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Quick thoughts: Intellicheck, the reinvention of a startup

There's been a ton written about IDN out there. So much in fact that I don't feel there's much value in restating the core thesis. The latest and most comprehensive one by MaxCapital can be found here. There's also this thread by @saharainvesting. @hareng_rouge and @RodriGo_ethe have been tweeting about it. There's also this writeup by @rs3688. @nimbleopinions has also done a ton of good work on the company.


One aspect I'd like to shed some more light on is the evolution of the sales process at IDN. Before Bryan Lewis joined the company in early 2018 IDN had a solution that was still looking for the right problem. In startup terminology, IDN just wasn't finding product market fit. Selling identity verification solutions to bars and liquor stores wasn't working, both because converting individual bars and liquor stores to IDN's solution was incredibly labor intensive and because many bar and liquor store owners weren't truly interested in excluding underage customers, they just needed to appear to be exerting best efforts to do so.


Bryan Lewis changed things up both by targeting the retailers and by switching the sales channel to large banks. By selling IDN's fraud prevention / identity verification technology to banks with large card and in particular private label credit card (PLCC) portfolios he vastly simplified the sales process. Once a large bank was onboarded as a customer all retail card partners of the bank became potential customers. Both the bank and the retailers have a strong incentive to implement IDN's solution to help reduce losses from fraud (see below for some numbers).

This approach worked and led to a near tripling of sales from FY2017 to FY2020. It also created a long and deep runway for IDN to continue to increase sales by onboarding further banks, adding retailers at existing bank customers and further increasing scans at existing retailers. This last point is particularly noteworthy as the IDN team under Bryan Lewis has been fully focused on onboarding new customer relationships and bringing in new retailers through the bank channel for the past 3 years. Now that they have a solid customer base, more efforts can be devoted to cross-selling additional products to the existing customer base (account look-ups, non-receipted returns, buy online, pick up in-store and online solutions). As the vast majority of IDN customers only has implemented one of IDN's solutions/use cases this is an interesting opportunity.


More importantly (and this is me thinking out loud) the core competitive advantage of IDN is that they provide highly accurate ID verification at reasonably low cost via API. Maybe a next step for the company could be to develop an open API, similar to Stripe (https://stripe.com/docs/api), to unlock the possibility of developer led sales as well as further online sales. The existing salesforce could continue to sell to retailers and large enterprises, but with a bit of a revamp of the homepage and by opening up the API I think Intellicheck could add a developer led sales channel that would be highly complementary. By implementing an open API any company could easily integrate an API call to IDN into their app and thereby gain access to the most accurate identity verification solution. What I find exciting about this is that it is a) highly scalable and b) completely complementary to the existing opportunity.


To further illustrate this: While the current sales process is oriented towards enterprise sales led by salespeople who are experienced at selling to a given vertical, adding an open API would open up a completely new developer-led sales channel. Developers could write a simple call to IDN's API and have a highly performant identity verification feature up and running in their app without having to talk to a salesperson first. IDN would bill based on the number of API calls, just like it does with existing retailers. If IDN got this right one could easily imagine how this could drive sales to a whole new set of fast-growing customers.


While there is a lot of potential IDN is clearly still transitioning towards hypergrowth startup. There's pros and cons to this. At this point, IDN has found product market fit, has a moat around its core technology and has signed up large customers to its solution. The employee base has to some extent turned over toward people with a more startup oriented mindset. Garret Gafke, who has considerable experience both leading startups in the identity space is a great example of this.

The board however is still mostly made up of people who were aligned with IDN's vision before Bryan Lewis came in (former military or alcoholic beverage industry experience) as opposed to where the company is going now (direct sales to banks, targeting retailers and anyone else who needs their ID verification). One of the things that could still be improved at IDN is a refresh of the board. This is not meant as a criticism of any of the individuals serving on IDNs board today. They have all had distinguished careers and have accumulated lots of experience in their respective fields. The issue is simply that some of their areas of expertise are no longer relevant to the direction the company is taking. To illustrate, the current board composition is as follows:

  • Lieutenant General Emil R. “Buck” Bedard, long military career (owns ~137,000 shares)

  • Major General Jack A. Davis, U.S. Marine Corps, Retired. (owns ~100,000 shares)

  • William Georges spent nine years as senior vice president of The Century Council, overseeing their development of programs to fight alcohol misuse, drunk driving, and underage drinking. He is a retired 25-year veteran of the Albany, NY Police Department where he ultimately achieved the rank of Assistant Chief/Chief of Patrol where he was responsible for all uniformed police services. (owns ~50,000 shares)

  • Dylan Glenn is CEO of KBBO Americas, L.P. KBBO Americas is the U.S.-based investment vehicle for the KBBO Group, a diversified investment company headquartered in the United Arab Emirates. (owns ~1,700 shares)

  • Dr. Amelia L. Ruzzo's experience includes positions with Thermo Fisher Scientific from 2012 to 2015 and ITT Exelis from 2010 to 2012. In these roles, she was responsible for aligning IT with business objectives in the development of strategic and tactical plans for segment businesses. (owns ~0 shares)

  • David E. Ullman is a seasoned retail executive, he spent nearly twenty years as Executive Vice President and Chief Financial Officer for billion-dollar retailer, manufacturer and e-commerce company, Jos. A. Bank Clothiers. (owns ~11,000 shares)

  • Guy L. Smith has been the Executive Vice President of Diageo, the world’s leading premium drinks company, since 2000 and is responsible for Corporate Relations and Marketing Public Relations. (owns ~215,000 shares)

The role of a board is to represent the shareholders interest as well as help set the strategic direction of the company. In this case, overall board ownership (ex Bryan Lewis) amounts to a little over ~2.5% of the company. Not bad, not great. As IDN under Bryan Lewis is still very much a startup, the board is extra important as they are supposed to deliver advice and strategic input on the future direction of the company.


Three things I believe the board could have done better so far are the following:

  1. Currently IDNs PSUs are tied to a formula that is "50% vest based on the Company’s market price and 50% vest based on its Adjusted EBITDA performance metric". I don't think the management team of a startup with a huge TAM, growing triple digits YoY should be 50% incentivized based on Adjusted EBITDA. Exploiting the new opportunity and top line growth should really be the top priority. IDN should be spending every dollar it earns to hire more salespeople and developers to exploit its current opportunity. IDN has at least ~85% gross margins and will become a cashflow machine in due time, but for now growing the top line should be the priority. I would think introducing a sales growth target would be appropriate for the next few years.

  2. IDN has been very conservative in its use of forward-looking statements. The Q4 2020 call contained barely any indication of what was happening during Q1 even though it was held in late March. This was during a crucial time for the company as the US was starting to recover from the pandemic. I believe the board should give management more room to speak about what they are currently seeing on calls as well as establish multi-year targets for the path of the company. A good case study of this is Sharpspring (SHSP), which experienced a meaningful rerating in its stock in Q4 2020 after it gave investors some visibility into its possible/probable future by establishing 5-year targets and explaining them through a detailed cohort analysis. This of course would have to be done in a responsible manner and within the SEC's Safe Harbor for forward-looking statements (Matt Levine does a great job of explaining how this works here)

  3. IDN is a SaaS company and to some extent it getting some credit for that by the markets. However the lack of disclosed SaaS metrics and lack of guidance and visibility into the opportunity is likely keeping some of the core SaaS investor base away. If IDN could continue to improve its disclosure of SaaS metrics such as cohort analysis, Net Dollar Retention (NDR), Customers, implementation backlog and churn that might go a long way toward attracting a core SaaS investor base

Voting on board membership ends May 4th 2021 and I would urge all shareholders to carefully consider who they choose to represent them and help steer IDN in the direction that is best for all shareholders.


Disclosure: long IDN

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