Devonshire Research Groups’ short thesis for Allied Minds.

On knowing when to quit

“If at first you don’t succeed, try, try again. Then quit. There’s no point in being a damn fool about it.” -W. C. Fields

News flash: events of April 5, 2017 are an irreversible short catalyst, with high likelihood of securities fraud and investor lawsuits to come

  • In December of 2016, Allied Minds raised £64m from investors to “invest” in existing businesses – 3 months later, the $147m write-down nullifies this investment, and creates the perfect storm for investor lawsuits to come
  • On April 5, 2017, Allied Minds announced the severing of funding to 7 subsidiaries, stating that that the failed ventures carried an estimated value of $147m (£118m); DRG calculates this write down includes over $115m invested directly into the companies
  • The ventures discontinued included those that DRG considered to be among the highest upside, meaning the valuation of the combined residual entity is likely to continue to slide
  • While other short callers – especially Kerrisdale – have singled out ALM as a short target, DRG believes that prior callers have misunderstood ALM’s business model, treating it through the lens of P&L and accounting scrutiny, rather than evaluating it as what it is: a publicly traded venture fund, or Public IP Company (PIPCO)
  • ALM is the last of the PIPCO’s, each of which has suffered at the hands of the recent America Invents Act (AIA), which significantly reduced licensing as a viable business model
  • Privately held venture companies with Limited Partners, would typically have their funding pulled and move to liquidation after 5+ years of failures; ALM’s public investors should hold ALM to the same standards
  • Why ALM, a high risk venture fund, should have been permitted to collect pension and private individual investment, without the scrutiny of accredited or qualified investment, will likely trigger additional legal scrutiny in the coming months
  • DRG believes there is a high likelihood for investor and/or securities lawsuits to follow in the coming months and years, as investors compare the slides and analyses to follow against the claims ALM management made during their capital raise in December of 2016

Questions DRG would encourage the board to ask of Allied Minds shareholders and executives

  • Are you disappointed with the performance of your investment over the past few years?
  • If the company’s risks and venture-based business model were truly appreciated by other investors, what drove the latest sell off? Is there a floor?
  • Are you concerned that the business is misunderstood by public shareholders, and possibly, by it’s current investors as well? Do the many subsidiaries make it even more confusing to new investors?
  • If ALM were a private venture fund, would investors have halted further investments in the fund, sold the fund’s assets to another firm, or perhaps liquidated the fund altogether?
  • Is ALM trying to exit business ventures, like a normal venture fund might, and eventually close and liquidate its assets, or is it trying to survive and become a tech licensing company?
  • Is it possible these two central business models are at odds with each other, and with the purpose and requirements of a publicly traded vehicle?
  • Should the SEC allow companies like ALM to trade publicly, exposing retail investors to risks normally reserved only for accredited and / or qualified investors?

Executive Summary

Allied Minds (ALM) has a poorly understood business model – equity analysts have failed to identify proper comparable companies, and prior short sellers mislabeled the company while conducting deep forensic financial accounting

  • ALM is a publicly traded venture capital fund, and therefore suffers fundamental mark-to-market issues
  • The business is predicated on the ability to monetize out-licensed IP from Universities
  • Other true comparable companies include Public IP Companies (called PIPCOs)
  • PIPCO’s have suffered tremendously following the American Invents Act, and the devaluation of licensing businesses

Allied Minds has failed, and continues to fail, at identifying and monetizing technology in a way that returns value to shareholders

  • ALM has not generated any meaningful revenue from its subsidiaries and is overstating their valuations
  • ALM’s revenue multiple puts it on par with an early stage software company, not a mismanaged VC fund
  • ALM’s management fees are higher than VC industry standards, despite not returning any winners

ALM’s patent portfolio has limited value and does not substantiate the company’s current high-flying stock price

  • Despite claims that it is a “technology-driven” company, ALM has not patented as much as expected given its market cap
  • ALM’s portfolio is not heavily cited by other industry players, signaling that the patents lack value
  • A top-down analysis of ALM’s patent portfolio suggests that it is worth <$25 million

ALM’s subsidiaries lack the necessary IP to be disruptive in the markets they are attempting to enter

  • The patent portfolios of ALM’s subsidiaries are vastly smaller than the portfolios of their competitors
  • Some of the subsidiaries’ portfolios have already been damaged by inter partes review (IPR) attacks
  • The market sizes for the technologies that ALM’s subsidiaries are pursuing are too small to warrant their valuation

On misunderstood, overly-complex business models

“If there is something in nature you don’t understand, odds are it makes sense in a deeper way that is beyond your understanding.” -Nassim Taleb, Anti-Fragile

What is Allied Minds, and why is it trying to be two conflicting, contrasting business models at the same time?

Business models should not be this difficult to describe

Allied Minds

Allied Minds

Publicly traded Venture Capital funds are a bad idea at all stages of the fund’s lifecycle; there are good reasons why most funds are private

Allied Minds

Bloomberg’s list of comparable companies, and those identified as sector equivalents – are inaccurate and misleading

Analysts, struggling to understand ALM’s business, placed it into the wrong sector

Allied Minds

See the full PDF below.