Manawa (originally called Adrenaline Hunter) was founded in 2015 by Maud Mathe and Philippe Bichet, two young entrepreneurs supported by Denis Fayolle, a "serial entrepreneur" (La Fourchette, ManoMano, Singulart...), to develop a global platform for booking extreme sports activities and adventure travel, manawa.com.

The first round of financing brought together family, friends and business angels, including yours truly, who together contributed €0.6m (based on a pre-money valuation of €2m). Dilution of the founders was only 23%, thanks to very substantial goodwill, since the founders had only contributed €0.15m. In addition to the quality of the entrepreneurs, this situation can be explained by the work done upstream by the founders on analysing the market and the technical solutions for addressing it.

The website was effectively launched in May 2016, and growth was achieved during the first few years, but at the cost of significant investment (advertising, finding partners to supply the site, creating content to attract visitors). Cash burn was therefore higher than anticipated in the initial business plan, and an additional €0.5m was raised from shareholders in early 2017.

A first "real" capital increase (series A) of €2m took place at the end of 2017, seeing the entry of the Bpifrance tourism fund and a German corporate venture fund (based on a valuation of €6m).

At the end of 2018, the main shareholders also subscribed to a €0.5m bridge (in the form of convertible bonds), the first tranche of a forthcoming capital increase. At the start of 2019, Manawa began sounding out venture capital funds and industrialists for this purpose, but appetite was lukewarm pending a more accomplished demonstration of the company's ability to break even. To maximise its chances of raising this new round of financing, in mid-2019 the management team realised that it would have to modify its business model to generate profitability in addition to growth. The size of the team was adjusted with the departure of 11 people, i.e. a quarter of the workforce. At the same time, a new €0.8m bridge was put in place by the shareholders. One of the founders no longer wanted to be part of the venture and left the company.

The financial situation continued to deteriorate, and the sale of the company was envisaged. The founder's remaining time was monopolised by attempts to raise funds and then negotiate the sale. Unfortunately, very advanced discussions with an industrial buyer (a city activity booking platform) stalled at the very last minute. That's life in business and mergers and acquisitions, but the consequences for a start-up are much more dramatic than for a company that is already profitable and established in the market. All the time wasted in negotiations with the conviction of succeeding brought Manawa dangerously close to running out of available cash.

At the end of 2019, an emergency fundraising of €0.4m was carried out to save Manawa at a time when its financial resources had been exhausted. Only a few of the shareholders most involved in monitoring the company were prepared to reinvest based on a symbolic valuation. Those who did not wish to follow, such as the German corporate venture fund, or only partially, such as Bpifrance, were then very heavily diluted. Management took advantage of this respite to accelerate the turnaround towards breakeven: new redundancies, closure of loss-making divisions, opening of new profitable marketing channels.

In 2020-21, just as the measures put in place were beginning to bear fruit, the company's business was hit hard by the Covid-19 crisis (with all its commercial activities temporarily closed). Management reacted swiftly, drastically cutting costs. The workforce was reduced to a handful of people, assisted by a few interns. The team showed great flexibility in directing bookings towards countries and areas open to tourism. These actions enabled Manawa to survive (unlike some of its competitors). Thanks to government support, in particular a government-backed loan, the company was able to weather the crisis and quickly demonstrate its ability to bounce back.

Pragmatically, in a very complicated environment for tourism, management decided at the end of 2021 to join forces with a subsidiary of Caisse des Dépôts to ensure the long-term future of its business. It was the end of the entrepreneurial adventure, but not the end for Manawa or its management team, who, in a new shareholder environment, returned to a path of strong growth.

   This Manawa adventure shows that the success of a start-up is not generally based on a brilliant, revolutionary idea, but above all on the qualities of its managers (and shareholders). In addition to being a visionary, inspiring and a team leader, qualities that every good manager needs, managers of a start-up must be:

• Flexible. The ability to pivot a company's strategy quickly. The financing in place often covers only a few months at best, so decisions must be taken quickly.
• Sometimes tough. We have seen several start-ups that have had to drastically downsize at some point in their development, resulting in significant staff redundancies. It's a question of survival. Managers of a start-up are certainly tougher and more intractable than those of a traditional SME. The same applies when someone doesn't fit the bill or when there is dissension in the management team; there is no room for sentiment or prevarication here.
• Perseverant. It's a certainty that the initial business plan won't be realised! The entrepreneurial adventure is made up of obstacles and changes of strategy, and success, when it comes, generally only happens after years of trying out different options.
• Solid. After everything we've just written, it's clear that the moral burden on managers is enormous. It's so much easier to be an employee in a big company! But the satisfaction when you succeed isn't the same...

Shareholders are also a bit special... They invest primarily based on a leap of faith. Due diligence is very limited, and the ability to assess the realism of the business plan is very limited. Shareholders are therefore investing primarily in a management team. Remember that in the start-up sector, more than 80% of investments are failures, and the profitability of an investment portfolio is linked to the success of a limited number of ventures.

And if you're thinking of booking an outdoor activity near you or far away, this is where to click.

World-wide corporate tax rates have declined very modestly in 2023 and are now averaging 23.37 % (23.53% in 2022). On the contrary, OECD countries haved started to edge up from their low point reached in 2022 of 23.04% to reached 23.57% in 2023, mainly due to the jump registered in the UK from 19% to 25 %. They are about 21% for the second year in a row in the European union, but are still low due to lower corporate tax rates in Eastern Europe.

With Simon Gueguen, lecturer-researcher at CY Cergy Paris University

Corporate socially responsible investment (SRI) has developed considerably over the last twenty years, largely as a result of investors' growing concern for environmental sustainability. Institutional investors who practice SRI are committed to favouring investments in companies that are virtuous according to ESG criteria (environment, social, governance). The precise definitions of SRI and ESG are open to debate, and the difficulty of moving from qualitative concepts to quantitative data makes rating systems questionable. Nonetheless, ESG rating agencies (for companies) and SRI codes of conduct (for institutional investors) have developed and are beginning to make their mark on the markets. The article we present this month^[1] shows that investors who claim to be SRI do indeed include ESG criteria in their portfolio choices almost everywhere in the world (and particularly in Europe), but not in the United States.

The study leaves aside questions of definition and is based on the most authoritative principles in the field. Regarding SRI, a global initiative was launched with the support of the United Nations in 2006. These are the Principles of Responsible Investment  (PRI), a code of conduct signed by around 4,000 investment funds worldwide (data from the study to the end of 2021). The principles are numerous, but the main one (and designated as the first principle) is a commitment to favouring investments in companies that are virtuous in terms of ESG. Virtue in this area can be measured in two ways: the ESG rating itself or the improvement of the rating. For example, companies operating in a polluting sector but committed to reducing pollution may be considered virtuous. For ESG ratings, Brandon et al used data provided by three institutions: Thomson Reuters, MSCI and Morningstar. Although there are some differences among them, the results are the same. While the ESG criteria are debatable (decarbonisation being the only truly measurable criterion), the rating systems tend towards a form of market consensus.

The results are unambiguous. If we exclude US funds, the ESG portfolio scores of signatories to the PRIs (reconstructed from the weighted ESG scores of the securities in the portfolio) are higher than those of non-signatories. The difference is 13% of a standard deviation; this may seem modest, but it is important to bear in mind that the amounts involved are considerable (over $100,000 billion in assets). This gives it a strong economic significance. Above all, the ESG score improved (by a further 14% of a standard deviation) after the code of conduct was signed, indicating a real commitment on the part of the signatories.

The most interesting part of the article is what they find about US funds, which is... no effect. Signatory funds invest no more in ESG than non-signatories. Worse still: the average score of signatories is (very slightly) lower than that of non-signatories! And signing up does not improve their score in any way. This looks a lot like greenwashing, and the word is mentioned by Brandon et al, although they do not make an actual claim. This is an area for future research.

A legal explanation based on differences resulting from a common law rather than a civil law system does not hold water, because the effect is strong in the United Kingdom. Two (possibly complementary) ideas are suggested. Firstly, the extremely strong competition between US funds, which would push them to declare themselves SRI-compliant for commercial reasons, without accepting the constraints that go with it. Secondly, the US market is less mature (compared with Europe in particular) when it comes to responsible finance. Brandon et al note that many of the US signatory funds had made commitments at the end of the study period. Perhaps they just need a little time to understand that signing up is not enough...

[1] R. G. Brandon, S. Glossner, P. Krueger, P. Matos and T. Steffen, "Do responsible investors invest responsibly?", Review of Finance, 2022, vol. 26(6), pages 1389 to 1432.

This is a rule that professional investors have developed to identify what they consider to be the best companies in the subscription-based software (SaaS) sector. And the 40 in question are the sum of the business growth rate (annual sales, monthly recurring revenues) and the EBITDA margin.

In other words, to pass this threshold, which is exceeded by around a third of companies in the sector, a company can have mushroom growth, for example 70%, but losses representing 30% of sales at most; or much less growth (20%) and already have achieved significant profitability (EBITDA margin of 20%). Obviously, the first situation occurs at the beginning of a start-up's life, because growth of 70% a year will naturally run out fairly quickly (growing by 70% each year multiplies the initial size of the company by 202 over 10 years, and by 40,642 over 20 years). That said, if you really do have a mushroom growth rate, it's not out of the question that customer interest in the product justifies the hope that one day or other the company will be able to break even.

And if the company's growth slows down and it is unable to rapidly generate positive margins, gaining in margin rate what it loses in growth rate, its residual lifespan will rapidly shorten, especially in an environment that has been favouring profitability over growth for the last eighteen months. At the other end of the spectrum, even with 5% growth, a 35% EBITDA margin makes more than one shareholder happy, as those who have invested in Dassault Systèmes can testify.

Regularly on the Vernimmen.com Facebook page^[1] we publish comments on financial news that we deem to be of interest, publish a question and its answer or quote of financial interest. Here are some of our recent comments.

Magic thinking in China: ban short selling (January 31st)

Since its high point in February 2021, China's flagship CSI 300 index has fallen by 44%, compared with rises of 51% for the DAX, 53% for the CAC40 and 82% for the S&P 500. This weekend, the Chinese stock market authorities resorted to old, hackneyed recipes: banning short selling in the magic hope of bolstering share prices.

Academic research has consistently shown that a ban on short selling has no discernible impact on prices, increases the bid-ask spread and reduces market liquidity. In other words, it does not achieve its objective and reduces market efficiency.

As illustrated by our previous post dedicated to the 15th anniversary of the death of Adolf Merckle, short selling is highly risky and those who engage in it are either incompetents who quickly disappear because the risk is so high, or swindlers who try to manipulate prices and who will quickly come up against the market regulators, or investors who have done their homework and passed on information to the market that others did not perceive (cf. Muddy Waters, who presciently sold Casino short at the end of 2015). Wanting to deprive ourselves of this type of information is like banning the bearers of bad news, and it is not the way to develop confidence in your financial market, quite the contrary, as shown by the 2.8% decline yesterday and the day before yesterday in the CSI 300 index.

If China's financial markets are doing so badly compared with ours, it's because priority is no longer being given to economic development, but to strengthening the Communist Party's leadership role and to imperialist dreams, which are likely to convince investors to look elsewhere for greener pastures. Even for a dictator, you can't have your cake and eat it too.

Believe's delisting - look for the mistake (February 13^th)

Believe, a major independent music company (Jul, Naps, etc.), listed on the stock market since June 2021, yesterday announced its plan to delist. It is true that Believe's stock market life had got off to a poor start, with an IPO price at the bottom of the announced range (€19.5 - €22.5), and a share price down 15% on the evening of the IPO. However, Believe was able to raise €300 million in a purely primary transaction to finance its expansion, and had a market capitalisation of €1.5 billion on that basis.

The share price gradually fell to €8, then stabilised at around €10. Yesterday the management, Believe's main private equity fund (TCV) and another private equity fund (EQT) announced an offer of €15 and a delisting if the offer seduces more than 90% of the capital (it already has 75%). Believe's founder and CEO commented: "Since its IPO, Believe has maintained excellent growth momentum, enabling it to achieve the targets set at the time of listing two years ahead of schedule."

And here, we can't help thinking that there is either a problem with the IPO price in 2021, the proposed exit price in 2024, or the Chairman's statement. Let's rule out the last option, because a press release like this is proofread by lawyers who know how to make comparisons. Then there are the prices. If Believe is 2 years ahead of its business plan less than 3 years after its IPO, logic would dictate that the 2024 price (€15) should be higher than the 2021 price (€19.5), especially as the stock market has performed well in the meantime: +20% for the SBF 120 (dividends reinvested). Moreover, an investor who invested in the SBF120 in June 2021 has a Believe share equivalent of €23.4, compared with a share price of €12 on Friday evening and an offer price of €15.

So either the IPO price was good, in which case the exit price is undervalued, and we will read the independent expert's report with interest. Or it was not good, and the exit price is correct. This should come as no surprise, given that at the end of 2022, of the 139 companies that have floated on the Paris Bourse since 2014 and are still in existence, 77% were valued below their IPO price.  

When we talk about the attractiveness of the stock market - and the subject is far from being confined to Paris - we might wonder whether introducing bankers should not ask themselves questions about their practices in advising on the IPO price, where the battle to obtain the mandate can lead them to overbid on valuations and overpromise. And it is very difficult for a company to recover from a very negative initial effect when, on the evening of the flotation, the investors who subscribed realise that they have lost 15% of their investment in one day.

^[1]  Like it here