A Major Milestone: Coinmetro acquires Ignium
Analyzing the business opportunities arising from Coinmetro’s first acquisition.
What first started as a rumor a few weeks ago has now become reality.
Coinmetro has successfully acquired Ignium.
Reaching this milestone is sending a clear message to the market, the competition and Coinmetro’s community: Coinmetro has moved its business to the next level.
That alone warrants a new article delving into the details of Coinmetro’s first M&A transaction. I am going to take a look at how this deal came about, what kinds of services Ignium is offering and how they might fit into Coinmetro’s product suite. Lastly, I will conduct a SWOT analysis of the deal to assess the acquisition’s strengths, weaknesses, opportunities and potential threats.
So, without any further ado, let’s dive right into the matter at hand:
What happened
The news first broke on January 27th, when Ignium sent its shareholders an email stating:
“We have an option to sell Ignium. The buyer is Coinmetro Group OÜ (Coinmetro)”
The reason why Ignium decided to enter into negotiations with Coinmetro to conduct an acquisition is an issue that has sadly affected many other startups in the Web3 and Tech space. Over the course of the last year, Ignium has run out of funding and did not have enough financial runway left to keep the company going:
“As you might be aware, the market for startup funding has been challenging, especially in the space of web3, blockchain and NFTs. The recent news from the industry only exacerbates this. (…) We have not been able to grow fast enough, have run out of money and not been able to raise a new round.”
This situation led to Coinmetro jumping into the breach by offering to acquire Ignium.
On the one hand, this move served to avoid letting all the previous work that was put into the development of Ignium’s services go to waste and on the other hand integrate those services into Coinmetro’s own platform.
The initial negotiations however revealed some hurdles that needed to be overcome.
The first and perhaps most important question that Coinmetro needed to discuss with Ignium’s shareholders was the valuation of Ignium for the acquisition. In this regard, the two parties agreed on a company valuation of €4,000,000 for Ignium.
The second question to answer was how exactly Coinmetro would pay for the takeover. One might think that Coinmetro purchased all of the necessary shares to gain control over Ignium by cash, but in this case a different approach was chosen. Over 95% of the Ignium shares necessary to complete the takeover were purchased through a share-deal. This allowed Coinmetro to pay Ignium shareholders by swapping their Ignium shares into Coinmetro shares instead of having to solely rely on Coinmetro’s cash reserves to finance the acquisition. With that in mind, Coinmetro only spent a low to mid six-figure amount of cash on the acquisition while mainly using Coinmetro equity to purchase Ignium.
Finally, on February 15th Coinmetro Group OÜ officially announced that they have acquired a controlling share of 71% of Ignium OÜ with the intention of acquiring all outstanding shares of Ignium by the end of April.
By then, Coinmetro will have successfully completed its first takeover.
What is Ignium
Now that we have looked at the behind-the-scenes details of the acquisition, there is another question I am sure is preying on your mind: What exactly is Ignium even doing?
Founded in 2019 by co-founders Reimo Hammerberg and Kevin Murcko, Ignium started its business with a mission that may sound simple on paper but has proven to be rather complex in reality: Levelling the playing field in the world of fundraising.
Ignium set out to allow private companies the same opportunities to acquire capital as large public companies.
You may be wondering how Ignium planned to reach such a lofty goal that many others have failed at in the past. The answer: Tokenizing equity of Small to Medium Enterprises (SMEs).
Simply put, the idea Ignium was founded on was to allow the companies on Ignium’s platform to leverage the power of their community by turning their own customers into so called “Investomers”. This means that people could actually own a part of their favourite small businesses by buying their tokenized shares instead of only being able to support them by buying their products. Allowing existing customers to become “Investomers” would also increase their attachment to the SMEs and the services they are offering, resulting in a stronger client-retention for these businesses.
As a logical next step to this product, Ignium also created its own secondary market, where anyone who bought tokenized shares was able to trade them with other users of the platform.
Sounds a little too abstract?
Let me illustrate this with an example most of my readers will know about: The Coinmetro Bond.
Yes, the entire Bond offering and subsequent share issuance that allowed Coinmetro to raise €2.5 million from their community was facilitated through Ignium. This case study also illustrates perfectly how Ignium’s concept could function in a best-case scenario.
It not only allowed Coinmetro to raise funds, but also to offer stock options to their employees, organise the daily(!) pay out of interest for their bonds and to manage their capitalization table efficiently. Similar success stories include Backify’s (€500,000) and Ignium’s (over €900,000) own fundraising campaigns on the platform.
However, Coinmetro could rely on a far greater community than most other businesses that became clients of Ignium. Ignium only offered a tool to these companies, but unlike a crowdfunding platform they did not provide a pre-existing base of investors. The SMEs on Ignium had to rely on their own communities to find buyers for their tokenized shares or bonds.
This did not always work out for some businesses as well as it did for Coinmetro, leaving them short of their fundraising goals.
It may be speculated that this was what led to Ignium refining their business model by pivoting toward a more community-oriented direction.
Instead of issuing tokenized equity, Ignium began to mint NFTs for their clients, via the Algorand blockchain, that they, in turn, could sell to their communities.
A good case study to showcase this new approach is Saaremaa Mahemuna (despite being quite the tongue-twister).
We are talking about an organic chicken farm in Estonia that was in dire need of funding to continue operations. Banks would refuse to give them a loan and they could not find anyone willing to provide them emergency funding.
What ultimately saved their business was Ignium giving them the tool to mint their own NFTs.
Those NFTs did not only fit the theme of Saaremaaa Mahemuna’s farm with their chicken-inspired art, but also allowed anyone that participated in the NFT sale to receive a share of 5% of any future profits of the business.
The end results of this fundraising campaign were quite impressive: 650 chicken NFTs were sold for a total of €65,000 – a great success that not only served as a proof of concept for Ignium but also saved a business from insolvency.
As you can see, Ignium has built out a rather versatile product suite over the years.
This means that Coinmetro now will be able to embed these products Ignium has developed into their exchange.
We will see the first integration of Ignium’s tech on Coinmetro in the not too distant future with the upcoming launch of a secondary market for Coinmetro shares.
SWOT Analysis
With all of the above in mind, I am now going to assess Coinmetro’s acquisition of Ignium by conducting a so called SWOT analysis.
This is a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities, and Threats of a business venture by identifying internal and external factors that could impact its success.
Strengths:
Let’s look at the strengths first.
First of all, Coinmetro is taking over a fully functioning and fleshed out platform that despite its complexity has proven itself to work seamlessly in day-to-day business.
It’s important to note that the development of Ignium’s platform and the technology behind it cost around €1 million. This means that Coinmetro can save both time and money by taking over Ignium compared to building such a platform from the ground up.
Another strong point is that the additional services Ignium offers will further diversify Coinmetro’s product suite, which will allow Coinmetro, as a company, to be able to react quicker to emerging trends in the market.
Also worth considering is the fact that acquiring Ignium will add to Coinmetro’s valuation for future funding rounds simply by absorbing Ignium’s current valuation of €4 million into the company.
This is especially important as a growing company valuation between funding rounds is one of the key metrics potential investors look at.
Successfully going through with a business move like this may possibly also improve Coinmetro’s reputation within the industry. Coinmetro demonstrating the capacity and resources necessary to take over other companies may also give potential investors some added confidence to take part in future funding rounds of Coinmetro.
Weaknesses:
Any in-depth analysis also needs to look at the negative aspects of the subject matter. Just like in nearly every other case, Ignium also has its weaknesses as a business.
The main flaw of Ignium in its current state is simple: The company ran out of funds.
The main question is whether this happened because of fundamental flaws in the business or management itself or if it was largely due to the worsening environment for startup funding that deteriorated in the last year.
Even though statistically 90% of startups fail - which makes Ignium’s case not that unusual - it is still important to evaluate how Ignium’s structures and other expenses could be slimmed down to reach the target of profitability and self-sustainability at some point in the future.
As it stands, Coinmetro’s main intention behind the acquisition is to integrate Ignium’s products into their own platform. That means that most of the recurring costs Ignium was burdened with (e.g. salaries or office rent) will fall away since Coinmetro will be able to support those newly acquired products with its own existing infrastructure. With these costs out of the way, it will likely become much easier for Coinmetro to slim down the cost profile of Ignium’s services and turn them into profit generating products over the mid to long term.
Opportunities:
Time to take a look at the future: What opportunities could the Ignium takeover unlock for Coinmetro?
The first opportunity arising in the immediate future is the launch of a secondary securities market on Coinmetro’s platform.
Ignium already has a working “billboard-style” market. This means that their market does not have a matching engine that automatically executes buy and sell orders, but instead consists of publicly posted offers that have to be manually accepted to make a trade.
This peer-to-peer system of running a market does not require the same licensing and is not as tightly regulated as a “classic” market based on a matching engine.
With the takeover, Coinmetro will be able to provide a secondary market for their own equity. In addition to that, other companies’ shares may be added to the market down the line, as well, generating a new recurring income stream for Coinmetro through trading fees.
Making use of Ignium’s tech also fits Coinmetro’s approach of mainly relying on technology that was built in-house in their day-to-day business to avoid being too dependent on external solutions.
This also means that Coinmetro can add yet another product to their Intellectual Property and may monetize Ignium’s technology even further by taking fees from other businesses that are looking to use this technology for their own services (so called “white labelling”).
Besides a market for securities, Ignium also offers something else: An NFT market.
At the moment, the market is limited to the NFTs minted on Ignium’s platform, but Coinmetro could expand this product by also allowing external NFTs to be traded. Even though NFTs may be momentarily out of fashion now that the hype has died down, trends can always change and pick up again. With Ignium’s tech, Coinmetro will be able to fully capitalize on the opportunity should NFTs ever become the talk of the (crypto-)town again.
Having the ability to mint their own NFTs from now on will also allow Coinmetro to offer NFTs that will expand beyond just being silly pictures. For example, they could mint special Coinmetro NFTs equipped with special perks such as fee reductions for the exchange or early access to new and exciting products.
Another opportunity that may be in the cards would be a relaunch of Coinmetro’s Invest platform that allowed customers to invest in exciting upcoming companies.
I asked Kevin Murcko, the CEO of Coinmetro, during an AMA whether this would be a possibility:
Lastly, one possible indicator for the opportunities the Ignium takeover may bring with it is the former valuation of the company. At its peak, Ignium used to be valued at €20 million. If this valuation is reached once again, we are looking at a possible 500% increase compared to today’s valuation of €4 million.
I therefore asked Kevin, as well, which steps he thinks would be necessary to return Ignium to its previous heights:
In conclusion, I think it is fair to say that the Ignium acquisition definitely brings some worthwhile opportunities with it that may unfold in the future.
Threats:
The last step to complete our SWOT analysis is an evaluation of the business threats that come with the takeover.
The biggest threat I see for Ignium’s business model in the long-term is a changing regulatory landscape. Kraken’s $30 million settlement with the SEC over the alleged offering of “unregistered securities” has shown us the importance of working and building rapport with local regulators – which Ignium did by obtaining a regulatory exemption from the FSA as Estonia’s regulatory authority.
This may however not be enough if the upcoming “Markets in Crypto Assets” EU regulation requires business models such as Ignium’s to be licensed.
When asked during the AMA what his thoughts are concerning this regulatory threat, Kevin answered the following:
Another concern is the increased cash burn rate that the acquisition is adding to Coinmetro’s balance sheet. As per the CEO, we are talking about an increase of around $10,000 to $12,000 of monthly expenses that mainly stem from added payroll costs:
Conclusion
In conclusion, I think the positive aspects of the Ignium acquisition outweigh the negative ones. Coinmetro is diversifying its product suite and unlocks some interesting future business opportunities at a reasonable cost for the company.
I am excited to see what products and services may come out of this takeover in the future and what kind of value they are going to add to Coinmetro’s platform.
What Is your opinion on Coinmetro’s first acquisition?
Feel free to let me know in the comments.