StartEngine (August 2020)

Deal Abstract

https://www.startengine.com/startengine-crowdfunding-3

Equity crowdfunding platform. Competes against SeedInvest, Republic, WeFunder, and the entire ecosystem. Trying to build an alternative trading system so that Regulation CF and Regulation A can be liquid. CEO is was a co-founder of Activision and they recently signed Kevin O’Leary on board. Analysis requested by a reader (yes, I take requests at mail@muhanzhang.com!)

Shoutout to A.S. for the tip!

Decision

Invest.

Why Investing/Passing

  1. Like the Market: I’m a power user of equity crowdfunding platforms. If I could, I’d have thrown $200 each into SeedInvest, Republic, WeFunder, etc.
  2. Famous Team: Very strong CEO and strategic partner with Kevin O’Leary.
  3. Growth Potential Via Trading Platform: Don’t see SeedInvest doing this due to slowing growth since joining Circle, not sure what WeFunder is doing. Republic Note I haven’t looked into, but probably should.

Big caveat: Another example of where I’m going against my own rules, and investing for other reasons. As someone who is a power user of equity crowdfunding platforms, and given my worldview, I am interested in building a portfolio of equity crowdfunding companies. SeedInvest pulled this off, but got acquired by Circle. I think I missed Republic (besides the Note,) and WeFunder.

The 6 Calacanis Characteristics (91 161 18)

CheckPass/Fail
1. A startup that is based in SVFail: Los Angeles, CA
2. Has at least 2 founders False (1)
3. Has product in the market Pass: product in the market.
4. 6 months of continuous user growth or 6 months of revenue.Fail (!!!): 2019 revenue was 4.3MM, down from 2018 revenue of 4.6MM.
5. Notable investors?Pass: Kevin O’Leary from SharkTank.
6. Post-funding, will have 18 months of runway Fail: 2019 burn was $4MM, has raised $5.7MM so at 17 months. That said, the campaign is still going on and likelihood of closing $6MM very likely.

The 7 Thiel Questions (ETMPDDS)

  1. The Engineering question:
    • Bad: I haven’t raised money on SeedInvest/Republic/WeFund/StartEngine yet, but the fact that revenues stall showed me that it wasn’t good enough to take market share from competitors.
  2. The Timing question
    • Good: With the existence of so many equity crowdfunding platform, it’s clear that there is a market for brokering unaccredited dollars to startups. Fits a thesis from my reflections.
  3. The monopoly question
    • Bad: This company is not going to be the one platform to rule them out. That said, they’re also raising at a $190M valuation, so they’re not going to go out of business.
  4. The people question: 
    • Very Good: Very strong CEO, and strategic advisor.
  5. The distribution question
    • Good: See the timing question.
  6. The durability question
    • Good: for the same reason that distribution is good.
  7. *What is the hopeful secret?: 
    • Equity crowdfunding is a stable, growth cashflow market that will help fund the trading platform.

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

  1. Deploy the Trading System: This is the biggest differentiator I’ve seen so far.
  2. Deliver Greater Network Effects for Investors: I invest primarily on SeedInvest because I know the companies are vetted, and their Auto-Invest feature lets me invest as low as $200. I see this being done with the bonus shares/stock feature, but didn’t spend more time to analyze.
  3. Get More Super Star Startups: The big thing that brought me to invest on SeedInvest is there were two deals that helped me overcome my inertia to investing, WhereBy.Us and Inside.com. Just as voters follow candidates before they get into the political party, my read is that investors chase deals over platform.

What the Risks Are

  1. Regulation Risk: the value of the alternative trading system is the same risk it has.
  2. Lack of Differentiation: other than that ATS, what else is StartEngine building to differentiate itself from other equity crowdfunding campaigns?
  3. Business Model: I was pleased to learn that Regulation CF allows for a 6% fee and surprised to learn that Regulation A can only take a one time fixed fee or monthly recurring fee. This type of details will be critical to understand for StartEngine’s business.

Muhan’s Bonus Notes

Just as there are categories of strong startups that aren’t for my portfolio, there are categories of startups that I’d invest even if the individual deal isn’t that great. Venture capitalists ultimately provide an extremely commodity good: capital. To differentiate ourselves, we focus on networking/understanding/investing in a specific subset. I’ve seen focuses from medical technology, labor automation, blockchain, and even operating systems for autonomous cities.

Financials (References)

  • Current Fundraised: $5.7MM
  • Raising: $41MM
  • Valuation: $190MM

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.

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

Notice trends in how you think

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