Weekly Report (8 October 2021)

Oct 8, 2021 10 min read
IN THIS REPORT:

StartEngine Reg A+: StartEngine has already raised $10M+ from 6,000+ investors. Learn why I won't be one of them.

Rentberry: Raising on StartEngine, the company has already raised $3.6M+ from 1,900+ investors. Many VCs also backed the startup, including 808 ventures, AIM, JadeValue, Zyng Capital, Beechwood Ventures, and 92 Ventures. Find out why I'm not investing.

Monogram Orthopaedics: Backed by 6,800+ investors, the company has already raised $10M+ on StartEngine. Can we justify an $89.9M valuation?

Home Bistro: Backed by 2,200+ investors, the company has raised $5.4M+ on Equifund. But the company SEC filings don't seem to reflect what is stated in their pitch deck.

Flower Turbines: Raising on StartEngine, the company has already raised $3.8M+ from 2,200+ investors. With cutting-edge technology validated by research and real customers, this startup may deserve further due diligence!

StartEngine

StartEngine
Invest, Trade, and Build Your Startup Portfolio

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

What They Do: As you may already know, StartEngine is one of the three leading Reg CF platforms, along with Wefunder and Republic.

Thoughts: Being an active angel investor, I appreciate the value of Reg CF portals like StartEngine. Nevertheless, I do not follow how they arrived at a $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 tells us that their GMV for the period between January 2021 and August 2021 is $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.  I have reached out to the team on the platform to ask for additional info and StartEngine's CEO replied with the following:

Hi Manuel,

Thanks for the note. There are a few things I’d like to point out that differentiate us from Wefunder.

1) We have a secondary trading platform that lets investors trade in a peer to peer marketplace. Creating a marketplace for private securities is hard but well worth it because liquidity is key for investors.

2)We have the Owner’s Bonus program, a subscription that gives investors access to unique perks, that is becoming a major revenue driver for us in 2021.

3) We have a strong pipeline of companies that raise capital via Regulation A+ (which enables companies to raise up to $75M in a calendar year) via our broker-dealer. Wefunder does not have a broker-dealer, so they cannot earn commissions on Reg A raises.

4) We have introduced Alternative Assets to StartEngine, which will further diversify our revenue.

Wefunder doesn’t have any of these advantages, and they have all played a role in our valuation and in our growth. Wefunder forecasts $8M in annual revenue on their most recent campaign page. We just reported $13M in revenue for the first half of 2021.

Below is my answer:

Hi Howard,

Thanks for your detailed reply. Please see my comments below:

"We have a secondary trading platform that lets investors trade in a peer-to-peer marketplace. Creating a marketplace for private securities is hard but well worth it because liquidity is key for investors."
Yes, I understand that a secondary trading platform might be a value-add for some investors. Nevertheless, I believe WeFunder and Republic's decision to not implement it right now makes sense for two reasons:

The secondary trading platform is a huge limitation for StartEngine when it comes to international investors. Many companies on StartEngine can only accept US-based investors because they are using a StartEngine service, managed via the portal's secondary trading platform, to create a consolidated cap table.
For this reason, investors must open a secondary investment account at checkout. And since only US-based investors may open secondary trading accounts, many investors are excluded from investing in those companies.
Imagine for a moment that you are an international investor who still wants to invest in such a company (as I did). In this case, you would need to reach out to StartEngine support and pay a significant fee to have someone from the StartEngine CS team manage the process manually. As you might imagine, this prevents many international investors from investing on StartEngine.

In addition to this, data suggests the market is not yet at a point where a secondary trading platform provides significant value. If we consider your latest figures, I see annualized GMV of $300M. Suppose this is an indication of the potential liquidity of a secondary trading platform. I cannot see how the platform would be sustainable with such low liquidity.

In addition, when you consider that you are sacrificing a significant portion of the addressable market (international investors) simply to have a secondary platform for which the market demand is not yet significant, I don’t believe this is as value-added an offering as you suggest. Whilst you have created a point of differentiation from your competitors, you have done it by sacrificing part of the market which they have not.

"We have the Owner's Bonus program, a subscription that gives investors access to unique perks, that is becoming a major revenue driver for us in 2021."
This does not translate into much of a moat given it is something that any platform could implement at any time, I do not see how this contributes to a 5x valuation.

"We have a strong pipeline of companies that raise capital via Regulation A+ (which enables companies to raise up to $75M in a calendar year) via our broker-dealer. WeFunder does not have a broker-dealer, so they cannot earn commissions on Reg A raises."
This is a good point. Would you please help me understand it better? Could they not implement this service as well or are they limited in some way in doing so?

"We have introduced Alternative Assets to StartEngine, which will further diversify our revenue."
This, too, is something that I presume any competitor could implement at any time but I see their strategy of focussing on a high-growth segment of the market. As a startup, you have limited resources. So focussing on a segment (Reg CF) makes you more efficient (Indeed, they are the leading platform for Reg CF right now, according to KingsCrowd data). Then, of course, if you realize that you have sufficient resources to saturate that segment at some point, you can expand to another one.

"WeFunder forecasts $8M in annual revenue on their most recent campaign page."
I find this statement misleading as their campaign indicates an $8M+ revenue run rate which is quite distinct from a forecast.

According to their SEC filing, they made $4.2M in revenue in 2020 on GMV of $82.7M. Their annualized GMV for 2021 is $240M, which implies $12.2M in revenue for 2021.

Yes, you may make double that amount but even then, whilst your revenue might be 2x theirs, I don't see how that translates to a 5x delta in valuation. Indeed, WeFunder raised at 13x price to annual run rate ratio compared to your 30x multiple.

As you can guess, I won't invest in StartEngine at a $786M valuation.

Rentberry

Rentberry
The first global home rental platform with full automation!

Platform: StartEngine
Offering Type: Reg A+
Security Offered: Common Shares
Valuation: $25M
Amount Raised: $3.5M+

What They Do: Rentberry describes itself as the "first rental platform that allows for all the rental tasks to be done in one place". In other words, the company aims to be an all-in-one solution for property renting helping tenants and property owners to take care of all rental-related tasks—submitting personal information, custom offers, virtual tour, eSigning rental agreements, sending maintenance requests, and so on.

The company claims to have raised $13M from institutional investors and VC funds, including 808 ventures, AIM, JadeValue, Zyng Capital, Beechwood Ventures, 92 Ventures, and many more.

The 2020 performance as stated in their pitch deck looks great, with 3.5M users, 11.5M properties, and 87k cities, representing 126%, 193%, and 358% YoY growth respectively. So, it is no coincidence that the company is forecasting $5M+ in revenue for 2021.

Sound like a once-in-a-lifetime opportunity? Well… It isn't.

You know how the saying goes—all that glitters is not gold. Let us dig a little deeper.

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