A B2B financial-services bubble?

Is 2014 the year of the B2B high-tech financial services bubble? If so, it may already have burst.

In February, SpendMatters columnist Jason Busch singled out three companies that provide B2B finance networks — Tradeshift, Tungsten and Blur Group — as leading examples of what he saw as a potential bubble. All three startups had high valuations at between 15 and 20 times trailing revenues, though Busch didn’t think all three companies were equally inflated.

Less than six months later, where’s the bubble? Privately held Tradeshift has raised another $30 million on top of the $99 million it already had. But Tungsten’s share price is flat, despite revenues increasing and the number of transactions it processes rising 20 percent per year. Meanwhile, Blur’s share price has collapsed, falling more than 70 percent after it decided to use a more conservative approach to realizing revenue.

A closer look at what happened with all three companies makes clear how tricky it is to sort the businesses from the bubbles.

Tradeshift

Tradeshift, which offers business payment services including free electronic invoicing, launched in 2009 but didn’t start rounds of funding until 2011. Back in February, Busch described it an early-stage start-up with an audacious vision — as well as a “truly astronomical” valuation. The company had just gone from $24 million to $99 million, and has since captured another $30 million in venture-capital funding.

But Tradeshift has also added some large customers, including agribusiness giant Archer Daniels Midland in June and the U.K.’s National Health Service in May. NHS finance director Simon Murphy specifically cited the fact that Tradeshift offers a social-media style of user interface, instead of the more conventional business look and feel of its competitors. Murphy also said NHS wants to put virtually all its invoices for 200,000 suppliers on the Tradeshift network. It’s not clear whether that volume will translate into revenue for Tradeshift, since the electronic invoices themselves are free.

Tungsten

Competing supplier network Tungsten, which launched in 2000 and has been publicly traded since 2013, has more than 125 customers and deals with 78,000 active suppliers, with roughly $170 billion in transactions moving through its network. In February, Busch described it as “the real deal,” and despite a valuation of 15 times trailing revenue, opined that it isn’t bubbly at all.

Five months later, Tungsten’s valuation is what it was in February, though its share price dipped about 30 percent and then recovered. But the company has also bought a U.K. bank, the former FIBI plc, for $50 million to add additional trade financing services. Tungsten has also continued to add customers, while transactions are growing at 20 percent a year and revenues are rising at about $170 million a year.

Blur Group

But the best representative of the bubble market in February was Blur, according to Busch, who said he couldn’t see “how investors could value what is essentially a similar marketplace concept (in this case focused on services, especially marketing services) to those from the last failed B2B go-round.”

And in the months since, Blur’s share price has collapsed after a change to how it recognizes revenue and an oversubscribed share offering that roughly doubled the number of shares. From a high of almost 800p on London’s AIM exchange earlier this year, Blur’s shares have fallen to 65p.

What happened? In January, at its peak, Blur announced that it had 500 affiliates, 35,000 sellers, nearly 40,000 business users in all and total project value of more than $150 million — $100 million of which had been submitted within the previous six months.

But the company also hinted that the larger projects would take longer to complete, and thus not generate income for Blur as quickly as smaller projects had in the past. Within a week, the share price slid below 600p.

The price had edged down below 500p in April when Blur announced it would take a more conservative approach to recognizing the revenue associated with projects on its network. Instead of counting $22 million in project bookings, it would now only recognize about $5 million in revenue immediately.

The result of the accounting change: On April 17, the share price fell from from 437p to 280p — a 36-percent one-day drop.

Then the price dropped again in May to 85p, after Blur said it was looking for more money. In late May, the company announced that it would issue more stock to increase its share count by 70 percent, selling the new shares at 75p. The offer was eventually oversubscribed, and the company roughly doubled its total number of shares. By August, the share price had drifted down to 65p.

The accounting change that stripped away what Busch called “irrational exuberance” over Blur accounts for roughly 84 percent of the fall, and suggests that, in this case, there was a bubble after all. But the high-profile nature of that collapse may make it easier for both start-ups and investors to be more realistic in their estimates of how valuable B2B financial services networks are.