Yesterday, I bought more AEYE. I think that I may have overdone it a little based on what we know about the company at this point. I’ll be looking to sell some to reduce my position size to 2.5%. Here are my additional thoughts:
I really like the revenue growth. It appears that they may be breaking out. Let’s see if the acceleration of sales growth continues.
The market that they are in is already huge. The market is websites of which there are hundreds of millions. They only need to capture a very small fraction to be very successful.
I also like their business model. From what I understand, their model is very scalable. That is they can quickly add new customers without a lot of incremental spending. We should really find out how automated their audio file creation works and how much manual effort is required.
Now, there are some very good reasons to be cautious. I am in an angel investing group and we get about 50 applications for funding every quarter. So I have had the opportunity to evaluate a few hundred start ups. Because we get so many companies applying and because we can’t hear them all pitch at our in person pitch events, we have developed a process for ranking the companies. Our rankings are based on 4 criteria: market, product/service, management, and terms of the deal. The top ranked companies come to our meeting and give a short presentation. If we are still interested, we meet with them for about an hour afterwards to ask more questions and to learn more about the business and the management team. Then we form a team and do several weeks of due diligence on the company.
AEYE is at a similar stage as some of the companies that I often see. They have revenue but they are just starting out in getting sales traction. They have been starved for cash for several years. I went back and looked just how much cash they had a different points.
So they have been scraping by for 5 years. Here are a few things more thoughts:
How much spending will be required for them to catch up on things that they really should have spent on but didn’t because they didn’t have cash?
How effective will be the management team be at managing their cash once they get more?
How experienced is the management team? The CEO is 36 and the CTO (is this his brother? they have the same last name) is 31. How good are they at leading, attracting talent, making good business decisions? Do they have prior successes or will this be the first real company that they are running?
How good will the management team be at raising more money? They will need it to grow this business.
How much of a distraction will fund raising be? Ideally, management should be focused on running and growing the business. The more time they need to raise money, the less they can spend on the operations.
How good is the product? We know they’ve recently received some big orders. Did they get them because their product is really good or because they have established connections with powerful decision makers or a combination of the two? For continued growth, the product better be damned good.
The licensing is a big part of their strategy. How strong are the patents? Do they give them both freedom to operate as well as the ability to block others? Both are needed to successfully execute a licensing strategy.
In my opinion, if one doesn’t know the answers to the above (and is comfortable with then answers), then one should not go overboard on investing in this company. Even then, it’s still a small, risky company. For me, a 2.5% allocation seems like a good maximum for now.