SwagUp Financing: Feb 2024

SwagUp is the go-to platform for corporate merchandise.

The business is profitable and has strong fundamentals, but we have a unique, idiosyncratic opportunity to invest: this round is intended to help them pay off debt incurred during prior restructuring / layoffs, freeing them up to maximize cashflow and build a very large business.

What they've gone through is very similar to the pattern in the broader market for many high growth businesses overall, and in particular for fulfillment / merchandise / transactional businesses... they saw a massive uptick in 2020/21 pandemic, invested in capacity and grew the team quickly to serve the flood of inbound demand, but then got stuck with an overcapitalized equity structure, overweight team, and overstretched fixed asset base. While some are still working through their challenges (Chewy, Peloton), the best companies moved decisively to get lean and efficient, restructure the business, and get quickly back on the path to profitability and growth: Instacart and Carvana are two great examples.

In my evaluation of the company, SwagUp clearly belongs in the latter camp. The business has strong fundamentals, the company is profitable, and still has a potential for serious appreciation, probable dividends in the near term, and quite possibly a PE / IPO exit in 5 years.

The Business History

At the peak in ~2022, the business was at $52M in annualized revenue. They even raised an opportunistic ~$3M SAFE round at a lofty valuation ($350M). I saw that round, and -- while I loved the product and was even a customer -- didn't invest because the valuation was too high. While the multiple wasn't absurd like some others (7x sales, and ~20x gross profit seems downright sane in 2021, for a business that was doubling and profitable), it wasn't clear to me that it should command such a “VC valuation”, at least based on the shape of the business at that time.

Subsequently, due to the recent "growth recession" where every company that hit hypergrowth (and corresponding hyper-valuations) got hit hard by the pullback in pandemic behavior, revenue dropped to $34M.

However, as mentioned, SwagUp restructured the business and got lean:

  • Cut headcount in half
  • Increased gross margin from ~30 to ~40%
  • Improved adj. EDBITDA from a $3.0M loss at the trough to a $2.7M profit today, in one year

(Note: the delta between GAAP & adj. EBITDA is mainly one-time restructuring costs.)

However, the dip + restructuring costs meant that they needed to take on burdensome debt -- in particular, the covenants are restrictive and keep them from making the right operating / financial moves for the business

The Business Today

With the business now at a healthy clip (they’re growing again!), they’re raising a small equity round ($5M) to pay off the debt, free up working capital, and continue to tap into compelling growth opportunities

Today, the business is at $34M (2023) in with ~40% margins, with $638K in EBITDA (but $2.7M adjusted, adding back one-time restructuring costs).

They are projecting approx. ~20% growth in 2024 and 2025, with $4.8M in EBITDA this year and $6.5M in EBITDA next year.

They’re clearly the market leader in corporate merchandise – with 2,000 customers including banner names like Amazon, Northrup Grumman, Nasdaq, Anthropic, Notion

But beyond immediate, organic growth plans, the company has the option and opportunity to thoughtfully invest in market consolidation, where there are a number of smaller players where SwagUp can purchase the book of business for ~2x EBITDA.

While this business appreciation is the main source of return for investors, they've clearly stated the intention to run this as a dividend business. We can't count our chickens yet, but I'd expect they declare a dividend within the next 2 years.

Market & Competition

The corporate merchandise market is fairly cyclical; companies purchase swag when they’re growing the team and have some discretionary budget, but they dramatically cut back when that isn’t true. SwagUp originally focused on startups and was particularly susceptible to the cutbacks in 2022/23. However, they’ve diversified their business significantly (e.g., Northrop Grumman, Walmart, SMBs in older school businesses) and will be more resilient during the next cycle.

In the meantime, the corporate merchandise market is highly fragmented, with numerous smaller regional and niche players. This fragmentation presents an excellent opportunity for SwagUp to consolidate — of course, in a thoughtful way, when there the multiples are compelling and there are clear synergies from an acquisition.

All that aside, SwagUp’s track record is what stood out to me — especially for a bootstrapped player, they executed furiously in 4-5 years to get to >$50M+ in revenue; and they’ve executed furiously to make the business sustainable when the market turned. This is why SwagUp has emerged as a clear leader despite a crowded field.

Their easy UX and solid SLAs stand out. Some competitors may offer lower prices, but their ability to manage fulfillment at scale, customize complex orders, and ensure timely delivery remains inconsistent.

Exit opportunities

I think there is a clear open road for this business in the next 5 years, by EOY 2028.

Bear case scenario

  • flat or growing a little (0-20% CAGR)
  • doing $60M in annualized revenue
  • 40% gross margins
  • $8-10M EBITDA

Valuation is likely $80-120M, but throwing off meaningful dividends. That would work out to 20% IRR on appreciation + 10-20% dividends / year.

Base case scenario

  • $100M in annualized revenue
  • 45% margins
  • growing 25% YoY
  • $20M+ EBITDA

This would make them a great private equity exit candidate. Many other players in the merchandise space are PE-owned, so there is precedent for this.

We would underwrite that to a $200M+ exit, i.e., a 5x cash-on-cash return / 35-40% IRR, plus dividends along the way which we estimate would boost the return to a ~45% IRR.

Bull case scenario

  • $200M revenue
  • 50% gross margin
  • growing at a material 40-50% clip

This could occur due to a combination of market recovery (still happening slowly), combined with SwagUp management undertaking thoughtful horizontal & vertical integration.

In that scenario, we would expect the company to be a likely IPO / direct listing candidate, listing at $600M+, a 15x cash-on-cash multiple and 70% IRR.

Terms of this round

Premoney valuation of $40M – an attractive multiple of:

  • ~1.2x LTM revenue and ~1x NTM revenue
  • ~15x LTM (adj) EBITDA and ~8.5x NTM EBITDA

We're currently diligencing the financials; I've pulled in an advisor to the deal who is an ex VP of Corporate Finance at a unicorn + Jefferies investment banker, to help ensure that there will be no lingering risk to the capital structure of the company once the debt is paid off.

But I've dug into the company and the management team's plans enough to feel confident that the business foundations are strong, and that this is just one of those rare opportunities to invest in a diamond in the rough.

The company expects to hold the first close at the end of February.

We are charging 20% carry for the SPV, but no management fees.

Pitch deck

Indication of interest form