Mr Linney became a 'Dragon' on the hit BBC show in 2013 after an entrepreneurial career in telecommunications and internet businesses dating back to the dot-com boom. He co-founded Outsourcery, a provider of cloud-based IT services, in 2007. After he "invested millions" in the business, Mr Linney told us Outsourcery required more capital to "scale up" so he floated it on Aim in May 2013, raising £13m at a price of 110p a share. He topped up the company's coffers with a further £4.2m placing at 112p a share in December (all of the shares were placed by Investec). But by 11 June, the share price had fallen to just 28p.
So what happened?
Sources close to Outsourcery adamantly deny the price move was based on recent trading activity or clumsy institutional investor selling; rather, they blame a wider sell-off in technology stocks. The Aim Technology Index has retreated by 20 per cent since April, having more than doubled in the previous two years. But the two-thirds fall in Outsourcery's share price over the same period would suggest either something else may be going on, or the shares were wildly overvalued to start with.
Andrew Darley, research director of technology and telecoms at small-cap broker finnCap, suggests it's a bit of both. "The fall from grace from a highly-rated stock is a potentially precipitous one," Mr Darley wrote in a recent note to clients. "We think [Outsourcery's IPO] marked the starting gun for the valuation hysteria in the UK." At the same time, there has not been as much sales growth as investors initially hoped. The company needs to nearly quadruple 2013's revenues just to break even or turn a small profit, because of its large fixed cost base.
Outsourcery has been loss-making for much of the past seven years - it lost around £10m in each of the past two reporting periods - while it developed its platform that bundles together Microsoft cloud applications such as online video conferencing, file sharing and storage, and other traditional services such as Microsoft Office.
"In IT, things are going in one direction and that is cloud," Mr Linney says, "Companies no longer need to build expensive systems in-house; instead, they can consume services over the internet for a monthly fee per user." Microsoft is a leading developer of cloud-based applications and Outsourcery wants to be the largest re-seller of them. It's a competitive market, but one in which Mr Linney believes Outsourcery may have a head-start on competitors. Other companies are nevertheless likely to catch up quickly.
To capitalise on its first-mover advantage, Outsourcery has partnered with other middlemen such as Vodafone, Virgin and BT, who have agreed to try to sell Outsourcery's services to their existing business customers. The partnerships could eventually prove very fruitful but Outsourcery has already been working with some of them for years - and as yet the relationships have not translated into substantial sales. As finnCap's Mr Darley expounds: "Our preference...is for direct sales to a tighter niche. Nobody would really want their company's sales success to be decided by Vodafone's lame duck that is Cable & Wireless, or the attention deficient behemoths that are Virgin Media and BT when wearing their channel hats."
That said, on 28 March Outsourcery announced that one of its major partners had secured their first order. And on 3 June, a smaller channel partner signed up their first customer, too: global engineering group Lloyd's Register. The values of the contracts were not disclosed, but it's a start.
Analysts from house broker Investec Securities and paid research group Edison have both increased their group loss estimates for 2014 since initiating coverage last year, due to rising costs. They have yet to downgrade revenue forecasts, but this may only be a matter of time. Edison's base-case discounted cash-flow model calculates a per share value of 525p should Outsourcery meet its revenue projections for the next five years. That would make the shares, at 28p, a potential 19-bagger. Both brokers highlight the key risk to their forecasts as "timing on partners securing deals".
Our view, and seemingly the view held by the market, is that the lofty revenue estimates for the Dragon's business are likely to go up in smoke. At the time of its IPO, Outsourcery's enterprise value-to-forecast sales ratio was about six; it's now closer to two, which Mr Darley says is "probably the right price".
