The Business Of

Fast Food | Huel | How Do They Survive Without Profits?

Morning All!

Yesterday we put together Huel’s costs with their revenues. And we’ve covered a fair amount this week. So let’s have a quick recap…

• Revenues: In 2022, Huel had 941k customers. The average customer made 1.72 orders in the year. And the average order value was £73…

• All About The 1.72: … and multiplying these 3 drivers gives us our online revenue. 941k x 1.72 x £73 = £115m! The 1.72 figure is so vital and we’ll look at that in more detail tomorrow!

• No Profit, No Worries: Like Deliveroo, Huel don’t make a profit. But as we’ll see today, Huel’s a bit different to some tech startups that don’t look like they’ll ever make a profit!

And speaking of profits and margins, it’s time to take a look at our famous TBO EBIT margin rankings chart. And below, we can see our ranking updated to include Huel. With the UK startup keeping their fellow UK compatriot, Deliveroo, some company!

But all joking aside, how do companies that don’t make profits really survive? Can it go on forever? Well, those are the questions we’ll be diving into today! So without further ado…

Highland To The Rescue…

Okay, so before we dive into things. I don’t want to sound like I’m being too harsh on Deliveroo and Huel! Pretty much all of the largest companies in the world. The ones who we use the most often, all made losses in the early days and required help from investors. Facebook needed Peter Thiel’s $500k investment to get going. Amazon needed Jeff Bezos’ parents to help them get started. And Google needed a $250k investment from Jeff Bezos in the early days. Yes Amazon’s Jeff Bezos was one of the first investors in Google!

And just to show how important external investment is for a startup. I thought a good way to illustrate this would be to look at what Huel’s cash balance would look like if the company hadn’t received ANY FUNDING since 2019. So, the chart below shows Huel’s cash balance at the end of 2019 was £14.2 million. In 2020, the company lost £9m in cash from its operations and purchasing of machinery. In 2021, the company actually saw cash rise by £4.5m - although this was to do with working capital adjustments. And in 2022, Huel lost an enormous £19 million in cash.

Why am I going through this? Well, because it shows that without any external funding. Huel would have run out of cash in 2022! And no cash = no business! No Huel = no breakfast for me! So yes, I just wanted to make it evident how important external funding is for emerging companies like Huel.

Okay, but Huel is still around. So, it must mean they did get some funding right? And yup, that’s right. In 2022 the company received £12m from the infamous Silicon Valley Bank - the bank that just recently collapsed! And Huel raised a further £8m from Highland Europe - a US private equity firm. Making their total financing inflow in 2022 £20m.

So, remember we said the company would have had negative £9m in cash without funding. Well, the £20m funding meant that Huel ended 2022 with a cash balance of £10.4m. But hold on - surely the company need to raise even more money right? Because if they lose another £19m - or even just half of that in 2023 - they’re going to be out of cash again! And yes, that’s completely right! And that’s what we’ll dive into now…

Welcome James Bond Idris Elba…

So, right at the end of 2022 - after Huel had closed its books for their 2022 financial year. News broke of another round of fundraising. And this fundraise was pretty cool. Well, as cool as fundraising can get! Because it had some very recognisable names on board…

Whilst Highland Europe - the private equity firm who had invested in Huel earlier - was the lead investor. Huel welcomed some famous faces to their investor club with Idris Elba and Jonathan Ross investing in the startup. Apparently Mr Elba is actually a Hueligan himself! Getting into the meal replacement drink during his prep for the Thor movie. Maybe if I keep it up, I’ll look like Idris one day…!

Idris Elba with Huel’s CEO

Okay, so Idris and his pals give Huel $24m. But what do they get in return? Shares! How many shares? Great question. So, the $24m that Huel received valued the company at $560 million. 24 is 4.3% of 560. Which means that in exchange for the $24m that investors gave them, Huel gave up 4.3% of their shares. This article here explains the whole venture capital process super clearly.

So, Huel want to grow and need money in order to do that. And so raise $24m. But some of you may be asking - why are Idris and co. giving them that money? What use are shares if the company isn’t public? Because Idris can’t sell his shares for money. And you are absolutely spot on here! But what Idris and co. and hoping for is that if and when Huel do go public - through an IPO. The company will be valued at more than $560 million. And Idris will then be able to sell his shareholding for well more than the amount he invested!

Now, just to go back to something I said earlier. I mentioned at the start of the newsletter that Huel isn’t like a lot of tech startups. And the reason I say that is because… Huel really don’t NEED money. They could run profitably. And in fact, we saw yesterday that the company’s EBITDA margin in 2020 and 2021 was positive.

So, why are they taking money? Well, because like a lot of startups, Huel are choosing to lose money now. In order to grow quickly now. In order to make more money later! For them and their investors! This takes a bit more explaining but I don’t want to make this newsletter too long… so we’ll dive into this in detail tomorrow!

Founder, Former CEO, Future Billionaire?

Okay, so just before we wrap up. I wanted to chat briefly about the founder of Huel, Julian Hearn (the guy in the photo below). And the first thing to say is that Huel wasn’t his first big hit. He had a very impressive history before Huel. He built and sold his first company, Mash Up Media for millions, with hardly any investment.

And this is something that happened by the way with Mark Zuckerberg and Elon Musk. Mr Zuckerberg created 4 programs before Facebook. And Mr Musk had done the same before Paypal. So, the first idea doesn’t have to be the only one!

But like Zuckerberg and Musk, Mr Hearn could soon be joining an exclusive club! As of November 2021, Julian Hearn owned 53% of Huel’s shares. As we’ve seen today, they’ve raised money since then so his shareholding will have been diluted. But let’s assume he now owns 45% of Huel’s shares.

What does this really mean? Well, it means that if the Huel IPOs at a valuation of $2.22 billion. Hearn’s shares would be worth $1 billion! Remember, Huel’s valuation was $560 million at the last fundraising round, so $2.22bn looks a little while off. But if the company keeps growing, Mr Hearn could well be joining the billionaire boys’ club fairly soon!

8th Jun 2023

Nigel Jacob CFA