Rad Intelligence Deal Memo (September 2020)

Deal Abstract

https://wefunder.com/rad

Managed marketplace for advertisers to find influencers who will repost their content. Generated $125k in revenue in Q4, tripling revenue in a quarter. Has some tricky issues to resolve whether serving the most inexpensive market is a sustainable business, and whether the value hypothesis of streamlining content doesn’t eviscerate influencer value add.

Shout out to reader John for forwarding me the deal!


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Decision

Invest

Why Investing/Passing

  1. Fundamentals: Quadrupled sales in a quarter and is raising on a $5 million valuation for a amanged marketplace business.
  2. Categorical Expansion of Thesis: When I think of what businesses will have strong early revenue with a disciplined valuation, marketing and sales tech seem highly feasible. As millennials become more of the executives at companies, it makes sense that sales tools will become more automation based, just like Betterment actually beats a normal advisor because millennials trust computers more than wine-and-dine sales. Although I don’t like marketing tech, especially social media tech, this makes sense to my thesis about timing and commercialization of these topics, and it may be worth me learning about more than, say, robotics technology.
  3. Founder Content & Repeating Investors: Although I don’t know ExpertDojo or Dzhel Ventures, the fact that they’re repeat investors (along with Founder’s repeat team) is promising. Podcast and USC Marhsall content seemed sincere.

The 6 Calacanis Characteristics (91 161 18)

CheckYes/No
1. A startup that is based in SVNo: Santa Monica, CA
2. Has at least 2 founders Yes: No (Has four in C-Suite but only CEO has meaningful voting power)
3. Has product in the market Yes
4. 6 months of continuous user growth or 6 months of revenue.Yes: 2019Q4 was $10k, 2020Q1 was $31.5k, 2020Q2 was $125k.
5. Notable investors?No: Looked through ExpertDojo and Dzhel Ventures and don’t recognize any portfolio companies or the funds founders.
6. Post-funding, will have 18 months of runway No: 2019 burn was $706k, targeting $1MM in funding so coming in right around 17 months of runway.
400% revenue growth from Q1-Q2, 1000% user growth from Q1-Q2, Grew from 4 to 16 clients in 2020

The 7 Thiel Questions (ETMPDDS)

  1. The Engineering question:
    • Good: assuming that businesses spending $3k-$5k a year on advertising don’t have any way of getting influencers at scale with accountability, this product is definitely better than the alternative.
  2. The Timing question
    • Good: Ad-pocalypse and budget-strapped influencers means there should be more demand on both sides of the marketplace.
  3. The monopoly question
    • Good: Network effects for micro-influencers and micro-brands spending money. Can scale quickly.
  4. The people question: 
    • Fine: Team seems fine. CRO has particularly relevant experience, CEO has executive experience with online companies and e-commerce.
  5. The distribution question
    • Good: They’re a marketing company trying to get advertisers and influencers to use their advertising and influence platform.
  6. The durability question
    • Good: Not sure if there’s much defenses against multihoming (e.g. a competitor copies and they go on both apps much like Uber/Lyft,) but network makes it pretty defensible.
  7. *What is the hopeful secret?: 
    • By neglecting businesses that spend $3k-$5k in annual digital spending and influencers who earn less than this amount, businesses have missed a smaller-but-more-numerous client base.

What has to go right for the startup to return money on investment:

  1. Maintain Quality While Scaling Efficiently: Onboarding thousands of influencers and tiny ad accounts while maintaining some degree of quality is not easy. This product is a low-price product, inherently, which means toeing the line between a budget offering and a complete meltdown is very fine.
  2. Keeping Clients on the Ecosystem: I’m glad that the CEO isn’t concerned about advertisers and influencers connecting off platform, but this platform needs to demonstrate value so both will want to stay on the platform.
  3. Build a Great Brand: Marketing tech, especially social media marketing tech, feels extremely sleazy. If this company can build a real brand and demonstrate value, that’ll overcome user skepticism.

What the Risks Are

  1. Self-Cannibalization: What happens if churn becomes greater than growth? Both from lack of platform value add and also because customers and influencers on this marketplace are small fish/may exit the marketplace?
  2. Thesis is Wrong: I can see the value of standardizing the video content, but what if customers only trust the influencers because of their unique content? Sure, standardizing saves work for the advertiser and the influencer, but if results in drops of conversion, then the entire business’s raison d’être is gone.
  3. Low Margin Business With Ceiling: if RAD only sticks to low margin, low profit business, could they hit a ceiling in growth?

Muhan’s Bonus Notes

Financials (References)

  • Current Fundraised: $745k
  • Valuation: ~$5MM

Updates

This is where I’ll post updates about the company. This way all my notes from offering to post-offering updates will be on one page.

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6 comments
    • muhan
      muhan • Post Author •
      September 10, 2020 at 8:16 am

      I think that’s the same company/not a competitor! Jeremy is the CEO’s name, and RAD Intelligence could have been a smart upgrade from a cheeky eponymous portmanteau name of B. + RAD.

      Let me know if I missed something!

      Reply
  1. Jia
    Jia
    September 11, 2020 at 12:21 am

    How do you think their network effect will make this defensible? I can see advertisers and influencers jumping ship if someone else comes in offering advertisers lower fees, and influencer higher pay. The network effect is not on the platform, but the product(good for advertisers).
    maybe I missed something?

    Anyways, this does look like a great company with awesome growth and attractive valuation. I am probably going to invest too! thanks for posting this.

    Reply
    • muhan
      muhan • Post Author •
      September 11, 2020 at 8:46 am

      Good question. The network effect to me is the trust and “standard operating procedures” of the platform. I tagged my marketing colleagues to ask their feedback, as I’ve never paid for influencer marketing, to sound check the value proposition. The comment thread was super helpful, and you can read it here: https://www.linkedin.com/posts/muhanzhang_invest-in-rad-intelligence-platform-providing-activity-6707342830873964544-kwC_

      To your points of:
      1) Advertisers/influencers jumping ship: I don’t think the pricing of this marketplace is painful to advertisers/influencers. If anything, they’re going after really, really small businesses, think SMBs that are spending $3k-$5k a YEAR on advertising. Similarly, the influencers they’re buying are probably fairly small influencers. In other words, I don’t think this is a premium product that has a lot of room for someone to undercut them buy.
      2) The big thing I had to validate with my network was whether this model worked. Currently, the influencer network is “organization approaches influencer to create sponsored content, company/influencer go through a few rounds of edits where influencer pitches content that fits their brand, company gives feedback, then when both sides agree, influencer publishes content and is paid either on sharing or on performance.” What RAD’s business model is completely eliminating that to “organization posts exactly the content they want influencers to post, and influencers post the content if they’re open, then they get paid on performance.” If RAD gets a network of both happy influencers who are expecting to retweet/repost corporate content, and corporations find influencers who don’t want as much creative control, then the chances of another network emerging and catching up seem unlikely to me.
      3) Although I don’t think it’s that hard to replicate, the company *is* developing novel technology so that the integration between their marketplace and advertising platforms (Facebook, Instagram, etc.) is tighter so the UI/UX is smoother.

      Keep us posted on whether or not you invest, Jia, would love to be co-investors together on another deal!! And also to your deal memo as well 😉

      Reply
  2. Shyam Sudhakar
    Shyam Sudhakar
    September 11, 2020 at 3:32 am

    Sorry. I meant if you have any thoughts on RAD’s competitors.

    Reply
    • muhan
      muhan • Post Author •
      September 11, 2020 at 8:48 am

      Are you thinking of anyone specifically, Shyam?

      From what I understand, the competitors of RADs are not marketplaces for influencers, but rather, digital agencies that match influencers to brands. I’ve been pitched by companies like this before. Overall, while I have concerns about whether the company can make sure its low-cost platform doesn’t denigrate into spam, I see them as using tech-enabled marketplace mechanisms much more efficiently than digital agencies, which to me, are still quite manual.

      Reply
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