCs in the Silicon Valley? Even if there are patents in place, any engineer will tell you it's fairly easy to "engineer around" a patent.

Companies that have been around many years without big success are basically treading water. In the case of new technology, it's often an indicator that the product simply isn't right for the market. It appears Fits.Me management is aware of this, as their company history page refers to being "launched in 2010." While it may be technically true the brand Fits.Me was launched in the UK in 2010, the company and their technology has been around for seven years, and by using 2010 on their webpage, it gives us the impression they're trying to hide their many years of no success.

Taxpayers Weep

Now for the fun (or sad) part. The money.

As you probably guessed, they had a dip into the pockets of Enterprise Estonia (EAS):

It turns out they reached into the pockets of EAS on 6 different occasions, from July 2006 to October 2010. Total EAS money: 903,456 euros.

But wait, that's not all! SmartCap (Estonian Development Fund) put in 1 million euros! The information on Estonian Development Fund's site (which is slightly outdated) shows a slightly lower number, and their 2011 annual report shows that some of this was convertible debt, but our sources tell us that the number as of the latest round means that it's now an all-equity investment and the total is 1 million. SmartCap is a sovereign wealth fund owned 100% by the Estonian government/taxpayer.

So in total, they have received 1,903,456 euros in taxpayer money, over the course of seven years.

In fact, the number is a bit higher when it comes to government money, since their most recent round included an investment from Conor Ventures, and their Technology Fund II is funded from the EU money, but we'll leave that out of our calculations since we don't have the data.

A Future Fit for a King?

In summary, we have a company that has been around for many years with little success, a questionable product, and few customers. This doesn't seem like a recipe for success.

We could be wrong of course. Maybe a large retailer like Amazon will just buy them out. Maybe robot mannequins will take over the world, and form the new ruling class. The future is hard to predict.


It should be emphasized that we have no problems with private venture capitalists giving money to risky ventures. What we do have a problem with is taxpayer money being used on these ventures, especially when the numbers are so large, like over 1.9 million euros in this case.

Even worse, it seems like there is no limit to the amount of funding or the number of times companies can get this money. Not only is this unfair to the taxpayer, but it's also unfair to other companies, outside of Estonia, who compete in the same industry. They're forced to contend with the real world of venture capital and making a profit, instead of riding the free money gravy train of no-strings-attached taxpayer money that is available to Estonian companies. How does this promote the free market and fair competition?

June 13, 2013 Update

 

Since originally publishing this post, we uncovered another 1.8 million euros of taxpayer money that was given to the company. So the updated total of taxpayer money is now 3,773,456 euros.