It has been a month since London payment company Powa Technologies collapsed into administration and, as the dust settles, we’ve got some idea of what went wrong.
What looked from the outside like a successful business was actually struggling to sign clients, struggling with management dysfunction and a demoralized workforce, and was “basically pre-revenue” even though the scale of the money invested in it — $220 million — suggested otherwise, according to a video seen by the Financial Times.
But there is still a huge question that remains unanswered: where did all that money go?
Before it’s collapse, Powa Technologies had raised at least $220 million (£152.6 million) from investors in less than three years. But the company, which at one point claimed to be worth $2.7 billion (£1.8 billion), had less than $250,000 (£173,490) in the bank at the start of last month.
It’s one thing for a new business to be unprofitable in its early days. Plenty of companies are, on the assumption that eventually they mature into companies that generate growing revenues and positive cashflow. But Powa simply burned all its investors’ cash.
Unpicking where all that money went is a hard task. By the time it went under, Powa’s two main operating companies were almost 6 months late filing legally required company accounts. Those accounts would have covered 2014, meaning the most up-to-date finances we have for the company are for 2013 — almost 3 years out of date.
Those accounts show that in the 18 months to the end of 2013, Powa Technologies Group, the controlling group company, made a loss of £22.5 million ($32.4 million) on revenue of £2.3 million ($3.3 million) — losses were running almost 10 times ahead of sales.
While the accounts are out of date, they do give at least some limited insight into the rate at which the company was burning cash and what it was spending it on. It also gives a good starting point for guesstimates as to what money was spent on in the intervening period accounts are missing for — back-of-the-envelope calculations as to what the company might have been spending on.
This note from the 2013 accounts neatly sets out where the bulk of costs were coming from:
By far the biggest expense, highlighted, is staffing costs, which shot up from £660,000 ($951,000) to £4.7 million ($6.7 million). The 18-month reporting period accounts for some of the difference but it’s still a big jump. Headcount grew from 18 to 74 between the two periods.
In fact, a later note makes clear that staffing costs across the period were actually £6.2 million ($8.9 million) if you don’t breakout the cost of R&D (research and development) staff, which the above table does for some reason.
The highest paid director, who is not named, took home £244,000 ($351,500) in 2013 while £727,000 ($1 million) was spent overall on director pay (there were 3 directors in the period).
If you take out director remuneration and account for the 18-month accounting period, the average pay across staff at Powa in 2013 was £52,291 ($75,300) — a big number for a startup.
Powa employed 311 staff globally by the time it went under. While they won’t have all joined immediately in 2014, if we assume that the average pay remained at a similar level to 2013 and, worst-case scenario, Powa had to pay 311 full-time staff for the next two years, staffing costs would have blown through just over £32 million ($46.1 million). A big chunk of change.
As you’d expect from a tech company, R&D is the second biggest operating expense, sucking up £2.1 million ($3 million) in 2013.
Powa had three main divisions: PowaWeb, which built and maintained online stores for brands and companies; PowaTag, a mobile payment app that let people buy products by scanning QR codes, ads, or audio waves; and PowaPOS (known as mPowa in its early days), a mobile phone card reader to rival the likes of Square.
From multiple conversations with former staff and executives, BI understands that the bulk of Powa’s technology spend went towards developing PowaTag and PowaPOS. PowaWeb, the oldest part of the business, ticked along in the background while the newer products were developed.
A former executive, who declined to be named, estimated Powa spent around $60 million (£41.7 million) on manufacturing and setup costs for the PowaPOS unit, which struggled to make it to roll-out. Administrators Deloitte, who now act and speak for Powa, declined to comment on this figure.
PowaTag also sucked up resources. Management repeatedly asked for changes to the product which delayed a proper launch, according to former staff. That meant not only spending more on development, but also delaying revenue coming in. BI has already reported that the bulk of Powa’s PowaTag customers had not actually signed contracts, merely expressed interest in the product.
We can probably estimate that Powa spent at least £50 million on technology in the two years accounts are missing for (£41.7 million for the PowaPOS development + just over £8 million on PowaTag.)
PowaTag also sucked up a lot of the company’s marketing budget, which ran to £1.8 million in 2013.
Powa ran several trial campaigns in partnership with retailers, the most notable of which was a high-profile deal with French retailer Comptoir des Contonnieres in June 2014.
Multiple former employees have told BI that many of the PowaTag trials the company ran with retailers were paid for by the company itself — Powa paid to install its software onto a retailer’s systems, a cost that could easily run to £200,000, say the former employees. A former executive says the Comptoir des Contonnieres deal cost Powa €250,000 (£195,000).
These trials rarely resulted in any meaningful revenue, according to the sources. Deloitte declined to comment when asked about Powa paying for trials with retailers.
If we assume marketing costs remained fairly constant in the two years accounts are missing for, Powa will have burned through another £3.6 million on marketing.
In 2013, Powa spent £886,000 ($1.2 million) on property. However, the report notes: “We have invested in the infrastructure … that the business will need to underpin and sustain our rapid growth. As part of this, we secured at the end of 2013 the lease on a new headquarters at the Heron Tower in London that can accommodate our rapidly expanding UK team.”
Powa took two floors — the 34th and 35th — in the Heron Tower, a skyscraper in central London. The Financial Times estimates the rent on such a floorplate would have been £2.5 million ($3.6 million) a year.
In February 2014, Powa also took space on the 39th floor of One Bryant Park in New York, a $1 billion skyscraper also home to Bank of America and the Durst Organisation, the property giant that built the structure in 2009/10. While the office was smaller than the London headquarters, it likely was rented at a similar rate to the Heron Tower space.
The all-shares acquisition of MPayMe in 2014 also gave Powa a footprint in Hong Kong and, when it went under, Powa had offices in Paris, Spain, Italy, Shanghai, Korea and Tokyo, according to its website. (Powa Technologies UK, formerly MPayMe,
(Powa Technologies UK, formerly MPayMe, has filed accounts for 2014 — it made a £2.3 million loss.)
By the time Powa filed its 2013 accounts in December 2014, the company had entered into leasing agreements totalling over £13 million ($18.7 million), although these were spread out over more than 5 years.
If we discount the payments due later than five years and charitably assume that Powa did not get the chance to pay all of its rent due “not later than five years,” we can estimate rental costs of at least £4 million ($5.7 million).
However, if Powa entered into new agreements after the reporting period or included more of the “not later than five years” costs by the time it went under in February 2016, it could be much more.
The eagle-eyed will have already spotted that the expenses table at the beginning of the article outlines just £17.4 million of outlays in 2013 — so how did it make a loss of £22.5 million in 2013? The answer is financing.
Interest payments on loans, rising interest accrued on shares and loans, and foreign exchange losses cost Powa £6.5 million ($9.3 million) in 2013.
The Series A preference share costs — totalling £2.6 million ($3.7 million) — are unusual and interesting. It shows that at least some of the investment made in Powa had elements of debt to it.
The company makes clear that Series A preference share “capital is entitled to a fixed cumulative cash preferential dividend at the annual rate of 5%.”
What that means is Wellington Capital, Powa’s main investor, wasn’t just doing a vanilla equity investment. Powa had to pay for the investment — 5% a year and then 5% on the interest itself. That becomes costly quickly.
The shares were also redeemable after 5-years (we never got that far), meaning Powa could buy them back — again, a little like debt.
The preference shares, which were issued as part of Powa’s blockbuster $79 million (£49.8 million) funding round in July 2013, also included £11.1 million ($16 million) of long-term debt, as made clear later in the report.
Powa issued a further $20 million (£13.8 million) of preferred shares after the reporting date of these accounts. It also raised a further $80 million (£55.5 million) from Wellington in November 2014 (it’s not clear if this included the $20 million issued), raised $50 million (£34.7 million) from investors in 2015, and took out at least one loan from Wellington Capital.
It’s likely that the $220 million (£152.6 million) raised since 2013 is therefore a conservative estimate. It’s also likely that Powa’s £6.5 million ($9.3 million) financing bill rose substantially in the subsequent two years. But as a conservative estimate, let’s say Powa was paying £7 million ($10 million) a year in the missing period. That comes to £14 million ($20 million).
A surprising cost was the amount Powa reportedly spent on PR — press relations.
But this reportedly came at a significant cost. The Financial Times reported on Friday that Powa was spending £786,000 ($1.1 million) retaining firm Flame PR, according to documents it had seen. If that was the case in 2014 too, then Powa would have spent £1.5 million ($2.1 million) on PR in the period accounts are missing for.
So how much?
These back of the envelope guesstimates go some way to help us understand just how a company was able to blow through at least $220 million in under three years.
Let’s look at the totals:
- 2013’s loss (£22.5 million)
- MPayMe’s 2014 loss (£2.3 million)
- estimated staffing costs for 2014 and 2015 (£32 million)
- estimated technology costs for the missing period (£50 million)
- estimated marketing costs (£3.6 million)
- estimated rent bill for 2014 and 2015 (£4 million)
- estimated financing costs (£14 million)
- PR costs (£1.5 million)
- TOTAL: £129.9 million ($186.9 million)
Given that these are — again it’s important to stress — just guesstimates based on extrapolating from 3-year-old data and multiple conversations with former staff and executives, that doesn’t seem too far off the total.
There are likely plenty of other costs that we don’t know about — executive pay, for instance, in the missing period is almost impossible to guess at. Powa’s fifth biggest outlay in 2013 was also simply “Other costs”, which ran to £1.8 million. Given that we don’t know what exactly these were and whether they were reoccurring it’s impossible to estimate how much “other costs” drew down on revenues in 2014 and 2015.
We should get some clarity soon, however. Deloitte is due to releases its report on the company’s collapse within the next few weeks, which should give some idea of where all the money went.
Deloitte declined to comment on our estimated figures.