One of the interesting aspects of having a public company such as Difference Capital Financial (DCF-TSX) as an investor in private companies is that every once in a while an interesting tidbit of information can be found in public filings that can shine a little light on private company developments. Often, individual adjustments to Fair Market Values for small investments ($7 million) are not meaningful to a public company's results but in this case, Difference's size and investment model does make the adjustment meaningful and reportable.
So to the point, Difference Capital filed its FY2016 results which reported two interesting adjustments to its Fair Market Value calculations for its Internet investments: a write-down of its investment in BuildDirect and a small write up in its investment in Vision Critical.
BuildDirect.com Technologies Inc. (“BuildDirect”) In October 2016, the Company (being Difference Capital) invested an additional US$1.1 million in secured convertible promissory notes of BuildDirect. During 2016, the Company made fair value adjustments to its investment in BuildDirect common shares based on the debt financings completed by BuildDirect and qualitative observations reflecting the current financial situation of BuildDirect. The adjustments resulted in $9.5 million of unrealized loss during the year.
I would note that during 2014, Difference purchased $2 million of BuildDirect common shares, bringing its total investment to $7 million and also recognized $2.5 million in unrealized appreciation on the value of its investment. I've always found the BuildDirect business model very attractive, albeit a tough one given its earlier focus on becoming the "Amazon" of heavy-weight building and renovation products like marble and granite flooring and composite and wood decking. I'm a big fan of co-founders Jeff Booth and Rob Banks and they were building a great company so I really would like to see them succeed. I may be wrong but I'm "guessing" that the Company's product line expansion into very competitive categories like appliances and home decor where it holds zero advantage may have partially negated their very unique differentiator and first mover advantage. If that is, in fact, the case and the Difference Capital markdown is an indication of challenges at the business it may be time to "get back" to doing what they did well.
The second Fair Market Value adjustment Difference Capital made was to mark up its private investment in Vision Critical Communications by $0.6 million. Obviously, that's a positive indication.
The Fair Value reported as of December 31, 2016 for both Hootsuite Media and Scribble Technologies were not adjusted and continued to reflect the Average Cost reported on Difference’s Balance Sheet as of December 31, 2015. Looks to me like Hootsuite may have been “growing into” its valuation during 2016. We need more tech company winners so I'm hoping that bodes well for a 2017 public offering.
Please note that: the decision to make these adjustments was made by Difference Capital as part of its public reporting obligations and may not reflect the view of other investors in the private companies; and, the adjustments are reported as “unrealized gains or losses” and are subject to future adjustments depending on market and company conditions.