Is this fast-growing, Neil Woodford-backed small cap your ticket to an early retirement?

Although it advertises on TV and has the lofty aim of disrupting the stodgy mattress industry with direct-to-consumer online sales, start-up eve Sleep (LSE: EVE) has likely flown under the radar of many retail investors. But with triple-digit growth, a founder-led management team and the hearty backing of Neil Woodford, who owns over 20% of outstanding shares, the company reminds me a lot of another small cap that has done phenomenally well of late and garnered significantly more attention, Purplebricks.

For investors on the lookout for the next Purplebricks or ASOS to see their retirement portfolio take off like a rocket, there is plenty to like about eve Sleep. In the half year to June, revenue increased a whopping 126% year-on-year (y/y), albeit from a very low base, to £11.5m. This certainly suggests the company's in-house-designed mattresses, pillows and sheets are proving a hit with consumers.

It's also good to see the management team, which includes several of the co-founders, isn't relying solely on the direct-to-consumer online sales that are its core offering. The team has now struck deals with retailers such as Next and Debenhams to sell the products in-store. This serves the dual purpose of increasing overall sales as well as significantly increasing brand awareness.

However, there are some downsides that potential investors should be aware of. As the company ramps up expansion it is also ramping up spending and operating losses for 2016 increased to £11.3m, or nearly as much as the £11.9m posted in revenue. That said, listing the company did raise £35m before fees, so it can withstand several years of losses before needing to raise further funds.

Furthermore, with 77% of shares not in public hands, it's unclear whether minority shareholders can be assured their needs will be prioritised. While eve Sleep is growing sales at a rapid clip and has a huge addressable market, buying shares of a lossmaking AIM-listed start-up does not appeal to me.

A flashier option

One London-listed online retailer that's actually proven profitable is Australian flash sale group MySale (LSE: MYSL). The company runs flash sales across Australia, New Zealand, the UK and Southeast Asia and brought in A$3m in EBITDA in the half to December from A$136m in total revenue.

Equally reassuring for investors is that the business finally appears to be cash generative, with cash balances rising from A$27.5m to A$29.1m half-on-half. The fact that previous investments in building out marketing and supply chain capabilities are paying off bodes well for the firm's profitability as it continues to grow revenue at a rapid pace, with online sales up 18% y/y in H1.

The downside is that even with a maiden pre-tax profit pencilled-in by analysts for the year to June, the company is still valued very, very highly at 176 times forward earnings. Potential investors should also be aware of the problems flash sale sites ran into in the US and Europe a few years ago when retailers no longer had to dump top-notch inventory at bargain prices to flash sellers as they did during and immediately following the Great Recession.

Although MySale turning its first profit is to be applauded, its shares remain far too highly valued for me to invest in a business model that that is unproven over the long term.

One share that has more than proven its business model works over the long term is the Motley Fool's Top Growth Share of 2017. This founder-led business has increased sales every year since going public in 1997.

And with international expansion just kicking off, the Fool's analysts see the potential for its shares to triple in the coming decade. To discover this stellar stock for yourself, simply follow this link for your free, no obligation copy of the report.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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