Inside the collapse of Alphatise, the startup that offered 'the world's best internship', but months later went bust

Anna Bezuglova jumped out of a plane in the hope of landing a job at Alphatise.
Alphatise executive director Paul Pearson. Image: Facebook.

Australian online shopping startup Alphatise generated huge media coverage for itself around the world when it launched a competition for “the world’s best internship”, which carried a $100,000 package for the successful applicant.

Anna Bezuglova, a 19-year-old University of Sydney commerce student, was the winner thanks to an application featuring her jumping out of a plane to show how far she would go for a job at the company.

In November, Bezuglova took the job and set about scaling down her studies to take on the full-time sales and marketing role. Her package included a $50,000 salary, a car, a laptop, $50,000 worth of shares in Alphatise and a mobile phone. Around that time, Alphatise CEO Paul Pearson was talking about a potential ASX listing and conducting another round of fundraising.

Earlier this month, senior staff and board members met in the company’s Jones Bay Wharf office in Sydney’s Pyrmont – a tech and media precinct which houses Google’s Australian HQ – overlooking the waters of Sydney Harbour.

Richard Frey, one of the co-founders and technical lead on the product, had been hearing rumours that investor confidence was crumbling, right when they were in the middle of another fundraising round.

He describes that board meeting as an “oh-f**k” moment.

The company was out of money. Days later it was in the hands of administrators.

“I’m very shattered. It has really been my trial by fire in the business world,” Frey told Business Insider.

“The saddest thing is to have put so much work into it and… it’s almost like it’s not mine now. Someone has come in and here’s something that we’ve built for two years and they’re going to take it away from you.

“My biggest thing is getting the staff paid. All the guys in there, they are my friends.”

Alphatise was founded by Pearson, Frey and Ben Nowlan and was two years in development before being launched to the public as a social marketplace last year. Company management actively chased media coverage.

Alphatise in the Apple iPhone 6 line. Image: Alphatise / Twitter.

The company secured the first two spots in line outside the Apple Store in Sydney ahead of the iPhone 6 launch in September, in what executive chairman Pearson admitted was a publicity stunt.

Pearson told Business Insider the goal of the intern application program was to secure talent, but also attract media attention. Advertising and PR costs exceeded $500,000 over the past three financial years – a lot of coin for a startup.

Headlines, however, don’t bring money in the door.

As one former employee describes it, behind the confident exterior – investors were throwing six-figure sums at the company and the media was propelling its message to the masses – it was “a house of cards”.

Alphatise entered voluntary administration in early March, but late last year there were signs things were going awry. There was increasing evidence of internal problems and staffing disputes.

Financial documents seen by Business Insider show Alphatise had burned through $3 million so far this financial year, and had just over $270,000 in revenue.

Pearson said that while the company was burning through cash it was below the forecast amount and that the development costs were expected to drop.

“We were 30% below forecast expenditure for the year…and we were 125% above forecast revenue for what we raised capital for,” he said.

Administrator Deloitte Touche Tohmatsu is now looking into the startup and has appointed Vaughan Strawbridge and David Lombe as joint administrators of the company.

“We have a ‘care and maintenance’ plan in place to achieve continuity of the business while recapitalisation or sale solutions are explored,” Strawbridge said.

A number of expressions of interest into funding or buying out the business have been received and further due diligence is underway.

It’s one of the more spectacular collapses of a high-profile Australian tech startup, and a timely warning to investors and founders about the risks in a sector which many hope can be a future engine room of innovation and economic growth.

A common problem: cash burn

By various estimates, the failure rate of tech startups is well above 50%, and could be as high as 90%. They’re risky, often unproven businesses by nature and while failing often and fast is one of the catch-cries of the sector, failures need to be managed so the company’s doors stay open.

Director of StartupAUS Jana Matthews said there were a multitude of risks in running a tech startup which could lead to a company failing, and Alphatise may have fallen victim to a few of them.

“The partners can have disagreements and come apart, something happens in your personal life which means you can’t keep going, you choose the wrong technology and suddenly there’s a new one, you have a competitor that you didn’t expect, you underestimated how long it would take,” she said. “I suspect several of those things happened [at Alphatise].”

The company ran on the idea that buyers could stipulate how much they wished to pay for a product and start a bidding war with sellers sourced by Alphatise.

Alphatise reportedly took a 4% cut of each transaction. Consumers could also request discount vouchers to spend in store, which when redeemed gave a 50c referral fee to Alphatise.

“I think they underestimated the competition and when you have entrenched, established companies like an Amazon or an Ebay which are already there and have the dollars and the might behind them to change direction and come in and take over, I think perhaps they underestimated the deep pockets that they would have to compete,” Matthews said.

Here’s the most recent profit and loss report, under the apt title “Reasons for Failure”.

So far this financial year, Alphatise was running at a $3.2 million loss having generated $278,566 in revenue. Last financial year the company earned $9,211 and posted a loss of $1.07 million.

“The company had insufficient cash to meet its liabilities as and when they fell due. Our investigations are continuing and a more detailed analysis of the company’s finances and causes of failure will be provided to creditors at the second meeting of creditors,” Strawbridge said.

Matthews said when a startup was in its early days it was important for it to focus on a niche so it could test the product, fail fast and, if necessary, explore new options quickly.

“Even Amazon started first with books, then it added records and then it added some other things,” she said.

“Start with something manageable and expand as opposed to going out and having something that would take millions of products – I worried when I saw that.

“In order to have millions of products you’ve got to develop relationships with a lot of vendors on one side of the platform and then understand what all of their needs are. On the other side of the platform you’ve got to represent those products to potential customers and then you’ve got to manage a lot of different customers who have different needs… It’s not like you can do niche marketing,” she said.

The reckoning

When Bezuglova was announced as the winner of the intern competition, Pearson told Business Insider the company was growing steadily.

“We’re doing well, we’re acquiring sort of 3,000 new customers a week at the moment,” he said before Christmas. “We’ve just launched in 14 countries and we’re just putting the finishing touches on our version two software.”

In December Pearson said he was raising on a valuation of $22.5 million and was targeting former mining investors. He said the next round of funding would be spent on marketing, general operating expenses and to ready the company for a potential IPO onto the ASX in 2015.

Pearson told Business Insider that late last year the company went back to the company’s 70-or-so existing investors and managed to raise $1 million. He also said the company was considering listing on the ASX and had started the listing process.

“It’ll be a front door listing IPO. It won’t be a back door or a reverse takeover,” he said at the time.

“There’s no rush. We want to progress, we want to access a larger pool of capital.

“When you get into that $5 to $10 million rounds they’re just incredibly hard to get in the private equity market. We’ve not explored much venture capital at this stage. When we explored it back at our $15 million valuation we were hitting a lot of roadblocks with venture capital in this country.”

Then evidence started to emerge that the company was having staffing issues and that it was burning through cash, fast.

In November I was told co-founder Ben Nowlan had left Alphatise. I asked Pearson about it last year and he originally denied it but today he confirmed the split, saying it happened in October.

Nowlan and another Alphatise investor said as much last year. This week Nowlan said “I left in November after having concerns of the direction of the business and the way money was being spent.”

Now, disputes over what happened are hitting the courts.

“I have a company that people are suing me over,” Pearson said. “It’s emotional, it’s hard, I’m upset, I’m pissed off.”

NSW Supreme Court records show Alphatise is being sued by former chief operating officer Matthew Banks over an “employee dispute”, which Pearson refused to comment on. He did however say, “We haven’t settled the case. We feel very strongly about it, we have a really good legal support team.”

Court documents show the dispute was over, amongst other matters, a 4.5% stake in the company which was allegedly offered to Banks but not fulfilled.

The view from Alphatise’s Sydney office. Image: Alphatise / Twitter.

Banks was contacted for comment however declined as the matter was still unresolved in court at the time. There was a directional hearing in the NSW Supreme Court in early December and the case has now been put on hold while Alphatise is in administration.

More cracks started to appear when late last year Pearson said Alphatise had “contracted” and was laying off staff in Sydney. It was also outsourcing a bunch of roles to the Philippines.

“All companies go through that stage where they flex and they hire a lot and they contract,” he told Business Insider. As of March 5th, Alphatise had 24 employees.

According to the administrator documents outstanding employee entitlements, including wages, annual leave, superannuation and redundancy payouts total $219,840.

So far this financial year the company clocked up $1.827 million in staff costs, its sundry expenses were $153,421, travel was over $110,000 and investor introductions and consultants had set it back $245,063.

Business Insider has also seen internal documents which gamed out employee shares to a valuation of $100 billion. The way it was calculated, an employee with a stake of 0.1% would be worth $66 million if the company reached that valuation in the future.

At the end of 2014, Alphatise was hoping to raise an additional $2 million on top of the $4.5 million it had raised from prominent investors including Atlas Iron non-executive director David Hannon, through Chifley Investments, where the minimum investment amount from its wholesale fund is $500,000. Pearson said Hannon has invested “more than $700,000” into Alphatise.

BRW Young Rich lister and CEO of Mpire Media Zhenya Tsvetnenko also reportedly invested a low six figure amount into the company. Documents from the administrator show the largest shareholder is Paul Pearson’s family trust with a 21.7% equity holding in Alphatise.

For a social shopping platform like Alphatise, securing users and keeping them active is imperative to the company’s success. The company had a previously stated aim of hitting 100,000 users before the end of 2014 but there are some indications it closed out the year well under half of that target and user acquisition was much slower.

“Those numbers were a bit naive, we thought we could nail the product first time around,” Frey said, adding at the end of 2014 the company had closer to 40,000 registered users.

Rumours that all was not well at the startup’s Pyrmont office started to emerge late last year with allegations of layoffs, poor user growth and cashflow issues.

Fast forward to mid-March and intern Bezuglova is now concentrating on her studies after her short time at the startup. The administrators are working to stabilise the business and cut the cost base.

Expressions of interest in the sale or recapitalisation of the business have been advertised and the first creditors meeting took place on March 16.

“We are still in the early stages of appointment and our investigations are continuing,” Strawbridge said.

“For now, the business continues to trade while [we] begin assessing initial expressions of interest.”

“Any future management team will be determined by the party that is successful in achieving a recapitalisation or acquisition of the business.

Frey said if the company managed to recapitalise there was a plan to expand into Asia where customer acquisition is cheaper.

“If we do get more money in, we’re going straight to Southeast Asia. In Australia we can acquire a user for like $3, in Asia we can get one for about 50 cents,” he said.

Matthews said she hoped the founders would speak out about what they had learned, and share where they thought it went wrong because it would be a big help to other startups.

“If you haven’t failed and you haven’t learned from that, I don’t know how you could possibly grow a company,” she said. “What is failure? It’s when something didn’t workout as we expected and you’ve got to step back and say: ‘what can I learn from that?’.”

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