Cash 4 Gold Clunkers: Everyone Loves a Good Bubble

When Cash4Gold got funded by Highland and General Catalyst, I remember one of the partners crowing about the deal at a school sponsored venture panel. In case you missed their Super Bowl ad, Cash4Gold would send you prepaid envelopes in which you would send them your gold jewelry, they would then send you money for it. A simple arbitrage play; they offered convenience and you'd get 60 cents on the dollar.

Later Micheal Arrington wrote a piece extolling how profitable Cash4Gold was.

Cash4gold

Revenues in 2009 are on track to hit $160 million, says our source, with a similar profit margin. That implies $50 million or so in 2009 profits. (Via TechCrunch)

At the time, I thought it was a bubble bet. Gold was at all time highs, this couldn't be a good idea. But when anyone said anything negative the refrain from the investors was always the same "You haven't seen the numbers." It is hard to argue with someone when they say, in effect, I know something you don't know so you're going to have to trust me.

Anyway, recently the other shoe has dropped.

Cash4Gold: On Friday I reported that Highland Capital Partners is no longer a shareholder in the parent company of Cash4Gold. General Catalyst has since confirmed that it too is out, although it declined to specify why or how (based on an apparent confidentiality agreement with the company). Also, one of General Catalyst’s limited partners emailed to say that Cash4Gold was still in the firm’s portfolio as of Q2, and had been written down nearly to zero. (via The Term Sheet by Dan Primack)

To recap: In October 2009 this was the best idea ever and they were printing money so VCs backed them. A year later they are worth zero. Troubling to say the least.

Now, there are some interesting ideas about how the rise in the price of gold might have hurt Cash4Gold, but let's be fair. Whatever the investment thesis was, it managed to go sideways in a year. It isn't like the economy rocketed up and people no longer need cash, nor is it that the inflation struck and people wouldn't want to part with gold. So was it a management problem? Or was the thesis really just a bet on the spot price of gold?

A friend of mine suggested that the revenue projections were unrealistic since they didn't take into account competition. There were already big players in the space and there was no barrier to entry. While the barrier to entry and competition issues really boil down to execution and the cost of obtaining a customer the revenue projection issue would really be the nail in the coffin. If the revenue projections were off (and they must have been) one could argue that diligence should have caught this.

Whether this was speculation on the price of gold, bad execution, or bad due diligence, this weird excursion from the VC norm definitely didn't pan out. This in turn means that people will mock the deal because they thought it was crazy at the time (I sure did). But you have to give the guys who backed this credit, they had the courage of their convictions and put their money where their mouth was. Of course, now they get to pay for their boldness twice, once with money and once with jokes at their expense.

1 comment

  1. interesting post. I agree with your friend that the revenue projections were unrealistic since they didn’t take into account competition. Cash for gold should have known better…

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