Weekly Report (15 October 2021)

Oct 15, 2021 11 min read
IN THIS REPORT:

StartEngine (Part 2): As discussed in our last weekly report, I wasn't going to be investing due to valuation as well as the founder's responses to my questions which I didn't think were adequate. Because of this, I didn't even bother to check their SEC filings, however, a fellow investor pointed out an unpleasant detail in StartEngine's SEC filings which I thought was worth exploring more. Curious to know more, I took a look at their offering circular; well, if I had any doubts before, reading their Use of Proceeds section was all I needed to be 100% sure that I would NEVER invest in their Reg A+.

Flower Turbines (Part 2): As I mentioned last week, I reached out to my brother-in-law who happens to be an engineer, he helped me understand that Flower Turbines might not be the investment opportunity I thought it was. Further due diligence required.

Iris: Active on Republic, the company has already raised $600k+ from 880+ investors. But will this broker-agnostic social trading app be able to compete with leading platforms like eToro? How are they going to monetize their user base? Backed by leading VC firms, Iris might deserve further due diligence.

StartEngine (Part 2)

StartEngine
Invest, Trade, and Build Your Startup Portfolio

Platform: StartEngine
Offering Type: Reg A+
Security Offered: Common Shares
Valuation: $786M
Amount Raised: $9.6M+

Previous Report Summary: In the last weekly report we reviewed the StartEngine Reg A+ offering and discussed their $786M valuation. Only a few months ago, we invested in Wefunder at $2.20/per share which implied a $160M pre-money valuation.

StartEngine's pitch says their GMV for the period between January 2021 and August 2021 was $150M, which is very similar to Wefunder, whose GMV for H1 2021 was $120M. I wouldn’t expect such a small delta in GMV to lead to such a large delta in the valuation. So I reached out to the founder to discuss this and, despite his explanation about their differentiating factors, I still couldn't justify their valuation (here's the report, in case you missed it).

So what's new in today's report?

Follow Up: I was so upset about the valuation and StartEngine founder’s response to my questions that, for me, investing wasn’t an option anymore. So I didn't even bother checking their SEC filings.

However, after publishing the last weekly report, a fellow investor reached out to point out an unpleasant detail in StartEngine's SEC filings. Curious to know more, I opened their offering circular and everything clicked once I read their Use Of Proceeds section.

The table below shows the net proceeds the company would receive from this offering assuming an offering size of $5 million, $20 million, and $55 million, and the intended use of those proceeds.

StartEngine's Use Of Proceeds
Source: StartEngine Offering Circular

Please pay particular attention to the third line, Sales by selling stockholders—that means that the company is going to use 50% of the funds raised through this Reg A+ offering to pay out early investors. If they raise $50M, the amount that will be invested into the business is maybe half of that?

What you may be thinking at this point is, "Why on earth would I buy stocks that institutional investors want to get rid of?"

Personally speaking, if I participate in a financing round, I want my money to be used for growing the business, not to provide an exit for early shareholders. Let's take a look at those use of funds again—50% will be used to buy out early investors, and 11.3% will go towards offering expenses. I mean, seriously!? Less than 39% of the funds will actually be invested into the business. I don't know about you, but I don't believe there is anything more to add at this point.

Flower Turbines (Part 2)

Flower Turbines
Innovative Small Wind Turbines

Platform: StartEngine
Offering Type: Reg A+
Security Offered: Common Shares
Valuation: $61.7M
Amount Raised: $3.7M+

Previous Report Summary: In the last weekly report we saw that the company has designed small and efficient wind turbines that (according to them) overcome the problems of most current wind energy solutions, including size, weight, noise, aesthetic appearance, and efficiency.

As a growth marketer, what I found fascinating about the company's product and potential growth drivers is that the product seemed to be able to market itself for free.  There wouldn't be any need for additional marketing spend once the product was installed—potential customers can see it from anywhere and everywhere (streets, hotels, parking lots, houses, etc...).

With that said, as I always remind my fellow angel investors, taking information provided in a pitch deck at face value is a recipe for disaster. So I reached out to my brother-in-law (an engineer) to help me understand the state of the industry and evaluate whether the innovations designed by Flower Turbines are serious or not. Before getting deeper into it, let's recap what the company says in its pitch deck to make sure we are all on the same page.

Flower Turbines Summary: According to the company, there are a few major problems with existing wind energy solutions besides aesthetic appearance.

Standard wind turbines cannot be installed in urban and suburban settings, including parking lots or on building rooftops either because it is impractical or because it is prohibited by law.

So what about existing small wind turbines? According to the team, the two obstacles to mainstream adoption of small wind turbines are:

  1. Most small wind solutions have to compromise between low noise and high efficiency. As a result, this makes them unusable for most areas where people live and work.
  2. They cannot be placed without causing interference to each other's wind flow. The aerodynamic interference of one turbine with another means they have to be widely spread, resulting in lower cost-effectiveness in settings where most people live and work.
  3. Conventional wind energy technology is treacherous for birds. A 2013 study published by ornithologist K. Shawn Smallwood in The Wildlife Society Bulletin found that wind turbines killed an estimated 573,000 birds annually in the United States.

According to the team, Flower Turbines solves all of these problems thanks to its patented technology. But is that true?

Thoughts: When I looked at Flower Turbines for the first time, I erroneously compared them to the wind turbines that most of us are used to seeing:

Photo by Rabih Shasha / Unsplash

My genuine thought as a total newbie to the industry was, "Wow, these turbines look very different from your average wind turbinesif they work and they really solve significant problems, this could be a really interesting investing opportunity."

Of course, as always, things are not that easy and, my dear fellow investor, all that glitters...well, you know the rest!

When I showed Flower Turbines to my engineer brother-in-law (here is his LinkedIn), the first thing he said was, "Yeah Manuel, this type of turbine has been around for a long time."

I wish we had been recording our conversation so you could see the look of devastation on my face when he told me—absent that, the image below gives you a pretty good idea!

He enlightened me about the existing solutions on the market, which are classified into two main categories:

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